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ABOUT HABIB BANK LIMITEDHBL 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. With a presence in 25 countries, subsidiaries in Hong Kong and the UK, affiliates in Nepal, Nigeria, Kenya and Kyrgyzstan and representative 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 Banking. HBL has the largest Corporate Banking portfolio in Pakistan with an active Investment Banking arm. SME and Agriculture lending programmes and banking services are offered in urban and rural centers. In the UK and GCC, HBL focuses on trade finance and remittances for the South Asian Diaspora in addition to basic banking facilities. HBL has always been a bank and a brand for the masses, with a history that is inextricably linked with the history of Pakistan itself. As it continues to grow, both locally and abroad, it strives to embody its brand personality: honest, approachable, and inclusive. HBL is currently rated AA+ (Long term) and A1+ (Short term)*. It is the first Pakistani bank to raise Tier II Capital from external sources.

HISTORY AND BACKGROUNDHabib Bank Limited was established by Mr. Ismail Habib (Late) on August 25, 1942 at Bombay. It was the first Muslim Bank of the sub-continent. It was established with a paid up capital of Rs. 2.5 million. At an early stage, the number of its branches was only 12.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 bank’s 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.

PRIVATIZATION OF HABIB BANKOn 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

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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.

MANAGAMENT HIERARCHY

PRESIDENT

BOARD OF DIRECTOR

MEMBER EXECUTIVE BOARD

REGIONAL CHIEF

ZONAL CHIEF

BRANCH MANAGER

BOARD OF DIRECTORS

NAME DESIGNATION

Sultan Ali Allana CHAIRMAN

R. Zakir Mahmood PRESIDENT & C.E.O

Mushtaq Malik DIRECTOR

Ahmed Jawad DIRECTOR

Yasin Malik DIRECTOR

Moez Jamal DIRECTOR

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A Bird’s Eye View

Year Important Event

1941 Commenced operation.

1942 Deposits reached 20 million rupees.

1943 Moved operations from Bombay to Karachi on the Quaid’s Request.

1946 First Banking Scheme Started for the Muslim Youth.

1947 HBL head office transferred to Pakistan.

1966 Silver Jubilee.

1974 Bank was Nationalized.

1991 Golden Jubilee

1997 HBL was Reorganized.

2004 HBL was Privatized.

2006 Largest Private Commercial Bank in Pakistan with branch network of 1477 branches within Pakistan and 65 international branches in 26 Countries.

2008 Declared best Bank.

2009 Pakistan’s Largest Banking Network . The Best Emerging Market Bank in Pakistan HBL among Top 500 Global Financial Brands

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International Correspondence

Bank maintains correspondent relations with the following international banks: American Express Bank, USA; Banco Di Roma, Italy; Commerzbank and Dresdner Bank, Germany; The Royal Bank of Canada, Canada; Hong Kong and Shanghai Banking Corporation Ltd., Hong Kong. The bank follows the internet banking code NetBanking and security is entrusted by VeriSign. This was launched with a contract made with TPS, (Pakistan). The bank supports the MNET Switch as a result of MoU signed between MNET and 1-Link.

Services

Bank AL Habib is one of the eleven partners of 1-Link system, an inter-bank ATM sharing system which allows customers to transact on ATM of any partner bank. Bank AL Habib is the third largest ATM service provider in Pakistan, having 188 ATMs while having the largest number of ATMs in the city Karachi.

Bank AL Habib Limited in affiliation with the Arab Financial Services offers two types of Master Cards.

AL Habib Capital Markets

Bank AL Habib has also established a name in the financial stock industry. AL Habib Capital Markets; one of the leading brokerage houses working under the logo of Bank AL Habib. BAHL holds a major stake in the AL Habib Capital Markets (Pvt) Ltd, rest by friends and family members.

Branches

The bank has a network of two hundred and twenty five branches.

Pakistan Karachi , has around 92 branches in all major/suburbs parts. This includes

one international branch at Export Processing Zone and one Islamic banking branch at Sharah-e-Faisal.

Lahore , has around 31 branches in all major/suburbs parts including an Islamic Banking Branch.

Multan , has around 5 branches including an Islamic Banking Branch. Faisalabad . has around 4 branches including an Islamic Banking Branch.

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Islamabad , has around 4 branches. Hyderabad , has around 4 branches. and 30 other cities of Pakistan

Bahrain Manama has a branch which acts as an Offshore Banking Unit

SOME GLIMPSES OF ITS FINANCIAL SUCCESS

HBL wins Best Emerging Market Banks award 2010 HBL receives 3 Global Finance Awards

I. Best Bank – Pakistan, II. Best Trade Finance Provider – Pakistan and

III. Best Foreign Exchange Provider – Pakistan. HBL among Top 500 Global Financial Brands 2008 HBL - 'Most innovative Global Trade Finance' award 2008 HBL Milestones - 'Buzziest Brands' Awards

Financial Highlights of 2010

The profit after tax of Habib Bank Limited (HBL) has increased to Rs 3.602 billion in the quarter ended March 31, 2010 as compared to Rs 3.481 billion earned in the corresponding quarter in 2009. The board of directors of the bank in its meeting held here on Thursday declared the earning per share of Rs 3.96 in the period under review against Rs 3.82 in the same period a year back.

According to the financial results sent to Karachi Stock Exchange (KSE), the banks mark-up/return/interest earnings increased to Rs 19.156 billion against Rs 18.237 billion while non-mark-up/interest income surged to Rs 2.653 billion against Rs 1.949 billion.The bank s mark-up/return/interest expenses increased to Rs 8.551 billion against Rs 7.817 billion, the provisions and write offs increased to Rs 1.388 billion against Rs 1.271 billion while operating expenditure increased to Rs 5.907 billion against Rs 5.640 billion. The before tax profit of HBL surged to Rs 5.964 billion in the first quarter of 2010 as compared to Rs 5.457 billion in the same quarter in 2009.

