1998-2011

HBL Turnaround strategy

Report by: Shumaila Firdous Ali (200601-65-6411 Mudassir Raza Hemani (2006-1656734) Course: Strategic Financial Management

Turn-around Strategy of HBL

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 ....................................................................................................................... 15 Net 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

Course: Strategic Financial Management | Term Report

Turn-around Strategy of HBL

LETTER OF TRANSMITTAL

Course: Strategic Financial Management | Term Report

Turn-around Strategy of HBL

ACKNOW LEDGMENT

Course: Strategic Financial Management | Term Report

Turn-around Strategy of HBL

PURPOSE OF W RITING THIS REPORT

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Turn-around Strategy of HBL

LEARNINGS FROM THE COURSE

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Turn-around Strategy of HBL

EXECUTIVE SUMMARY

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Turn-around Strategy of HBL

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 AKFED acquired 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.

Course: Strategic Financial Management | Term Report

Turn-around Strategy of HBL

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 y y

Rental banking Corporate banking International banking

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Turn-around Strategy of HBL

RETAIL BANKING

This segment of banking services includes customers such as consumers, agriculture and commercial customers (Small Medium Enterprise finance). In this segment bank improve its market shares studying second largest commercial bank in Pakistan covering 18%of market with total branches, 1404 of retail banking and 20 corporate banking. Following are the disbursed amount in different portfolios made by the bank;
y y y

Customer finance Agriculture finance Commercial finance

Rs. 22.3 billion Rs. 13.0 billion Rs. 19.0 billion

Since the accounts of the bank are closing as on December 31st each year
CORPORATE BANKING

This segment serves corporation and other big companies. Throughout HBL history this segment has giver much importance proved by operating 20 corporate branches solely are for corporate services. Major clients are WAPDA, KESC, WARID and PARCO. Overall disbursement of RS71.3billion was made in 2004.
INTERNATIONAL BANKING

In international banking segment HBL has operation in 24 countries of the world covering five continents. In addition it has subsidiaries, Joint ventures, affiliates and representative offices all over the world (See Appendix I). A total of $ 799 million Home remittances were done in 2004 through these branches.
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Turn-around Strategy of HBL

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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Turn-around Strategy of HBL

An International Bank: HBL has a presence globally through an extensive international branch network described in the table below;. Country AFRICA Kenya Mauritius Seychelles Suden ASIA Bangladesh Fiji Islands Maldives Singapore Branch Operation Branch Operation Branch Operation Branch Operation/OBU Sri Lanka Karachi EPZ MIDDLE EAST Bahrain Branch Operation/OBU Lebanon Oman UAE EUROPE Belgium France Netherlands Branch Operation Branch Operation Branch Operation 1975 1980 1979 1 1 1
12

Status

Opened

Branches

Branch Operation Branch Operation Branch Operation Branch Operation

1956 1964 1976 1982 1976 1991 1976 1971 1951 1983 1969 1964 1972 1966

5 4 1 1 2 1 1 1 3 1 3 1 11 8

Branch Operation Branch Operation

Branch Operation Branch Operation Branch Operation

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Turn-around Strategy of HBL

Turkey UK USA

Branch Operation Branch Operation Branch Operation

1983 1961 1971

1 6 1

COMPANYS PROFITABILITY:
In 1998 the Bank posted a pre-tax profit of Rs 1.2 billion as compared to a pretax loss of Rs 3.4 billion in 1997. For the first half of year 1999 it has posted pretax profit of Rs 815 million as compared to a profit of Rs 335 million in 1997 a growth 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 1998 Shareholder Equity Total Assets Deposits Accounts Loans and Advances Investments (Net of 137,123.80 154,373.81 70,676.71 64,277.75 2,642.14 1,361.82 2,974.52 1,238.52 13 & other 9,313.85 1999 705.23 Million in USD 1998 179.46 5,585.15 4,585.16 1999 13.59 5,881.01 4,833.60

