SFM Report

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1998-2011

Report by:

Shumaila Firdous Ali (2006

01-65-6411 Mudassir Raza

Hemani (2006-1656734)

Course: Strategic Financial

Management

HBL Turnaround strategy

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Turn-around Strategy of HBL

Course: Strategic Financial Management | Term Report 2

CONTENTS

LETTER OF TRANSMITTAL ...................................................................................................... 3

ACKNOWLEDGMENT ................................................................................................................ 4

PURPOSE OF WRITING THIS REPORT ................................................................................... 5

LEARNINGS FROM THE COURSE ........................................................................................... 6

EXECUTIVE SUMMARY ............................................................................................................ 7

Company Introduction ................................................................................................................. 8

Company Description: ............................................................................................................. 8

History of the Company: .......................................................................................................... 9

Company Portfolio ................................................................................................................... 9

Retail Banking ................................................................................................................... 10

CORPORATE BANKING ................................................................................................... 10

International Banking ......................................................................................................... 10

Size of Company: ..................................................................................................................... 11

Domestic and International Network ...................................................................................... 11

Companys Profitability: ............................................................................................................ 13

Comparison of performance between pre-privatization and post privatization: .......................... 14

TOTAL DEPOSITS ............................................................................................................... 14

Total Assets......................................................................................................................... 14

Loans and Advances .......................................................................................................... 15

Liquid Assets....................................................................................................................... 15Net Income........................................................................................................................... 15

Total Expenditure ................................................................................................................ 15

Non-Performing-Loans (NPLs) ........................................................................................... 15

Number of branches ........................................................................................................... 16

Reasons for decline: ................................................................................................................. 16

Political Pressure............................................................................................................. 16

Non-performing loans: ....................................................................................................... 17

Lack of efficient banking system: ....................................................................................... 17

Lack of customer focus: ..................................................................................................... 17

Turn Around Strategy:............................................................................................................... 17

Conclusion: ............................................................................................................................... 20

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LETTER OF TRANSMITTAL

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ACKNOWLEDGMENT

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PURPOSE OF WRITING THIS REPORT

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LEARNINGS FROM THE COURSE

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EXECUTIVE SUMMARY

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COMPANY INTRODUCTION

COMPANY DESCRIPTION:

HBL was the first commercial bank to be established in Pakistan in 1947. Over

the years, HBL has grown its branch network and become the largest private

sector bank with over 1,450 branches across the country and a customer base

exceeding five million relationships.

The Government of Pakistan privatized HBL in 2004 through which AKFEDacquired 51% of the Bank's shareholding and management control. HBL is

majority owned (51%) by the Aga Khan Fund for Economic Development, 42.5%

of the shareholding is retained by the Government of Pakistan (GOP), whilst

7.5% is owned by the general public i.e. over 170,000 shareholders following the

public listing that took place in July 2007.

With a presence in 25 countries, subsidiaries in Hong Kong and the UK, affiliates

in Nepal, Nigeria, Kenya and Kyrgyzstan and rep offices in Iran and China, HBL

is also the largest domestic multinational. The Bank is expanding its presence in

principal international markets including the UK, UAE, South and Central Asia,

Africa and the Far East.

Key areas of operations encompass product offerings and services in Retail and

Consumer Banking. HBL has the largest Corporate Banking portfolio in the

country with an active Investment Banking arm. SME and Agriculture lending

programs and banking services are offered in urban and rural centers.

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HISTORY OF THE COMPANY:

HBL established operations in Pakistan in 1947 and moved its head office to

Karachi. Our first international branch was established in Colombo, Sri Lanka in

1951 and Habib Bank Plaza was built in 1972 to commemorate the banks 25th

Anniversary.

With a domestic market share of over 40%, HBL was nationalized in 1974 and it

continued to dominate the commercial banking sector with a major market share

in inward foreign remittances (55%) and loans to small industries, traders and

farmers. International operations were expanded to include the USA, Singapore,

Oman, Belgium, Seychelles and Maldives and the Netherlands.

On December 29, 2003 Pakistan's Privatization Commission announced that the

Government of Pakistan had formally granted the Aga Khan Fund for Economic

Development (AKFED) rights to 51% of the shareholding in HBL, against an

investment of PKR 22.409 billion (USD 389 million). On February 26, 2004,

management control was handed over to AKFED. The Board of Directors was

reconstituted to have four AKFED nominees, including the Chairman and the

President/CEO and three Government of Pakistan nominees.