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ABOUT MCB

Over the years MCB has developed strong relationships with its customers by understanding their needs and treating them with respect, dignity and importance. The driving force behind its commitment and services is its focus on customers, ensuring that it not only meets, but also exceeds their expectation.

MCB believe in achieving their mission and vision by working together as a combine group. It treats its colleague as its internal customer and ensures that the requirements of internal customer focus are always met. Equipped with in-depth product knowledge and recognizing the strengths in each individual, It strive for optimum-results from its co-workers and bringing out peak performances by working towards common goals and objectives in today's dynamic banking environment.

MCB has an edge over other local banks, as it was the first privatized bank. The State Bank of Pakistan has restricted the number of branches that can be opened by foreign banks, an advantage that MCB capitalizes because of its extensive branch network.

Ten years after privatization, MCB is now in a consolidation stage designed to lock in the gains made in recent years and prepare the groundwork for future growth. The bank has restructured its asset portfolio and rationalized the cost structure in order to remain a low cost producer.

MCB now focuses on three core businesses namely Corporate, Commercial and Consumer Banking. Corporate clientele includes public sector companies as well as large local and multi national concerns. MCB is also catering to the growing middle class by providing new asset and liability products. The Bank provides 24 hour banking convenience with the largest ATM network in Pakistan covering 30 cities with over 225 ATM locations. The Bank’s Rupee Traveler Cheques have been leaders for the past six years and have recently launched their Gift Cheques Scheme.

MCB Bank Limited (Formerly Muslim Commercial Bank Limited) has a solid foundation of over 50 years in Pakistan, with a network of over 900 branches, over 750 of which are Automated Branches, over 225 MCB ATMs in 41 cities nationwide and a network of over 12 banks on the MNET ATM Switch.

MCB has become the only bank to receive the Euromoney award for the fourth time in the last five years. MCB won the "Best Bank in Pakistan" in 2005, 2004, 2003, 2001, and in 2000 the "Best Domestic Bank in Pakistan" awards. In addition, MCB also has the distinction of winning the Asia Money 2005 & 2004 awards for being "The Best Domestic Commercial Bank in Pakistan"

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MCB offers a wide range of financial products and advice for Personal and Corporate Customers. You can also apply on-line for many of our Online Services. Customers can access their accounts using our simple and convenient MCB Virtual Internet Banking services.

HISTORICAL BACKGROUND

Before separation of Indo Pak, the need for more Muslim banks was felt. And Muslims having strong financial capacity were thinking to invest in this sector as well. This was the idea, which paved the way for setting up Muslim Commercial Bank Ltd. known as MCB. This was the third Muslim bank in the subcontinent.

This bank was incorporated under companies’ act 1913 on 9th July 1947 at Calcutta. But due to changing scenario of the region, the certificate of incorporation was issued on 17th August 1948 with a delay of almost 1-year; the certificate was issued at Chitagong. The first Head office of the company was established at Dacca and Mr. GM Adamjee was appointed its first chairman. It was incorporated with an authorized capital of RS.15 million.

After some time the registered office of the company was shifted to Karachi on August 23rd, 1956 through a special resolution, recently the Head office of MCB has been transferred to Islamabad in July 1999 and Head office is termed as Principal Office.

This institute was nationalized with other on January 1st, 1974. At that time it had 506 branches and deposits amounting to Rs.1.640 m. Although MCB has a reputation of a conservative bank but nationalization also left its effects on this institute as well and by end of year 1991 in which it was privatized the total number of branches were 1.287 and deposits amounting to as high as Rs.35,029 m.

When privatization policy was announced in 1990, MCB was the first to be privatized upon recommendations of World Bank and IMF. The reason for this choice was the better profitability condition of the organization and less risky credit portfolio which made'' it a good choice for investors. On April 8th, 1991, the management control was handed over to National Group (the highest bidders). Initially only 26% of shares were sold to private sector at RS. 56 per share

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REVOLUTIONS IN MCB

Incorporated in Calcutta, India on 9th July 1947

First chairman – Mr. G.M Adamjee

Head office was shifted to Dhaka in August 1948

Head office was shifted to Karachi in august 1956

Nationalized on 1st January 1947

Privatized on 8th April 1991

Fist chairman after privatization – Mr. Mian Muhammad Mansha

Head office transferred to Islamabad 1991.

BRANCHES & ATMs

MNET enables all the member banks to share their electronic networks. Which means customers of member banks can use MNET as well as 1-Link ATMs Nationwide. MNET member banks ATM machines accept cards issued by MCB Bank Ltd, Citibank, Standard Chartered, HSBC, Saudi Pak Bank Limited, Habib Metropolitan Bank, JS Bank, Deutsche Bank, SME Bank, Arif Habib Rupali Bank and First Women Bank. MNET customers can use over 600,000 ATMs worldwide that carry the logo and shop at over 5 million outlets that carry the logo. M-Net switch has currently 612 ATMs in 50 cities. We plan to have the network grow in faster pace in future as MCB itself will be adding more ATMs by the end of the year. The ATM deployment has been planned in such a manner that a customer will be only a few minutes away from an ATM in major cities. This coupled with geographic coverage provides the largest convenient spread in the country, because of which we are very strongly concentrating on Diverse Coverage & Convenience.M-Net Switch ATMs are present in all the major cities of the country. They are available in the hilliest and northern areas of the country such as Murree, Abbottabad and Swat etc thus providing convenience of accessing 24 hours cash to the customers across the country. M-Net switch also has its Service Centers in the main cities of the country providing support to member banks customers. M-Net Switch ATMs are also present in all 3 main Airports of Pakistan i.e., Jinnah Terminal (Karachi), Allama Iqbal International Airport (Lahore) & Islamabad International Airport.MCB is in it’s over 50 years of operation. It has network of over 1,100 branches all over the country with business establishments in Bangladesh, Sri Lanka and Bahrain. The branch break-up province wise is Punjab (57%), Sindh (21%), NWFP (19%) and Baluchistan (3%) respectively.

