Habib Metro shows how (not) to compete against the big boys and win

Habib Metro is a boring, unexciting bank. It’s neither big nor small. Nobody uses its credit card. It won’t serve you if you need a home loan or car financing. Its name – at least half of it – bears an uncanny resemblance to that of a train, bus or a large supermarket.

Yet the bank is the single biggest player when it comes to trade finance, a type of banking that helps importers and exporters meet the ‘funding gap’ in trade cycle.

“Habib Metro is primarily a trade finance bank,” says Sirajuddin Aziz, its outgoing president, in an interview with Profit. “Up to 16 per cent of the country’s total external trade is being handled by Habib Metro,” he adds.

Set up in 1992, Habib Metro is a listed bank with 308 branches in 88 cities. Owned by the Habibs, a venerable business family with a banking legacy dating back to 1921, Habib Metro merged with Pakistan operations of Habib Bank AG Zurich, another group entity, in 2006.

Banks don’t usually publish the exact size of their trade finance operations. But his claim was corroborated by two other, independent sources. “I believe our bank has the largest market share in trade finance,” he says. 

To put it in perspective, Habib Metro was the ninth largest bank in 2016 – the latest full year for which industry-wide data is available – with net assets of nearly Rs40 billion. It was the 10th largest entity in terms of pre-tax earnings that year.

A bank requires old, time-tested relationships with importers and exporters to grow its trade finance business steadily. For example, a tea importer based out of Jodia Bazaar is required by his Kenyan counterpart to pay for the shipped merchandise in advance. So it takes a trade finance bank operating in Karachi to furnish a letter of credit (LC) to the Kenyan bank of the Nairobi-based exporter, promising that he will receive the payment on time even if the Pakistani importer is unable to pay it himself.

“We’ve been very entrenched in the bazaar area right from the word go… We take the major share in Jodia Bazaar. I think we should be the No. 1 bank in Jodia Bazaar,” he says.

But there are 30 banks in Pakistan and opening an LC should be a mundane, everyday business activity for nearly all of them. So what makes Habib Metro stand out?

“Quick decision-making and fast turnaround are most important (in trade finance). The price of dana (polyester) will change tomorrow if you don’t lock the transaction at the going rate. So the client would demand the LC right away,” he says.

According to mid-level employees of Habib Metro, trade finance clients enjoy rare access to the bank’s back office. This is against the usual practice whereby clients never get to bypass the front office, i.e. the bank branch. But Aziz denies it, saying clients sometimes contact the back office for operational issues, such as a minor correction in documents that requires the trader’s stamp. But they have no influence over the centralised credit decision-making process, he says.

At the cost of consumer banking?

Too much focus on trade finance seems to be at the cost of consumer banking, a segment that most other banks try to excel in. Selling credit cards and loaning funds for home and car purchases help a bank grow its bottomline far quicker than, say, financing external trade.

That’s because consumer banking products tend to have a substantial spread, which is the difference between interest rates at which a bank accepts deposits and extends loans. Most banks enjoy a spread of 3-5 per cent on auto finance loans, for example. Some banks, like the six biggest players, do everything from consumer banking to corporate banking. Most of the smaller players – Islamic banks, in particular – are into consumer banking only.

But spreads are extremely competitive in trade finance. Even a 2 per cent spread is considered high, which means pricing is cutthroat and business is driven solely by the volume.

Annual accounts of Habib Metro reveal that just 3.1 per cent of its net income in 2017 originated from retail banking – a segment that deals with small borrowers and includes loans, deposits and other transactions with consumers, small and medium enterprises (SMEs) and agriculture sector. The rest of its net income came almost equally from the trade and sales segment, which includes treasury, money market and stock market activities, and commercial banking that caters to corporate and other big clients.

Although Aziz helped the bank’s bottom line grow from Rs3.2 billion when he joined as president in 2011 to Rs5.5 billion at the end of 2017 – a compound annual growth rate of 9 per cent – the bank has shied away from expanding into the consumer segment.

This has been in contrast with Aziz’s earlier stints as COO and CEO at Bank Alfalah from 2001 to 2011. He grew it into one of the six largest commercial banks with a dominant position in consumer banking.

“This bank took a premeditated decision that it wouldn’t do that because that’s not its niche. Its niche is trade. We are not in consumer banking at all,” he says.

According to Elixir Securities, overall banking profits for 2017 are expected to record a marginal decline of 1 per cent. However, net profit of Habib Metro remained Rs5.5 billion, down almost 10 percent from Rs6.1 billion a year ago. Net profit in 2015 was even higher at Rs7.6 billion.

