FAYSAL BANK: EYEING GROWTH – Analysis of Financial Statements

Incorporated in 1994, Faysal Bank Limited (FABL) has been engaged in commercial, consumer, corporate and Islamic banking activities across Pakistan.

In its quest to avail privileges of reach and scale as those enjoyed by the bigger banks; FABL has considerably increased its business size in the past decade. The yearning to grow into one of the ten biggest banks of the country also drove FABL to adding Royal Bank of Scotland to its cart last year.

FABL runs a network of around 242 branches, including 30 Islamic banking branches, with total assets aggregating over Rs 287 billion as of 30th June 2011.

DEPOSIT GROWTH BUOYED BY EXPANSION

Backed by continuous roll-out of new branches and products, along with the acquisition of RBS, the bank’s deposit growth outdid the industry during the past few years. This can be gauged from the fact that when the industry’s (all commercial banks) deposit base registered a CAGR of 14.03 percent during the past five years (2005-10), that of FABL grew by 21.18 percent.

The RBS acquisition helped FABL record 50 percent year-on-year increase in deposit base.

FABL has been focussing on accumulation of low cost deposits. The growth of 12 percent in current account deposits in the first six month of CY11 helped improve the CASA ratio by one percentage point to 53 percent.

ASSETS UTILIZATION REMAINED HEALTHY

Aided by growth in deposit base, along with expansion in services and products; FABL’s asset size has massively increased in the past few years. The advances stood at Rs 143 billion by the end of 1HCY11, up from Rs 133 billion at the end of CY2010.

The bank’s fund utilisation was impressive as the advances portfolio registered a 5-year CAGR of 16 percent (industry CAGR – 11 percent).

To capitalise on handsome risk-free rate on treasury securities, the bank stretched its investment portfolio by a whopping 18 percent to Rs 102 billion during 1HCY11.

The ratio of advances and investments to deposits surged by eight percentage points to 120 percent as of June 30, 2011, indicating that the bank will expand its deposit base at a much higher rate in the future to increase the size of its earning assets.

The NPLs remained stagnant at around Rs 24.5 billion during 1HCY11. In light of growth in advances(acquired from RBS), FABL’s NPLs more than doubled to Rs 24 billion in CY10 from around 10.6 billion in CY09.

MARK-UP INCOME AND EXPENSES

The merger with RBS bank has also massively increased FABL’s revenues, lifting total mark-up income by 58 percent to Rs 13 billion in 1HCY11 compared to the same period, a year earlier.

Financing income contributed 67 percent to the CY10 revenue. Since the bank has been increasing its stake in investments, the share of revenues from investments is likely to grow in future.

Improvement in CASA ratio, along with a high utilization of earning assets, inched up the bank’s gross spread ratio to around 32 percent in 1HCY11 from 29 percent in CY10.

NON-MARKUP INCOME AND EXPENSES

FABL’s non-interest income, one of its strong points historically – increased by 42 percent year-on-year in CY10. This was mainly on the heels of the capital gain booked on settlement of NIT LOC and growth in commission and brokerage income.

The amalgamation of RBS operations helped the bank register growth in returns from brokerage activities, dealing in foreign currencies and other income during 1HCY11.

The acquisition of RBS operations, along with adoption of RBS administrative staff, has doubled FABL’s non-mark-up expenses in 1HCY11 over the same period a year earlier.

With FABL in a transition phase, aligning operations and employees of two previous separated banks, the bank’s income to expenses ratio fell to 1.25 in 1HCY11 from around 1.45 in CY10.

FABL has massively enhanced its human resource as currently it employs more than 3,582 employees, nearly three times more than the employee size in 2005.

FABL EARNING HEALTHY PROFITS

Battered by asset expansion, the Bank’s ROA fell to 0.53 percent in CY10 from 0.75 percent in CY09. While ROE eased to 8.5 percent from around 11 percent. Though both ROA and ROE have weakened in the past, realisation of operational and financial synergies, will likely improve FABL’s profitability down the line.

FABL IN COMPLIANCE

FABL’s CAR fell to 9.95 percent in CY10- slightly below the SBP’s requirement of 10 percent, from 11.93 percent in CY09. However the bank successfully met the minimum capital requirement in CY10 due to its share capital of around Rs 7 billion, along with an equivalent amount in reserves.

FABL’S SHARE PRICE UNDERVALUED

The price of FABL’s shares is currently hovering around Rs 10 each; down from an average price of Rs 16/share in CY10. On the contrary, BR Commercial Bank index, which tracks share price performance of listed banks, is standing at 2514 points as opposed to average index level of 2469 points in CY10.

A fall of 40 percent in FABL’s share price since the start of CY11 suggests that investors have a myopic attitude towards mergers as previous banking marriages in Pakistan have failed to meet stakeholders’ expectations.

In part, equity analysts also relate sluggish share price performance to FABL’s low turnover in the market and investor’s cold attitude towards midsized banks.

FABL RATING

PACRA has maintained the long-term and the short-term entity ratings of FABL at “AA” and “A1+”, respectively. “The ratings reflect FABL’s ability to withstand tough operating environment and maintain its market standing”, according to PACRA.

OUTLOOK

Healthy performance in 1HCY11 portends a stable outlook for FABL. However, given that the bank is currently in a transition phase following the merger; it continues to face challenges such as aligning operations and reducing cost of operations.

FABL has been continuously increasing the network of its branches. This expansion suggests that the bank will continue to witness growth in its deposit base, down the line.

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Faysal Bank (FABL)
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Key Statistics Rs(mn) 1HCY11 CY10 CY09 CY08
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Deposits 203,134 195,315 123,655 102,777
Investments 101,768 86,419 56,531 36,153
Advances 142,639 133,707 91,346 83,512
NPLs 24,500 24,707 10,671 7,446
Branches 242 226 133 129
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Ratios
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Infection Ratio 15 16 11 8
Coverage Ratio 70 71 66 69
CAR Na 9.95 11.93 10.84
CASA 53 52 50 43
ADR 70 68 74 81
IDR 50 44 46 35
Gross Spread Ratio 32.29 29.38 29.43 36.92
Income/Expense Ratio 1.25 1.45 1.81 2.13
ROE Na 8.51 11.18 10.89
ROA Na 0.53 0.75 0.8
WACD Na 6.7 8.23 7.03
EPS (Rs) 1.08 1.63 1.64 1.53
BV(Rs) 23 23 21 20
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Source: Bank Financial Reports
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Faysal Bank Ltd
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P&L(Rsmn) 1HCY11 1HCY10 chg CY10 CY09 Chg
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Mark-up earned 13756 8705 58.0% 19.710 16.958 162%
Mark-up expenses (9313) (6038) 54.3% (13,919) (11,968) 16.3%
Net Mark-up Income 4443 2668 66.6% 5,791 4,990 16.1%
Provisioning (128) (603) -78.7% (2,202) (2,192) 0.5%
Net Mark-up income after provision 4315 2065 109.0% 3,589 2,798 28.3%
Non Mark-up income 2650 2043 29.7% 4,012 2,813 42.6%
Operating revenues 7093 4710 50.6% 9,804 7,803 25.6%
Non Mark-up expenses (5689) (2578) 120.6% (6,775) (4,311) 57.2%
Profit before taxation 1275 1529 -16.6% 827 1,301 -36.4%
Profit after taxation 794 1734 -54.2% 1,190 1,200 -0.8%
EPS 1.08 2.37 1.63 1.64 -0.6%
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Source: Bank Financial Reports
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