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AWARDS

MCB bank Ltd. has also been awarded by the Euromoney Awards and the Asia

Money Awards. The prestigious Euromoney award has been given to MCB for

five times in the past six years.

EUROMONEY AWARD

BEST BANK IN PAKISTAN 2005

BEST BANK IN PAKISTAN AWARD 2004

BEST BANK IN PAKISTAN AWARD 2003

BEST BANK IN PAKISTAN AWARD 2002

BEST DOMESTIC BANK AWARD 2000

ASIA MONEY AWARDS –

THE BEST DOMESTIC COMMERCIAL BANK AWARD 2005

THE BEST DOMESTIC COMMERCIAL BANK AWARD 2004

Board of Directors Mian Mohammad Mansha Chairman S.M. Muneer Vice Chairman Mohammad Aftab Manzoor President & Chief Executive Tariq Rafi Director Sheikh Mukhtar Ahmed Director Mohammad Arshad Director Shahzad Saleem Director Mian Umer Mansha Director

Sarmad Amin Director

MANAGEMENT LEVEL

The organization chart within a department and in different offices is as follows:

Divisional Heads ………..……………………Head OfficeRegional Head (EVP) ………..………………Regional OfficeZonal Head (VP) ………..…………………….Zonal OfficeBranch Manager ………..……………………..Branch(VP, AVP, GRADE 1, 2, 3)

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ORGANIZATIONAL STRUCTURE OF MCB

As MCB is a banking company listed in stock exchange therefore it follows all the legalities which are imposed by concerned statutes Mr. Muhammad Mansha is chairman & chief executive of the company with a team of 10 directors and 1 vice chairman to help in the business control and strategy making for the company. Operational Management of the bank is being handled by a team of 10 professionals. This team is also headed by Mr. Muhammad Mansha. The different operational departments are Consumer Banking & IT div; Financial & Inter branch div; Banking operations div; HR & Legal div; financial control & Audit div; Credit management div; Commercial Banking div; Corporate Banking div; Treasury management & FX Group and lastly Special Assets Management (SAM) Group.For effective handling of branches, it has been categorized into three segments with different people handling each category. These categories are:

a) Corporate Bankingb) Commercial Bankingc) Consumer Banking

Corporate BankingThese are branches which have an exposure of over Rs. 100nmillion. Usually includes multinational & public sector companies.

Commercial Banking The branches which has a credit exposure of less than Rs. 100 million but having a credit portfolio of more than Rs. 20 million (excluding staff loans) Usually branches in large markets and commercial areas come under this category.

Consumer BankingThese are the branches which have exposure up to Rs. 20 million and these include all the branches which are neither corporate nor commercial branches. Recently the organizational structure was re-designed as follows: Province wise branches

Corporate Consumer Commercial20 branches 637 branches 383 branches

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Financial and Performance Analysis

Before formally starting ratio analysis it should be clear that typical ratios used t judge annual performance of any corporations are altered to large extent when being used for any bank, so here we will be focusing on some key ratios that will tell us about profitability, liquidity, efficiency and debt structure of both HBL and MCB and each ratio will be defined side by side in terms of its meaning and methodology applied for its calculations.

Profitability:

Profit before tax ratio (PBT/ total income)

Years 2009 2008 2007 2006 2005 2004HBL 39.72% 41.45% 36.63% 48.34% 42.09% 30.72%MCB 55.91% 63.8% 70.16% 70.49% 62.80% 34.47%

Methodology of calculation of this simple ratio is not so simple which also make interpretation little more complex, here total income means (NET Interest Income before provisions + Non Interest Income) means two items i.e. Non Interest expense and Provision deduction if added back nominator of ratio then this will become cent percent. So in real this ratio is telling us that how much out of net interest income (gross profit) and non interest income (fee, commission and services charges etc) we are left with after deducting our provisions (in actual NPLs expense) and paying for Non Interest expense (basically operating & administrative expense). Here I m treating Interest expense as Cost of Good Sold, as it is cost of material which a company sell or rent out so now lets come on result interpretation we see here that MCB in 2009 was able to save almost 56 rupees out of total income and only 26 rupees out of 100 are spent on administrative expenses and 18 on provisions. Where as HBL resulted only 33.72 for same year which mean 66.28 rupees out of 100 rupee of Net Interest margin and Non Interest income are spent on administrative expenses and provision further break down reveals that 16.8 are provision and 49.4 are spent for administration. If we talk about provision it is to be made according to SBP regulation so is the reason differences is only due to the fact that HBL have more advances and investment that fall into criteria of non performance or provision making means they have little less control as compared to MCB on their Investments or advances in other words little inefficient in collections, but when we come to non interest expense major difference lies here, MCB is able to control its expenses relatively, may be in absolute amount it is more but relative to earning MCB spend less on administration to earn same amount in comparison to HBL. Now if we look to previous years we find out that in 2004 this difference of profitability was minimized between both banks but both provision

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deduction and non interest expense were relative to income are higher for HBL however absolute income of HBL was higher in previous years compared to MCB it still is higher but gap is minimized due to MCB rapid growth in 2005. We also see here that year 2006 is the peak year as far this ratio is concerned, for both banks this may be attributed to economy boom is that final conclusion can be done after analysing few more ratios.