289,862.44 305,217.26 237,964.21 250,857.78

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Turn-around Strategy of HBL Provisions) Pre-Tax Profit / Loss Staff Strength Branches Domestic Branches Overseas Branches 1,229.97 23,096 1773 1708 65 5,262.73 23,033 1760 1705 55 23.70 101.40

Note:- Conversion Rate Rs. 51.90

COMPARISON

OF

PERFORMANCE

BETW EEN

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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Turn-around Strategy of HBL

LOANS AND ADVANCES

Banks loans and advances are increased by 41% in total which were mainly resulted, by the facts such as increase in agriculture and consumer financing. Banks overall 52% of branches are located in rural areas or near.
LIQUID ASSETS

Liquid assets of any bank are critical. This indicator is equal to the current ratio of a manufacturing company, which measures the ability to meet short term obligations. HBL liquid assets are decreased by 13%. The reason is to make investments in different portfolios and that was resulted by decrease in NonPerforming-Loans
NET INCOME

An increase of 10% in net profit was posted in the financial statements of the bank in 2004. The emphasized on investment (results increase in interest earning) and decrease of expenditures.
TOTAL EXPENDITURE

This indicator reflects the efficiency of the management to control the expenses and outflows of the cash. The bank has increased expenditure by 42% resulted by increase in deposits and hence payment of interest charges on that.
NON-PERFORMING-LOANS (NPLS)

NPLs refer the defaults of advance and loans made by the bank to its clients. This happens when management is unable to assess the risk involved in the
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Turn-around Strategy of HBL

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 was causing the huge fluctuations in governmental policies resulting in the inconsistency of HBls policies which led to the inefficient results.

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Turn-around Strategy of HBL

NON-PERFORMING LOANS:

HBLs previous management in the past made loans for concerns other than business 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. strategies applied by HBL management were: Following were the key

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Turn-around Strategy of HBL

Successfully negotiated with SBP to inject PKR. 9.7 billion in tier 1 capital (capital injection is reflected in the 1998 balance sheet).

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 figures by 2000 to almost 14000. This helps in increasing the profitability of the bank.

y y y y y y y y

Reduced staff by over 25% and closed 219 branches in 1997. Re-engineered the credit approval process. Implemented an aggressive remedial management program. Instituted international financial reporting standards. Focused on rebuilding the customer franchise. Closed 3 million non-remunerative accounts. Continues to plow back profits into the institution to enhance the capital base. Developed a customer franchise by creating customer focused business groups and launching customized products/marketing techniques.

Adopted international risk management methods, which require rigorous credit administration.

y y

Developed a plan to upgrade the information and communication technology. Developed country specific programs to build the Bank's international brand equity.

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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Turn-around Strategy of HBL

which in turn helps in improving the credibility and profitability of HBL which is quite evident from the balance sheets and profit loss accounts. y Introduced new products like Crore Pati Deposit Scheme, Muhafiz Traveler cheques and concerted efforts to mobilize deposits, along with improved efficiency, have helped in overall increase in profit y Managed investments and advances prudently and reduced the cost. The shift in bank's emphasis from deposit mobilization to prudent use of available resources has helped in improving the spread and cutting down provisioning. y The advances registered significant growth as a result of proactive business solicitation, systematic approach for credit risk evaluation and credit extension and active pursuance of loans. HBL now follows a risk evaluation and credit extension policy which is comparable with any policies of any prudent international bank. y The new management strictly follows merit policy, the role and influence of unions and officers associations has been on the decline. Introduced pay for performance measures and structured training programs for all employees. Employees are willing to work hard and they appreciate recognition of their honest work. y The major steps taken by the new administration involves the initiation of call centers. Also they spent a lot on the renovation of building and structure by providing money to the Habib Trust who still holds the owner ship of all buildings which helped in increasing the attraction factor as it is in human psychology that beauty attracts mind. Also they have made it compulsory for each and every employee even the president himself to take at least 4 days of training each year.

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Turn-around Strategy of HBL

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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