Debt turns equity: HBFC eyeing to turn a new leaf

By Kazim Alam

KARACHI: This would be the best time to stock up on the shares of House Building Finance Company (HBFC) had the public-sector giant been a listed company.

But why would anyone want to have a stake in an entity that is often likened to the proverbial white elephant that gobbles up state resources every year without yielding any monetary benefits? After all, HBFC has all the characteristics of a typical state-owned organisation.

For example, it has not published its financial statements for the last two and a half years. Its board of directors has long been non-existent. Its key management positions lie vacant. Its non-performing loans (NPLs) constitute over 53% of its outstanding portfolio. And its unionised employees fight doggedly for their ‘right’ to annual increments regardless of their performance.

In short, it is a loss-making entity and continues to survive only because of annual bailouts from federal authorities.

Yet HBFC is expected to turn the corner in coming months. Here is why.

The State Bank of Pakistan (SBP) held a 37.5% stake in HBFC until June 2011, according to its latest financial statements. Incessant losses have forced HBFC to seek loans from the central bank every year. But a recent understanding among all stakeholders turned that debt into equity, thus increasing the SBP’s shareholding in HBFC up to 98%.

Leaving semantics aside, it can be argued that Pakistan’s sole specialised housing bank is now effectively a sister company of the country’s central bank.

In an ideal free-market economy, the idea of a regulator competing against private entities by owning the largest player – with a 24% market share – would be received with deep scepticism.

But a pro-active, hands-on approach by the government tends to receive better acceptance in a country like Pakistan, where private banks are eager to lend money to the government while the mortgage-to-GDP ratio languishes at 0.5%.

Speaking to The Express Tribune, HBFC Managing Director Pervez Said said the increase in the SBP’s shareholding will bode well for HBFC. “We’ll receive infrastructure support from the SBP, as housing is one of the areas the SBP especially focuses on,” he said.

Is a turnaround at hand?

After a gap of two and a half years, the Ministry of Finance has finally nominated members of the HBFC board and they are currently undergoing the ‘fit-and-proper test’ by the SBP. “I can’t reveal their names right now, but I can say confidently that no other public-sector company has so strong, clean and experienced people as board members,” Said noted.

The Ministry of Finance appointed Said as MD early in May. He has over 34 years of professional experience. His last assignment was as the CEO of Burj Bank.

With regard to the likely composition of the HBFC board, Said said it will consist of up to eight members, with an SBP nominee holding its chairmanship.

Renowned advisory company, Ernst & Young, has already been hired as a consultant to identify and plug system-wide loopholes at HBFC. “We’re soon going to have centralised, technology-based systems and controls to increase efficiency and eliminate leakages,” he said.

Unlike past many years, the company is expected to post a profit in 2014, according to Said. One of the major reasons for the expected positive bottom line in the current year is the massive reduction in the company’s debt servicing costs after the conversion of SBP loans into equity.

Said said he is going to be singularly focused on the promotion of affordable housing, especially through financing for builders and developers. It means that instead of going to private banks for their liquidity needs, housing developers will have enhanced access to financing from HBFC.

In other words, HBFC will provide liquidity to both builders and purchasers of housing units. It will then be able to control risk and ensure better discipline on the part of housing developers, he noted.

“Financing the developer will mean greater influence for HBFC, which will be used for the promotion of affordable housing for low-income groups,” he added.

HBFC’s non-performing loans

HBFC’s NPLs decreased 12.1% to Rs6.5 billion during the 12-month period ending on March 31, according to the latest SBP Housing Finance Review. About 53% of its total outstanding housing finance constitutes NPLs while its share in the industry-wide NPLs is over 40%.

These figures may sound huge at first, but they represent NPLs of HBFC since 1952 – the year it was set up as a social lending institution. In other words, not a single loan has ever been written off in HBFC’s entire history for some inexplicable reason.

“Take my word. More than 50% of the balance sheet is bound to be affected if any financial institution follows the no-loan-write-off policy for so many decades,” Said noted.

Published in The Express Tribune, September 22nd, 2014

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