Gross Spread (NIM/Interest Income):

Years 2009 2008 2007 2006 2005 2004

MCB 69.31% 71.13% 75.26% 82.44% 84.34% 77.35%

HBL 56.09% 58.10% 62.06% 69.77% 77.34% 75.43%

This ratio is same as gross profit margin, but only difference is in GPM sales is only single operating revenue so it is also thee base when doing common size analysis of profit and Loss Account but here another operating revenue is from fee and commissions which is mentioned as Non Interest income so while doing common size base is sum of both interest and non interest income but as far this ratio is concerned here we are just concerned with spread earned. Spread is the earning of bank it is the difference between interest rates on which bank do investment and give advances (usually higher) and rate on which bank get deposits or borrowings. Now Spread earning is majorly due to interest rate differential but also partially due to equity investment in earning assets means that without borrowing banks do lend some of its money as well.

It shows that in 2009 MCB paid interest for its borrowing and deposit only 30.69% of its interest income which means that their interest income is 3.25 times of their Interest cost for the whole year whereas HBL cost of interest was 43.91 % of mark-up income which indicates that HBL earned only 2.27 of what it paid as Interest cost to lenders and depositors, one very apparent reason for this may be that HBL needs to ay high interest to attract depositors and to lenders as a premium of higher risk in their operations as compared to MCB backed by strong business group. If we look in previous years this ratio pattern is much similar to above ratio which supports our two points that in 2004 difference of profitability between both banks was less as compared to present and peak years of performance was 2005 & 2006 for both banks. One point to remember while looking this ratio pattern is that SBP prudential regulation about spread effects both banks in similar pattern so can not be reason of difference in any case.

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Years 2009 2008 2007 2006 2005 2004

MCB 27.35% 31.49% 37.66% 45% 64.87% 28.73%

HBL 18.05% 24.72% 20.12% 32.90% 34.99%

Return on Equity:

In equity calculation for ROE minority interest and surplus on revaluation is not included. Ratio of 2004 for HBL can not be calculated because average equity is used in formula and data for 2003 for HBL is not available. Here it is simple to interpret that increase or decrease in this ratio depends on two things a. Launch of new share (increase paid up capital) b. increase/decrease in net income. If increase in average paid up capital and reserve is more then net income then our ROE will decrease and vice versa, Here tremendous increase in year 205 for MCB is backed by reason of by 267% increase in net income this year which is unmatchable for all 6 years. New equity is also launched so average equity rose but that increase was smaller. MCB growing at higher pace launched equity each year except 2008-07. However, HBL launched new equity in only two years 2008 and 2009. Thus MCB earned highest return on equity investment in 2005 and HBL too went at peak in same year.

Return on Assets:

Years 2009 2008 2007 2006 2005 2004

MCB 3.25% 3.60% 4.06% 3.79% 3.20% 0.91%

HBL 1.65% 2.15% 1.57% 2.27% 1.90%

This ratio tells us how much earned out of each 100 rupee invested in assets if looked in this aspect it also tells us who effectively assets are utilized to generate income, again reasons for up and down are similar to ROE. MCB ROA increases in 2005 due to greater increase in net income. Ratio of 3.25 means that MCB earns 3.25 rupees on each rupee invested in sales

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Above chart is taken from IGI report and its figures very closely match our results, so satisfying us as a prove of going in correct direction.

So if we do conclude profitability analysis we see that in year 2004 both banks was having relatively same profitability but then banking sector boom starts which reached its peak in year 2006-2007, and this boom MCB performed well and grew by launch of new shares as well, as a result MCB is now out performing HBL, although HBL still in absolute is larger then MCB in amount of total assets as well as in amount of net income but when compare relatively then MCB generates more profits out of its assets and out of its income by controlling costs more effectively. Common size analysis will make picture more clear by showing that MCB controls non interest expense relative to revenues better then MCB.

Managerial Efficiency Measure:

Income/ Expense Ratio (times)

Years 2009 2008 2007 2006 2005 2004MCB

3.84 4.10 5.06 4.01 3.12 1.62

HBL 2.30 2.42 2.28 2.50 2.05 1.68This ratio in my opinion is one of the best measures of operational efficiency; here income stands for the same accounts as for PBT/Income ratio described above (i.e. net interest margin plus non interest income) and expenses in this ratio takes into account only Non-Interest Expense. Consider the fact that interest

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expense is just Cost of Goods Sold it is just the cost bank pays for its borrowing, this ratio compares that how many time is bank management able to earn for each dollar they spend on non interest expense that includes salaries, administration stationary, equipment, and SBP penalty costs etc. Now let’s interpret the results MCB makes 3.84 rupee earning against each 1 rupee spent in such costs as compared to 2.3 rupee earned by HBL management, so in short MCB comparatively is more efficient this can be explained better by saying that for earning 1 dollar in earning MCB spend less in such expenses as compared to HBL, but again if we look back in time we see that in 2004 both banks have same scenario but MCB rapidly became efficient. Year 2007 was best for MCB in point of efficiency in expense however; year 2006 was the peak for HBL as it was for it in profitability analysis as well.