COMPANY PORTFOLIO

As any commercial, bank HBL is also performing same functions and providing

services to customers and society. Its major banking services include;

y Rental banking

y Corporate banking

y International banking

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SIZE OF COMPANY:

HBL is one of the largest commercial bank of Pakistan. It accounts for a

substantial share (20%) of the total commercial banking market in Pakistan with

a network of 1,705 domestic branches; 55 overseas branches in 26 countries

spread over Europe, the Middle East, Far East, Asia, Africa and the United

States; 3 HBL wholly owned Subsidiaries namely Habib Bank Financial Services

(PVT) LTD. Karachi, Habib Finance International LTD (Hong Kong) and Habib

Finance Australia Ltd. Sydney; 2 Joint Ventures namely Habib Nigeria Bank

Ltd. (40%) and Himalayan Bank Ltd. (20%) and 2 representative offices in Iran

and Egypt.

DOMESTIC AND INTERNATIONAL NETWORK

HBL is one of Pakistan's premier banks in terms of deposits and advances with a

huge domestic and international network. Its salient features are;

Major Local Market Presence: HBL is one of the largest commercial banks in

Pakistan representing approximately 20% of the assets and deposits of the

banking sector.

A Household Name: HBL's brand name is well established. It has an extensive

domestic network of 1705 branches reaching virtually every segment of the

Pakistani economy.

A Full Service Bank: HBL provides its customers a complete range of banking

products and services including retail banking, corporate and institutional

banking, trade finance, consumer finance and credit cards.

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An International Bank: HBL has a presence globally through an extensive

international branch network described in the table below;.

Country Status Opened Branches

AFRICA

Kenya Branch Operation 1956 5

Mauritius Branch Operation 1964 4

Seychelles Branch Operation 1976 1

Suden Branch Operation 1982 1

ASIA

Bangladesh Branch Operation 1976 2

Fiji Islands Branch Operation 1991 1

Maldives Branch Operation 1976 1

Singapore Branch

Operation/OBU

1971 1

Sri Lanka Branch Operation 1951 3

Karachi EPZ Branch Operation 1983 1

MIDDLE EAST

Bahrain Branch

Operation/OBU

1969 3

Lebanon Branch Operation 1964 1

Oman Branch Operation 1972 11

UAE Branch Operation 1966 8

EUROPE

Belgium Branch Operation 1975 1

France Branch Operation 1980 1

Netherlands Branch Operation 1979 1

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Turkey Branch Operation 1983 1

UK Branch Operation 1961 6USA Branch Operation 1971 1

COMPANYS PROFITABILITY:

In 1998 the Bank posted a pre-tax profit of Rs 1.2 billion as compared to a pre-

tax loss of Rs 3.4 billion in 1997. For the first half of year 1999 it has posted pre-

tax profit of Rs 815 million as compared to a profit of Rs 335 million in 1997 agrowth of 143 per cent. This geometrical rise in profit was possible by managing

investments and advances prudently and cutting the cost.

The all around improvement in the performance of Habib Bank Limited (HBL) is

evident from the results of year 1999 and supported by half yearly results for

1999. Continued growth in all areas has further strengthened HBL's position in

the banking sector of the country. This performance was the result of untiring

efforts of the employees and innovative leadership provided by the professional

management.

Consolidated Financial Highlights of HBL

Description Million in Rupess Million in USD

1998 1999 1998 1999

Shareholder Equity 9,313.85 705.23 179.46 13.59

Total Assets 289,862.44 305,217.26 5,585.15 5,881.01

Deposits & other

Accounts

237,964.21 250,857.78 4,585.16 4,833.60

Loans and Advances 137,123.80 154,373.81 2,642.14 2,974.52

Investments (Net of 70,676.71 64,277.75 1,361.82 1,238.52

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Provisions)

Pre-Tax Profit / Loss 1,229.97 5,262.73 23.70 101.40

Staff Strength 23,096 23,033

Branches 1773 1760

Domestic Branches 1708 1705

Overseas Branches 65 55

Note:- Conversion Rate Rs. 51.90

COMPARISON OF PERFORMANCE BETWEEN PRE-

PRIVATIZATION AND POST PRIVATIZATION:

To see the performance of HBL after privatization and effects of management

comparing to pre-privatization period, let us consider following indicators:

TOTAL DEPOSITS

Total deposits of any bank translate the performance with respect to trust of

customers (account holders) on the bank. HBL total deposits were increased by

12% from 2003 to 2004. This is the evidence of the efficiency of the

management.

TOTAL ASSETS

HBL improved it total assets with the new management any increase of 12% is

posted this year. This indicator reflects to any investor or account holder a clears

picture of any bank. Increase in this indicator means decrease the in the bank

risk to liquidate.