But Aziz wouldn’t call it a decline in earnings. To him, it represents the ‘rationalisation’ of profit.

“The peaking of our profit in 2015 was a result of capital gains,” he says while referring to Rs4.7 billion gains on the redemption of securities in that year. “It was an arbitrage opportunity. My interest rate reading was right. So I sold securities at the right time. But remember, that is not my primary responsibility,” he says, adding that his primary responsibility is financial intermediation i.e. taking money from those who possess it and giving it to those who can deploy and multiply it.

Simply put, Aziz blames the drop in capital gains for a shrinking net income in 2017.

“My core business income is climbing. It means I am lending money. My LC commission is going up. My export commission is growing, which means I am doing business. I am not just buying and selling securities,” he says.

Total markup income of Habib Metro amounted to Rs13.9 billion in 2017, up 27.2 per cent from a year ago.

New role

After more than six years at the helm, Aziz will soon be elevated as CEO of the Group Financial Institutions in Habib Bank AG Zurich Group, which also controls 51 per cent shareholding in Habib Metro.

He will be replaced by Mohsin Nathani who previously worked as CEO of Standard Chartered Bank in Pakistan and the United Arab Emirates.

In his new role, Aziz will be responsible for developing trade corridors between the countries where the bank already operates. Habib Metro will try to take advantage of its foreign presence and appear to the marketplace as one global bank, he says.

“There are some avenues to create new streams of business and revenue. It’s tying up transactions on both ends and to facilitate greater quantum growth. For example, we are sitting on the doorstep of China in Hong Kong with our presence. We’ve been there for decades. I am going to utilise its presence for the China-Pakistan Economic Corridor for Chinese investment and trade,” he says.

Philosopher banker

Aziz enjoys the reputation of a philosopher banker. He has written many books, is a sought-after public speaker on management and finance, and speaks flawless English and Urdu.

A five-minute conversation with him is enough to reveal that he’s deeply religious. His junior associates say he urges them to respect their parents, show compassion and uphold moral values – lofty ideals that few corporate leaders seem to care about anymore.

Yet it was under his leadership that – many current and former employees believe – Habib Metro underwent a ‘cultural shift’. It used to be a bank that few employees ever decided to part ways with. People would join it after graduation and leave it upon superannuation.

But Aziz’s years at the bank saw an uptick in employee turnover, former staffers say. The bank was earlier known for giving heavy annual increments to employees, but the practice stopped after his ascent to the top, they claim.

Aziz strongly disagrees with this view and insists that the increment rates at Habib Metro remained in double digits even though the average for the entire industry was just 2-3 per cent.

“There were people who were in a certain age bracket that their productivity was going down. But we didn’t tell them to leave. Very respectfully, we told them to gradually hand over their responsibilities, and let us know the date when they would like to leave at their own convenience. That’s how people left. We didn’t fire a single employee,” he says.

As a result of their resigning, he says, room was created for the next generation of bankers to grow into senior roles. “People were feeling stagnant. Opportunity was created at once for people to grow,” he adds.

More recently, about one-quarter of the staff from the compliance department reportedly left Habib Metro for other, bigger banks. There was no attempt on part of the management to make them stay.

Aziz says he can recall telling one such young banker that he should consider all factors before switching jobs. “As an elder, I told him that money is not everything. The bank that was offering him a job was hiring only three or four (people), which means it could pay whatever it had to. My hiring is of 40-50 people. It’s not possible for me to raise the salary by 100 per cent for so many people. That’s against equity,” he says.

Easy money

No discussion with a commercial banker is complete without the standard question about the banks’ incurable addiction to risk-free government securities at the cost of private-sector credit growth.

After all, banks hold Rs6.85 trillion or almost 80 percent of outstanding stocks of government securities. In contrast, loans to private-sector businesses amount to Rs4.2 trillion, about 61 per cent of total bank holdings of government securities.

“Please understand that banking is one industry that operates within a cluster of industries that make up the economy. To blame banks entirely for having put a large part of their liquidity in treasury assets will be incorrect,” he says while insisting that entrepreneurs are shy of putting up new businesses.

“It’s other people’s money that I am carrying on my balance sheet. I want to play safe also. It can’t be all debt-financed. There has to be a fair combination of equity- and debt-based projects,” he adds.

Responding to a question about CASA, a performance indicator that reflects the share of low-cost current and saving customer deposits in total deposits, Aziz says it should be viewed in an ‘entrepreneurial perspective’.