Earning Assets to Total Assets:(Efficiency & Liquidity Analysis)

Years 2009 2008 2007 2005 2004 2003

MCB 87.23% 85.7% 83.6% 85.54% 87.34% 86.88%

HBL 87.02% 88.80% 87.60% 89.32% 94% 94.23%

Better interpretation out of this ratio needs understanding before. Banks do have two main categories of assets. 1. Earning assets includes all those assets that earn Mark-up/Interest returns for the bank. These include deposit accounts of bank with other banks, advances, and investments. All these assets earn income. However, to invest in these assets bank needs few other assets which include operating fixed assets (equipment, Building and furniture), cash holding (also a PR from SBP). One point to note is that provisions are not excluded while calculating earning assets. Now we can say that this ratio depicts that how efficient bank is to invest in earning assets by keeping investment in non earning assets with in certain limits. Means it will be efficiency of bank in my opinion that if they want to raise their earning asset by certain amount they need less investment in non earning assets. An other interpretation can be who much bank want to keep its investment in liquid or current account to keep them able to pay their obligations i.e. (current accounts, deposits and borrowing). Now better analysis can be done if we look separately to cash and balance with other banks and separately to operating fixed assets. Now if we have a close look it tells us that HBL investment in fixed assets always remain lower than 2% as compared to 4 % of MCB, so we here say that HBL in this six year period seems efficient to invest in earning assets with relative lower investment in building and fixed asset. However when we see liquid non assets holding HBL is increasing its investment in current account balance with other bans and in cash holdings probably because they do have poor earning assets and have some fear of defaulting on deposits, in comparison MCB remain constant in its cash holding and balances with other banks. This can be seen in common size analysis of balance sheet.

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Total Revenue to Total Average Assets:

Years 2009 2008 2007 2006 2005

MCB 16.78% 15.10% 13.99% 14.30% 11.30%

HBL 10.76% 10.99% 9.44% 9.32% 7.91%

This ratio is simply Total Assets Turnover, telling us that by investing in assets rupee 1 how much bank increases its revenue. MCB management is bringing up relatively more revenues from usage of its assets, this revenue may be mark-up income of ay be fee or commissions. Each 1 rupee in invested in assets is giving 16.78 passa in revenues to MCB in 2009, however HBL is getting 10.7 passa out of each 1 rupee in assets. we see that both banks are increase their TAT this is due t interest rate rising and increasing fee and commissions although increasing trend is visible but MCB is again at lead since 2005 and is still more competitive although in absolute amounts MCB have lower assets thus lower revenues then HBL but efficiency is no doubt much higher then HBL.

Assets Quality Analysis:

NPL to Gross Advance Ratio:

Years 2009 2008 2007 2006 2005 2004

MCB 8.62% 6.7% 4.67% 4.14% 4.46% 6.14%

HBL 10.09% 8.26% 6.86% 8.08% 11.80% 15.20%

NPL stands for non performing loans. It is different from provisions, provisions are based on estimations and made according to SBP regulations however NPLS are actually loans that are default on payments. Advances are major loan investments on which bank receive mark-up, other main category is investments but it basically is investments in equity of corporate sector. So we calculate NPL to advances ratio that tells us that how many of our total earning assets are in category of getting default. Advances are such a major category that it makes up around 70% of interest income of MCB as shown by following figure from MCB annual report.

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So now interpreting these ratios we can say that 8.62% of MCB advances are not performing properly on due date in comparison HBL asset quality is little deteriorated and have 10.09% in non performance loans. In 2005 which was also profitable year with respect to ROE, and NPL percentage for both banks reduced means economy was at boom and less loans were out performing, then we see that till 2007-2006 economy was in better condition so NPLs remain low but then recession started, lay offs and shut downs captured our corporate sector so corporate customers started defaulting again and both banks ratio again rose. But in all six years HBL have higher percentage of loans relatively in non performance.

Figure on next page is from IGI securities research on HBL

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This figure is proving that our results are perfect and here we see that MCB stood best in its NPLs, bank can control it NPLs to remain low by having better negotiations and terms and conditions for restructuring loans and offering more attractive services to keep customers loyal and honest.

Debt Paying Ability

Advance/Deposits Ratio:

Years 2009 2008 2007 2006 2005 2004

MCB 68.89% 79.39% 74.96% 77.0% 78.63% 62.12%HBL 66.59% 76.43% 71.93% 76.11% 73.26% 64.03%

As told above that advances are main loan bank give to corporate and consumer sector and gets mark-up on it which is about 70 % of interest income on other side deposits are core source of money that bank further invests and main mark up interest paid is on deposits. Deposits are above 70% of bank assets so second source of money is borrowing which is around only 7% of bank assets. Banks do not invest all of the deposits in loans they do keep part of that deposits and capital for liquidity requirements and do invest part of it in other earning assets like investment in stocks. But advances are such earning assets which are most illiquid, means bank is not free to cash out them in time of need. Even if they perform on time bank receive its contractual payments as pre decided by both parties. All other earning assets are more liquid. Investments are of three typesa. Available for sale b. Held for trading

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c. Held to maturity. Out of these only type c is not much liquid and that was also decided by bank management it self. So purpose of finding out this ratio is to see what percentage of deposits bank management is incvesting in advances and how much of it bank is keeping in other liquid earning assets or cash requirements. This will tell us about how much aggressive style bank has and also this ratio will tell us banks confidence in their advances. If they have less NPLs they will invest heavily in advances to earn higher return because they know that they can handle clients and get payments on time to fulfil depositor requirements. We see in 2005 both banks ratio jumped a different reason for this is that economy boomed and corporate sector needed financing to in invest so they did borrowing, but in this year MCB have been more confident for its loans as also is evident from decreasing NPLs so they invested aggressively. Later till 2008 both banks remain same but MCB with upper hand probably because they know that their payments are on time and they will not default. But HBL maintained a cushion for its depositors to be on save side. In 2007 and 08 we see that NPLs increased largely due to slump in industry and may be most of depositors are also cashing out with speed due to situation of inflation in and lower salary in economy so banks come to conservative approach again with MCB little more confident on its loans