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usage of funds by customer. The failure of which, then bank provides provisions.

The provisions provided by HBL to its NPLs are decreased by 56% as compared

to last year (2003).

NUMBER OF BRANCHES

HBL reduced its branches from 1470 to 1424 in 2004. This states that

management is looking for closing the unprofitable branches.

REASONS FOR DECLINE:

We all know that HBL was a governmental institute and over staffing is one of the

major problems in government organization. In 1996 the number of employees

both clerical and non-clerical in the organization was exceeding 31000. The

number of employees in the organization was the major problem in both sectors

that is managing the large number of employees and assigning them the tasks,

also the profitability falls due the amount of salaries HBL had to pay to the

employees. This problem also acted as a main barrier during the privatization.

POLITICAL PRESSURE

Before privatization HBL was highly influenced by the governmental policies as it

was the largest financial institute under government control. The economic

policies of the country were also affecting the banks policies. The problem

occurred mainly because of the unstable political situation in Pakistan which wascausing the huge fluctuations in governmental policies resulting in the

inconsistency of HBls policies which led to the inefficient results.

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NON-PERFORMING LOANS:

HBLs previous management in the past made loans for concerns other thanbusiness considerations. Many such loans were made to companies that were

neither creditworthy nor had adequate collateral. These loans have gone bad,

which has raised borrowing costs for others and caused bank losses, which have

had to be covered by large equity injections from the Government.

LACK OF EFFICIENT BANKING SYSTEM:

HBL lacked an efficient banking system that has the capacity to mobilize savings

and allocate them to the most economically productive uses.

LACK OF CUSTOMER FOCUS:

HBL management lacked insight and knowledge of consumer changing needs.

Thus, they were lagging behind as compared to emerging international players in

the Pakistani market. They were still stuck with old practices. Innovation and

desire to lead was missing from the overall organizations strategic intent.

These factors sums up to the inefficiency of bank caused mainly by the

overstaffing which led to over payment of salaries which in turn decreased the

profits.

TURN AROUND STRATEGY:

The turnaround strategy of HBL was a comprehensive approach to re-structure

and rejuvenate the entire organizational structure. Following were the key

strategies applied by HBL management were:

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y Successfully negotiated with SBP to inject PKR. 9.7 billion in tier 1 capital (capital

injection is reflected in the 1998 balance sheet).

y Staff Realization: This step was taken by the administration in order to increase

the efficiency and performance of HBL. Before the privatization government

introduced the Golden Hand Shake scheme in the annual year 1996-97 which

reduced the number of employees by almost 8000 reducing the number to 23000

from 31000. After the takeover process the new administration started the firing

process and they gradually sacked off about 7000 employees and brought down

the numbers to around 16000. Then in the summers of 2006 the HBL

administration sacked off all the non clerical staff which brought down the figuresby 2000 to almost 14000. This helps in increasing the profitability of the bank.

y Reduced staff by over 25% and closed 219 branches in 1997.

y Re-engineered the credit approval process.

y Implemented an aggressive remedial management program.

y Instituted international financial reporting standards.

y Focused on rebuilding the customer franchise.

y Closed 3 million non-remunerative accounts.

y Continues to plow back profits into the institution to enhance the capital base.

y Developed a customer franchise by creating customer focused business groups

and launching customized products/marketing techniques.

y Adopted international risk management methods, which require rigorous credit

administration.

y Developed a plan to upgrade the information and communication technology.

y Developed country specific programs to build the Bank's international brand

equity.

y Product Diversification: HBL diversified it products that is they introduced the

packages like car financing and house leasing. It helped a lot in improving the

reputation of HBL and people started to show the interest in HBLs services

y

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CONCLUSION:

To conclude we can arrive at the point that the privatization of HBL brought in

good results on the bank. This is proved by following facts:

1. The decision to privatize HBL is fruitful for both macro economy and HBL. Proved

by the losses occurred in past after taking over the management by new team it

controlled it losses not only but also posted huge profit amounted to Rs. 5.66

billion.

2. Management carried out the concept of Corporate Governance which is now

mandated by SBP and SECP both. Exercising this brought good control of the

management over issues.

3. Corporate culture is brought in the bank, which resulted decentralization of

management and widening the span of management and decreasing the levels

of management.

4. After privatization bank has closed its 46 branches in numbers. Reflects that

management is looking for just profitable branches only and in a position to

increase efficiency more and reduce losses and risks.

5. Management for more divisions in departments such as:

o Reduction in provisions for NPLs.

o Well assessment of risks.

o Looking at the trend of economy adding more portfolios. (Increase in

Agriculture finances over last few years this sector improving much).

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