Having a high CASA is like a feather in a bank CEO’s cap. It means the CEO is drawing in deposits at a minimal cost, which will then help generate a wider spread for the bank.

“Deposits are raw material for the banking industry. Every entrepreneur wants to keep their cost of material minimal. Emphasising CASA means I am trying to minimise my cost of raw material,” he says. He pointed out that private-sector loans have registered growth since May 2017 when macro-economic fundamentals started improving.

Loans to private-sector businesses grew almost 18 per cent in 12 months through January. Advances by Habib Metro at the end of September 2017 amounted to Rs167.3 billion, up 17 per cent from the beginning of the year. “Please don’t misinterpret raw material cost reduction.”

However, Aziz believes some tapering is likely to take place in advances’ growth given that 2018 is the year of a general election. “If things go well, advances will climb back.”

Diplomacy failure

As for Pakistan’s upcoming inclusion to the so-called grey list maintained by the multilateral Financial Action Task Force (FATF), Aziz says the government should’ve handled the issue with “more preparedness”.

The mandate of the FATF is to counter global money laundering and terrorism financing. An indication from the Paris-based body that it doesn’t find Pakistan’s banking system sufficiently sound to counter money laundering and terror financing can spell disaster for entities like Habib Metro whose core business revolves around facilitating international trade.

“They’re saying we don’t have mechanisms, we don’t have laws. But the law is there. We passed it last year,” he says, noting that Pakistan’s ambassadors and commercial councilors should have told the countries behind the FATF move about the steps that the government has taken to counter money laundering and terror financing. “Our legal framework with regards to anti-money laundering is one of the finest.”

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Sirajuddin Aziz, in his own words

“My father was a bureaucrat. I couldn’t go abroad to study because he was an honest bureaucrat.

“I did B.Com in 1977 with a distinction from Premier College, Karachi. I was 11th on the merit list. Then I did MBA in banking and finance over a period of time. I did some courses in Hong Kong, then completed the rest of the programme here in Karachi from a very fine institute that was affiliated with the University of Karachi. It was called the Institute of Banking Finance and Management. It was in the Federation House, Clifton. Unfortunately, they closed it down.

“My father wanted me to join the Foreign Service. But I believed it would be difficult for me to get into it because I thought I was not that qabil (competent). Also I knew that wahan suni nahin jaegi (I would not have much say in matters there) .

“My first job was with the Bank of Credit and Commerce International (BCCI). I remained with it till the bank was shut down. If BCCI was around today, I would still be working there.”

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Meet the New President/CEO Mohsin Ali Nathani:

Work, sport, social responsibility, Nathani’s avowed passions

Initially tipped off to lead Habib Bank Limited in place of Nauman Dar, Mohsin Ali Nathani instead landed with another Habib, to become the numero uno in the Habib Metropolitan Bank. A seasoned corporate banker with about two decades and a half in a slew of prime positions with renowned banking entities – Standard Chartered, Barclays, Citigroup and ABN Amro among them – in East and South-East Asia, the Middle East, and the Levant, Mohsin Ali Nathani joins Habib Metropolitan
Bank as its president and CEO at the start of the second quarter of the ongoing year, in place of Sirajuddin Aziz, who has been elevated to another, Far East-based assignment within the group.

He is a post-graduate from the prestigious Institute of Business Administration, Karachi in the class of 1987. Now in his fifties, Nathani – with work, sport and social responsibility as his avowed passions – comes back to his hometown after a four- year interregnum, as the head of a strong-in-its-own-niche bank: Habib Metropolitan. Amongst top 10 on the leaderboard for leading national banks, the bulk of Habib Metropolitan’s profits come from trade finance. In an interview to a major UAE daily newspaper in 2015, Nathani had mentioned: “passion as the secret to success”.

Answering a question, he said: “It starts with passion. I think you have to like what you do, which I do… Within the workspace, what I’ve figured out is that people are the most important piece. You extract… more value and more productivity out of them by helping them and making it easier for them to work.” And what he can’t live without? “Work”, of
course. He elaborated: “It’s not a good answer, but perhaps work. I enjoy work very much, but I am not someone who puts in 16 hours a day. I have a regimented routine and try to be as productive as possible with my time management.” If he wasn’t CEO of a bank, what else would he be doing?

“Social responsibility is my passion, so I would give a significant amount of my time to that profession on a non-profit basis.” Given that passion, it is nosurprise that Nathani is on the boards of Pakistan Council for Philanthropy, the British Oversees School, I-CARE and a trustee in his alma mater IBA’s Endowment Fund.

-by Agha Akbar