Earning assets to Deposits & borrowings:(Long-Term Analysis)

Years 2009 2008 2007 2006 2005 2004

MCB 107.74% 107.75% 103.52% 103.99% 101.65% 98.47%

HBL 102.23% 104.53% 102.70% 102.30% 106.45% 105.90%

This ratio tells us that Interest income of bank is not only due to spread(difference in rate of interest on advances and deposits), partial of net mark-up income belongs to higher investment in earning assets as compared to money of other people with bank on which they pay interest. Means that owner do have invested part of their own share in earning assets and kept part of it for liquidity obligations.Taking reciprocal of above ratio tells us that MCB investment in earning assets is 92.8% financed by borrowings and deposits and rest 7.2% is from equity. In other words we can say for each rupee lend in market they have to pay 92.8 passa to depositors and 7.2 passa to owners. Saying directly on each rupee borrowed from someone (deposits are also borrowing) MCB have given loan of 107.74It is some what difficult to reach at final conclusion out of this ratio but two ways of looking at this is that it is better for depositors to think that if we have to take 1 rupee of ours from bank it also have to take 1.07 from the market means they will be able to return our money because more then our money they have to collect from market.

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An other but remember less common interpretation can be that our bank have invested so aggressively in market that they may have less liquidity to pay us now, but this is not the case banks have to maintain liquidity requirement, this ratio depicts that bank will not default on our principle payment since they do have excess money available for collection.

Capital Adequacy Ratio:Years 2009 2008 2007 2006 2005 2004MCB 19.07% 16.28% 16.75% 18.65% 12.54% 9.64%HBL 18.20% 15.60% 13.30% 12.80% 9.90%

(Risk Analysis)

This ratio is internationally used to measure bank health for its depositors. It is basically calculated by dividing bank Tier 1 and Tier 2 capital with risk weighted assets.Risk weighted assets are calculated by assigning a risk weight to each asset (for example 100% for corporate loans and 50% for mortgage loans). Capital is a cushion for absorbing loss before it reach borrowers and depositors. So by calculating CAR and comparing it basically bank is telling that in events of loss we are able to absorb loss of this much percentage befor any loss is transferred to depositors.Thus a ratio of 19.07% means that even if MCB risky assets value decrease by 19% or upto 19.07% of them default till ten bank will be able to pay depositors from the money of bank wners in other words caital or reserve created for cushion. In each country there is a minimum requirment of this ratio. In pakistan it is 8%.so both MCB and HBL are over capitalized. But again MCB is at advantage.

Following Figure is again from IGI research report of 2006 ehich is supporting our results as well.

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Vertical and Horizontal analysis of HBL/MCB Profit & Loss Statement

HBL revenues earned from mark up have decreased steadily from 2004 to 2009. Throughout the analysis period the growth in mark up revenue has decreased this is due to the decrease in growth of advances which went down to 0.37% decline in 2009. On the other side mark up expenses had also followed the same trend for the same period. It came down to a negative growth of 25% while 2008 is the only year where growth in revenue has decreased while mark up expenses for the same period has increased very largely. This may be due to slump of financial institutions in 2008. The default of bad loans has major effect on the increase of mark up expenses. This is because HBL has disbursed loans on lower mark up and their borrowing cost or financing cost for loans that they have taken from other financial institutions was higher. Although we can see that this effect was mitigated in 2009 and their performance is back on track with an increase of 41% in mark up revenues while mark up expense increase only by 2.70% which is a healthy sign for HBL. There was steady increase in net mark up after provision till 2006 but in 2007 the growth in net mark up after provision decreased to -16% which is because of massive increase in provision for loan losses. The growth in Net interest revenue was almost 22% in 2009 while average NIR growth was 35% for TIER 1 banks this may be attributed to the decrease in growth rate of advances to -0.2% in 2009 from 19% in 2008. The loan growth in 2009 has declined to -13.50%.HBL's non mark up income grow at significant increasing rate from 2006 i.e. 8% to 18% in 2007 and again increasing by 63% in 2008 when eventually it fall down to a negative growth of 31% in 2009. This is why we can see that non mark up income as percentage of revenues declined subsequently from 2004 when it was 35% to 19% in 2005, 16% in 2006, 16% in 2007 and increasing to 20% in 2008

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while again decreasing to 9% in 2009. This is because banks investment in shares and other corporate instruments has declined in these years.This is because HBL's major revenue was contributed by income from mark up and in these years mark up has raised which widened the spread and ultimately there revenues increased. However it may not be as favorable when the spread decline. In such situation only banks that will survive will be those who have established alternative non mark up based revenue sources.Deposit growth ratio has been slow because of the base effect as well as the fact that HBL's advance to deposit ratio has been low and there was room to gear up balance sheet without much deposit growth.While non mark up income of MCB has always been on the lower side of HBL i.e. maximum income from non mark up sources was 34% in 2004 while on the lower side it was 10% in 2009 which was better that that of HBL in the same year by a tiny percentage.The non mark up expenditure has been growing sharply from 2007 when the growth was 16% in 2008 it increased to 21% which declined to 6% in 2009. In 2006 non mark up expense was 30% of total revenues. In 2007 it was the same while decreased to 27% in 2008 and 19% in 2009. The major reason behind this high proportion of expenses was due to high expenditure on employees' retrenchment and voluntary separation scheme (VSS) as well as increase in technological expenditures, which is expected to be the same in coming few years. Source: IGI

