VIS reaffirms entity ratings of Habib Bank Ltd

July 01, 2025 (MLN): VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Habib Bank Limited (PSX: HBL) at ‘AAA/A1+’ (Triple A/A One Plus).

Medium to long term rating of ‘AAA' indicates the highest credit quality; the risk factors are negligible, being only slightly more than for risk-free Government of Pakistan’s debt.

Short-term rating of ‘A1+’ denotes the strongest likelihood of timely repayment of short-term obligations with outstanding liquidity factors.

The outlook on the assigned ratings is ‘Stable.’

The ratings of HBL’s Basel III compliant Additional Tier-1 (ADT-1) TFC-2 and TFC-3 (issued in September 2019 and December 2022) have also been reaffirmed at ‘AA+’ (Double A Plus).

The medium to long-term rating of ‘AA+’ denotes high credit quality, protection factors are strong; risk is modest but may vary slightly from time to time because of economic conditions.

The previous rating action was announced on June 28, 2024.

HBL was established as a privately held bank in 1941.

The Bank is engaged in commercial banking and related services in Pakistan and overseas.

The Aga Khan Fund for Economic Development S.A. (AKFED) is the parent company of the Bank and its registered office is in Geneva, Switzerland.

HBL maintains its leading position in Pakistan’s banking sector, holding the largest market share in deposits, supported by an extensive domestic network, including dedicated Islamic banking branches.

The Bank has a notable international presence, operating across various strategic markets.

HBL enjoys a strong franchise with systemic importance to Pakistan’s financial sector.

During CY24, HBL’s asset base expanded by 8.8%. Growth was reflected in the credit portfolio, with gross advances standing at Rs2.38 trillion.

This growth was partially run off in early CY25 as short-tenor facilities matured.

The Bank maintained a significant holding of liquid assets, reflecting its conservative and flexible asset allocation strategy.

HBL’s asset quality remains sound, supported by effective underwriting practices and a comprehensive risk management framework.

Non-performing loans rose modestly during the year, predominantly in sectors such as construction and steel.

The implementation of IFRS-9 significantly increased provisioning levels.

While gross infection ratio temporarily improved, driven by significant loan growth, it reverted to prior levels by 1QCY25 as short-term exposures matured.

Despite this base-effect-driven reversal, provisioning coverage remained strong and the net infection ratio low, indicating continued resilience in credit quality.

HBL’s investment portfolio retains a conservative risk profile, predominantly comprising sovereign securities such as Pakistan Investment Bonds (PIBs).

The preference for floating-rate PIBs provides effective mitigation against interest rate volatility by reducing exposure to valuation losses amid interest rate changes.

HBL mitigates market risk prudently by managing the investment portfolio within a well-defined risk appetite structure and interest rate gaps, which take into account the behavior of both assets and liabilities, as well as market dynamics.

Liquidity remains strong, supported by HBL’s extensive franchise and well-diversified deposit base, reflected in an improved CASA ratio as of Mar’25.

Although market share has slightly reduced over the previous year-end, the Bank maintains strong access to stable, low-cost funding.

Liquidity indicators, including the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), significantly exceed regulatory requirements.

Deposit granularity remains high, indicating low concentration risk, further underpinning liquidity stability.

While the Liquid Assets to Deposits and Borrowings (LADB) ratio declined temporarily at end-CY24 amid elevated lending, it normalized by Mar’25 following the maturity of short-tenor exposures, reaffirming the resilience of the Bank’s liquidity buffers.

Profitability performance was maintained despite a narrowed Net Interest Margin (NIM) in CY24.

A substantial increase in non-markup income, primarily from treasury gains, card-related fee income, and gains from rationalizing international operations, supported earnings.

Inflation-driven increase in administrative expenses weakened the efficiency ratio, although, as a result of cost optimization efforts, the growth in administrative expenses remained lower compared to peers.

The international business showed notable improvement, contributing positively to overall profitability.

Elevated provisioning and a higher tax burden moderately impacted bottom-line performance, resulting in a slightly reduced Return on Average Assets (ROAA).

Moving forward, an ongoing strategic focus on cost management and sustained growth in non-interest revenue streams is anticipated to bolster profitability.

HBL’s capital position has improved, supported by internal profit retention.

The overall Capital Adequacy Ratio (CAR) rose to 18.2% (CY23: 17.3%) by end-CY24, remaining comfortably above regulatory minimums.

Prudent capital planning, strong internal capital generation, and conservative risk-weighted asset management collectively support a robust capitalization profile, expected to remain above regulatory thresholds.

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