FABL takes the bitter with the sweet

When Faysal Bank Ltd (FABL) acquired RBS Pakistan, at what was widely opined to be a throwaway price, the bank made headlines for all the right reasons. Unfortunately for FABL, it appears the market has quickly shed the euphoria associated with their recent acquisition.
Admittedly, post merger benefits and impacts are not always immediately visible. A lot of hard work and patience are needed on the part of the acquiring entity before the full extent of the ramifications of the deal can be seen.
But for now, it appears the market is anything but upbeat about the banks prospects. FABLs share price has shed some 35 percent since the beginning of the year to yesterdays closing level of Rs10.per share. The drop is significantly steep in comparison to other banks. BR Commercial Banks Index, which tracks share price performance of all listed commercial bank, fell by just 3 percent, over the same period.
The unenthusiastic sentiments also chimed with FABLs first quarter profit, which stood at a flimsy Rs 241 million for the end of March; compared to about Rs 1,685 million earned over the same period, a year earlier. Despite a considerable growth in net markup income; profits declined on the heels of higher non-markup expenses and lower non-markup income.
Powered by growth in loan and investment portfolio, FABLs top-line grew by 54 percent to Rs6.7 billion in 1QCY11. Following the acquisition, FABLs advances had surged to Rs 133.7 billion at the end of 2010 from around Rs 91 billion in 2009. Investment portfolio grew to Rs86 billion from around Rs56 billion, during the same period.
However, FABL kept its advances unchanged at the end of the first quarter (in the past three months). But bucking the market trend, FABL investment portfolio fell by around 17 percent to Rs71 billion.
Similarly, FABLs post merger deposits had jumped to Rs 195 billion at the end of 2010 from around Rs 124 billion in 2009. But, its deposit base slightly fell to around Rs 191 billion at the end of 1QCY11. At present, FABLs CASA ratio is hovering around 52 percent, which is very low compared to average ratio of around 62 percent for other mid-sized banks in Pakistan.
There was a slight growth in fee and brokerage income as well as income from dealing in foreign currencies, but lower gain on sale of securities, compared to same quarter a year earlier, resulted in lower non mark income.
Following the acquisition, FABL has broadened its reach, with a network of 226 branches, Due to this, FABLs administrative expenses jumped by 128 percent to Rs 2.7 billion in 1QCY11. This steep growth in expense is one of the major side effects caused by swallowing a bitter pill - RBSs high administrative expenses - last year.
Therefore the ratio of operating revenue to administrative expenses; a key measure of a banks efficiency, fell to 1.3 in the first quarter of 2011 as against 2.8 over the same period, last year.
FABL managed to curtail reduction in its asset quality, as its NPLs remained unchanged at around Rs 25 billion in the past three months. But, with infection ratio of around 17 percent, it seems that FABL would remain slightly conservative and prudential in lending down the line.
From business perspective amalgamation of FABL and RBS operation looks coherent. Given the current scenario, it seems that FBL might take time to turn RBS operations profitable and take advantage of synergies. However, at present, it is difficult to fathom how sweet the fruit of patience and sacrifice really is.

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Faysal Bank Ltd

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P&L Rs (mn)                   1QCY11      1QCY10         chg

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Markup earned                  6,679       4,321         55%

Markup expensed              (4,519)     (3,101)         46%

Net markup income              2,161       1,220         77%

Provisioning                   (445)       (107)        317%

Net markup income

 after provisions              1,716       1,113         54%

Other income                   1,383       2,157        -36%

Operating revenues             3,544       3,377          5%

Other expenses               (2,769)     (1,213)        128%

Profit before taxation           330       2,057        -84%

Profit after taxation            241       1,686        -86%

EPS (Rs)                        0.33        2.31

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Source: Company Accounts