On the other hand MCB's non mark up expenditure remained lower than that of HBL. It was 28% in 2005, gradually decreased to 16% in 2007 and again increased to 19% of total revenues in 2009 which still lower than that of HBL. However this investment in technology may give benefits to HBL in future. Profit after taxation increase by high margin in 2008 but in 2009 they failed to perform and growth in profit after taxation was negative. In 2007 profit after tax was 16% of total revenues which increased to 19% in 2008 and again decreased to 11% in 2009. They enjoyed the benefits of high spread in 2008 which increased their profit while in 2009 when the spread was lowered their profitability started to decline. They should have looked for other means of income rather than only relying on spread. On the other hand MCB's profit after taxation has been large throughout the analysis period. It was 39% in 2006, 40% in 2007, 34% in 2008, and 27% in 2009 still better than that of HBL. We can say that HBL did not focused on alternative ways of earning money and relied on the spread while MCB started to increase their investments and that’s why MCB has been successful in sustaining their profitability even in the event of economic recession. Still we cannot link every downfall in the banking business to the economic slump because our country was not much affected and state bank of Pakistan has mitigated the effect by injecting money into the market.Now the main point is that Banks remained focused on quick profit-making in the first seven years of this decade which eventually landed them in a situation where they failed to expand deposit base on the one hand and find ways of least

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risky yet highly profitable areas of lending. If they were been successful in securing their position and not going for short term gains they would have been in a much better position.

Vertical and horizontal analysis of HBL/MCB Balance Sheet

HBL's bank balance with treasury bank has increased with a steady growth. It reached to its peak in 2009 with a growth rate of 41% this means they are relying on depositing their cash with treasury bank rather than depositing with other banks, while this percentage has decreased in 2009. The growth in bank balance with treasury bank was very high from 2008 to 2009 which is 41% while it was 1.8% in 2008. As a result the percentage of total assets as cash with treasury bank has increased from 7.4% in 2008 to 9.4% in 2009. This means that their asset base is increasing so they had to maintain a greater portion of their assets with the treasury bank. On the other side the growth in cash with treasury bank of MCB has increased steadily. But their deposits with other banks is increasing very slightly which is 0% of total assets in 2005 and increased to only 1% in 2009. While the same ratio for HBL is increasing with high rate i.e. by 24% in 2008 to 3% in 2009 while it is 5% of total assets in 2008 and 4% of total assets in 2009 still it is better than that of MCB for the whole analysis period. Now if we go through all these changes we see that balance with treasury bank is the almost the same for both banks i.e. round about 8%-9% of their total assets from 2005-2009 which is because of the statutory liquidity requirement and cash reserve requirement of state bank of Pakistan. The change in these percentages is due to amendments in state banks prudential requirements. So we can say here that both of them has maintained their CRR and SLR requirement while the differential point to note is regarding their policies to deposit with other banks. We see that MCB maintained a very short proportion of their total assets with other banks, almost neglible figure and increase in this proportion was also neglible which means MCB does not feel comfortable to deposit their money with other banks or they have other higher return investment opportunities so they are following aggressive policy regarding using their assets and their low growth in this part shows they have no intentions to change their policies and attitude. Which we can see by looking at the increase in the proportion of advances and investments as percentage of total assets. While HBL did not follow the same strategy and they always retained greater part of their assets with other banks than that of MCB. Like in 2006 it was 6.02% of total assets while in 2007 it was 6% still a major portion of assets. This shows that HBL is not as aggressive in investment decisions as we can see that in 2008 the proportion of investments and advances almost remained unchanged while it decreased in 2009.HBL's lending to other financial institution has been very much deviant in the last three years it decreased by 75% in 2007 while it increase by 280% in 2008 and then again it decreased by 13%. While the proportion of lending to financial

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institution as total assets have always been stable but since 2008 it has decreased. MCB's lending to financial institution had also followed the same trend so this may be due market average and norms, and their attitude towards investing in other financial institutions.

Another major element to focus is on investment and advances. We see that the growth in investment of HBL increased by 48% in 2007 while their growth was negative in 2008 i.e. round about 22% while it again increased by 56% in 2009. Investments include investment in stocks of companies, associates, TFCs and bonds. Investments were 20.30% of total assets in 2005 while it slightly decreased to 20.26% in 2006. And in 2007 it again increased to 20.30%. But due to financial slump of 2008 it again decreased to 18% of total assets. But when the shades of economic recession started to eliminate bank revived its investments to 25% of total assets in 2009 which is a healthy sign. Another thing to notice is the portion of advances and its growth throughout the analysis period. We see that the growth in advances from 2005 had followed a steady growth rate i.e. 10% in 2006 while 9% in 2007 and increasing again to 19% in 2008 even in the event of financial slump.Advances were almost round about 60% of total assets for all the three years from 2006-2008 while it decreased to 52% in 2009. One point to note here is that even in the period of financial slump the demand for advances increased while only investment in corporate sector was effected by that event. So we can say that throughout the period HBL's advance base has been their core strength of the bank and they heavily relied on consumer banking. While on the other side MCB's investment in shares, TFC's and bonds has increased steadily and the portion of total assets utilized in investment was more than that of HBL throughout the analysis period. Like in 2005 investments were 28% of total assets while investment proportion of HBL was only 20% of total assets for the same year. MCB continued on increasing the portion of investment and reached to 33% of total assets in 2009 while the same percentage for HBL was only 25% in 2009. This means HBL is focusing on consumer banking while MCB is focusing on investment in shares and bonds and their intentions are increasing year by year.On prominent thing to note is that in 2008 after the event of financial slump HBL decreased it advances base and increased its investment in corporate sector. This shows that their focused has been changed from targeting corporate sector rather than relying on consumer loans and advances. Loan defaults remained high in the last fiscal year also due to a slump in domestic economy that had an adverse impact on corporate profitability as well as on consumption demand. Another factor behind high rates of loan defaults was that in the preceding years banks had made excessive irresponsible lending, particularly in consumer sector to earn unusually high margins. As a result, banks’ overall non-performing loans grew to Rs398 billion or 11.5 per cent of their overall loans in June 2009. (www.dawn.com, Nov 09, 2009)

