Bank: FAYSAL BANK LIMITED – Analysis of Financial Statements Financial Year 2006 – 1Q Financial Year 2011

Faysal Bank started operations in Pakistan in 1987, first as a branch set-up of Faysal Islamic Bank of Bahrain and then in 1995 as a locally incorporated Pakistani bank under the present name of Faysal Bank.

On January 1, 2002, Al Faysal Investment Bank Limited, another group entity in Pakistan, merged into Faysal Bank Limited, which resulted in a larger, stronger and much more versatile institution. The Bank has a network of 226 branches (133 in 2009); including 13 Islamic banking branches (6 in 2009).

An analysis of the change in balance sheet over December-2010-Mar-2011 shows that lendings to financial institutions increased by 100% from nil to Rs 100 million, in the call placements category. This shows that Faysal Bank has started engaging in the interbank market transaction, which is a positive indicator for profitability, keeping in view the prevailing KIBOR rates. (Faysal Bank had divested its lending to financial institutions in FY10.)

However, investments fell by 17.42% from Rs 86.42 billion in December 2010 to Rs 71.36 billion in March 2011. The main decrease in investments was in the available for sale and held to maturity categories. While this indicates a decline in profitability, it led to a 7.71% decrease in total assets from Rs 267 billion to Rs 247 billion over December-2010-Mar-2011.

On the liabilities side, the borrowing from financial institutions, ie call borrowings and repos, decreased by 43.80%, indicating the continuing unwillingness of Faysal Bank to engage in the interbank market transactions and the policy of paying off earlier borrowings. This led to a decrease in total liabilities from Rs 251 billion in December 2010 to Rs 230 billion in March 2011. Due to a 283% decrease in surplus on revaluation of assets and a relatively modest 14.87% increase in unappropriated profit over December=2010-Mar-2011, the total shareholders’ equity decreased by 0.84% over this period. However, the share capital increased by 0.25% over the first quarter of FY11.

Financial performance (FY10)

The Bank acquired the majority shareholding of 99.37% of the RBS for cash consideration of approximately Euro 41 million on the acquisition date of October 15, 2010 and the RBS became a subsidiary of the Bank as at the aforementioned date.

The strength and stability of Faysal Bank Limited is evident through the Credit Rating of “AA” (Double A) for long to medium term and “A1+” (A One Plus) for short term assigned to it by both JCR-VIS Credit Rating Company Limited and Pakistan Credit Rating Agency Limited (PACRA). During FY10, the bank acquired controlling interest of Pakistan operations of the Royal Bank of Scotland (RBS Pakistan).

The majority shareholding of Faysal Bank is held by Ithmaar Bank B.S.C an investment bank listed in Bahrain which directly and indirectly holds 66.94% of the shareholding of the bank, with the balance shares in the hands of general public, NIT and other Pakistani institutions.

Faysal Bank holds a 60% shareholding in its subsidiary, Faysal Management Services (Pvt) Ltd. During FY’10, the Board of Directors of FMSL decided to voluntary wind up the company and accordingly resolved to initiate proceedings of voluntary wind up by the members of FMSL under the Companies Ordinance 1984.

Recent performance (1Q11)

The credit rating of Faysal Bank remained the same at AA for long-term and A1+ in the short-term during 1Q’11. This shows that the merger of Faysal Bank with RBS did not affect the stability of the company in terms of interest payments due.

The mark-up earned increased by 54.53% from Rs 4.32 billion in 1Q10 to Rs 6.68 billion in 1Q11. This was due to the profitable investment environment for Pakistani banks as the return on government securities increased significantly over 2010-2011. The markup expensed increased by 46.03% from Rs 3.09 billion in 1Q10 to Rs 4.52 billion in FY10. This led to an overall 75.94% increase in net markup income from Rs 1.23 billion in 1Q10 to Rs 2.16 billion in 1Q11.

Provisions against non-performing loans increased 59.54% while provisions for consumer loans increased by 458%, ie 4.58 over 1Q10-1Q11, due to the inclusion of RBS’s infected loans portfolio into Faysal Bank’s portfolio. This led to a 316% increase in net provisions which offset the increase in net interest income, leading to 53.05% increase in net interest income after provisions from Rs 1.12 billion in 1Q10 to Rs 1.72 billion in 1Q11.

Gain/loss on sale of securities decreased by 91.33% from Rs 1702 million in 1Q’10 to Rs 147 million in 1Q’11, leading to a 35.91% decrease in net non-interest income. Overall this resulted in 5.49% decrease in total mark-up/non-mark-up income from Rs 3.28 billion in 1Q10 to Rs 3.10 billion in 1Q11.

In the non-mark-up expenses’ category, administrative expenses showed the greatest increase of 127% from Rs 1.21 billion in 1Q10 to Rs 2.76 billion in 1Q11. Coupled with the decrease in gain on sale of securities income mentioned earlier, this led to an overall 83.79% decrease in profit before taxation from Rs 2063 million in 1Q10 to Rs 334 million in 1Q11. This shows that the major reason for the decrease in the profitability of Faysal Bank has been RBS merger, which has significantly increased administrative costs and affected the non-mark-up income of the bank, caused by poor asset (securities) management.

Thus, profit after taxation decreased by 85.48% from Rs 1690 million in 1Q10 to Rs 245 million in 1Q11. The earnings per share similarly decreased by 87.73% from Rs 2.77 per share in 1Q10 to Rs 0.34 per share in 1Q11.

An analysis of the change in balance sheet over December-2010-Mar-2011 shows that lendings to financial institutions increased by 100% from nil to Rs 100 million, in the call placements category. This shows that Faysal Bank has started engaging in the interbank market transaction, which is a positive indicator for profitability, keeping in view the prevailing KIBOR rates. (Faysal Bank had divested its lending to financial institutions in FY10.)

However, investments fell by 17.42% from Rs 86.42 billion in December 2010 to Rs 71.36 billion in March 2011. The main decrease in investments was in the available for sale and held to maturity categories. While this indicates a decline in profitability, it led to a 7.71% decrease in total assets from Rs 267 billion to Rs 247 billion over December-2010-Mar-2011.

On the liabilities side, the borrowing from financial institutions, ie call borrowings and repos, decreased by 43.80%, indicating the continuing unwillingness of Faysal Bank to engage in the interbank market transactions and the policy of paying off earlier borrowings. This led to a decrease in total liabilities from Rs 251 billion in December 2010 to Rs 230 billion in March 2011. Due to a 283% decrease in surplus on revaluation of assets and a relatively modest 14.87% increase in unappropriated profit over December=2010-Mar-2011, the total shareholders’ equity decreased by 0.84% over this period. However, the share capital increased by 0.25% over the first quarter of FY11.

Financial performance (FY10)

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