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HBL's borrowing from financial institution has increased significantly in 2005 and 2006 from 18% growth to 61%. However the growth decreased to 4.6% in 2007 it decreased to -20% in 2008 in contrast we can see that HBL's lending to financial institution has increased by a significant growth rate i.e. 280%. This shows that bank has been able to mitigate its risk by not relying on other financial institution to increase their asset base by borrowings from financial institutions. While in the same year they were aggressive in lending their money to other institution and investing their money for higher returns. Because 2008 was the year when mark up rates and inflation rate was highest in the history. Comparing to 16 countries mark up rate Pakistan was on the top. In Pakistan, the discount policy rate had been gradually raised from 8 per cent to 15 per cent in last three years. The inflation had also grown in parallel with the mark-up growth during the past three years and jumped up from 10 per cent to 25 per cent. While we can see that borrowing as a percentage of total liabilities was round about 6%-7% from 2005-2009 while 2007 was the only year where this percentage increased to 9% after which it started to decline. It means HBL kept smaller percentage of their liabilities as borrowings from other banks. While on the other side we can see that growth in MCB's borrowings has increased significantly throughout the analysis period. We see that MCB kept 9% of their liabilities from borrowings from other institutions while this percentage was 10% in 2007 which decreased to 5% in 2005 while again increased to 9% in 2009. Comparing all this we can say that in 2008 when there was highest mark up rate in the country they did not borrowed from other financial institutions but HBL was more successful in doing so as their borrowings from other financial institutions was low percentage of their total liabilities.Deposit growth of HBL has been steady since 2005. It was 6.9% in 2005 while in 2008 it was 12% which continued to increase to 14% in 2009. They have been successful in increasing their deposit rate but the growth rate was not significant as compare to market average. Their deposits were 82% of their total liabilities in 2005 which was stable in 2006 but after that it continued to decrease to 77% in 2007 and again increasing to 79% in 2009. MCB's deposit base as compare to HBL was a bit low. As it was highest in 2005 i.e. 85% of the total liabilities after which it decreased to 71% in 2007. It again increases to 74% in 2008 and then again decreased to 71%. It is clear that MCB's deposit base is lower than that of HBL, although deposit base of all banks has been low since 2008 but still HBL managed to perform well. Their profitability still increased because of their investment in other corporate areas.Deposits of banks increased to Rs4.162 trillion in September 2009 showing a year-on-year growth of 10 per cent—better than 9.15 per cent a year before but far below an average growth of 18.5 per cent between 2002 and 2007.Deceleration of deposits’ growth can be attributed, to some extent, to a decline in GDP growth rates but primarily it reflects banks’ failure to offer reasonable rates of return and flight of capital in the wake of the war on terror and a general breakdown of law and order. Average deposit rate of banks stood at 6.3 per cent in September 2009, down 150 basis points from 7.8 per cent in September 2008. (www.dawn.com, Nov 09, 2009)

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Savings to GDP ratio stood at 13.4 per cent in FY08. It improved marginally to 14.3 per cent in FY09—thanks to an increase in public savings, but was still too low to facilitate the government in reducing its external borrowing requirements. Banks remained focused on quick profit-making in the first seven years of this decade which eventually landed them in a situation where they failed to expand deposit base on the one hand and find ways of least risky yet highly profitable areas of lending.

Market Look and Final Conclusion:

MCB have 691 million shares outstanding in market with capitalization of 151,822 million and share price of 219 on 31 December 2009. Its current share price is 207 rupees on 10 may 2020. However when we look at HBL its current outstanding share are 1001 million but still its market cap is below MCB it is only 106, 630million with current share price of 106. So we can look at that although MCB is larger in terms of share outstanding but investor expectation about its performance is far below as compared to MCB as evident from Share price. If we look in absolute amounts HBL outperforms with hundreds of more branches and more market share of both deposits and advances as shown in following figure from IGI securities report but MCB with small number of fixed assets and small market share is more profitable then HBL due to its managerial efficiency and less NPLs as evident from ratios.

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May 2010

MCB is also efficient in controlling its cost of administration and operations more effectively and earns more of its revenues from earning assets and less from

commissions and fee, however HBL comparatively earning larger percentage of revenues from commissions, from this we may can say that MCB may be

focusing more on corporate financing where as HBL on consumer thus charging higher servicing, another way my be that MCB is little more aggressively and

rapidly growing thus to attract more customer and enhancing market share they may be offering discounted services to customers. When we talk about liquidity of risk analysis we look at CAR and both banks are maintaining a big cushion to

absorb loss out of their risky asserts, again with MCB little better cushion not because of more capital but because they are less riskier and have less NPLs.in terms of cash and current accounts both banks are at good liquidity position to satisfy their depositor cash needs. HBL maintains more liquidity as they being

aware of their risk of earning assets.We do have positive future expectations from MCB, but this not at all means that HBL will be out of seen; no doubt they are competing well in analysis period and one of the giant market leaders in banking industry.

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References:

www.Dawn.com Stock Exchange Annual Reports of HBL for years 2004-2009 Annual Reports of MCB for years 2004-2009 IGI