Bank: FAYSAL BANK LIMITED - Analysis of Financial Statements Financial Year 2003- Financial Year 2006

Faysal Bank Limited started its operations in Pakistan in 1987, as a branch set-up of Faysal Islamic Bank of Bahrain and since 1995 as a locally incorporated Pakistani bank under the present name of Faysal Bank Limited. On January 1, 2002, Al Faysal Investment Bank Limited, another group entity in Pakistan merged into Faysal Bank.
Faysal Bank Limited is a full service banking institution offering consumer, corporate and investment banking facilities to its customers. The bank's widespread and growing branch network in the country including Azad Kashmir, together with its corporate offices in major cities, provides efficient services in an effective manner. Presently, it has 88 branches nationwide.
The strength and stability of Faysal Bank is evident through the credit rating it assigned by JCR-VIS Credit Rating Company Limited of AA (Double A) for long to medium term and A-1 (A one) for short term.

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FABL - Highlights

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Year end: December       9mths'07     9mths'06     Chg Rs      % Chg

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Net Interest income       3,146.8      2,538.5      608.2       24.0

Provisions                   60.2        222.3     (162.1)     -72.9

Net interest income

 after provisions         3,086.6      2,316.2      770.3       33.3

Non interest income       2,165.1      2,141.7       23.5        1.1

Non interest expense      2,133.6      1,372.7      760.9       55.4

PBT                       3,118.1      3,085.1       32.9        1.1

Tax                         791.5        809.8      (18.4)      -2.3

PAT                       2,326.6      2,275.3       51.3        2.3

EPS                          4.39         4.30       0.10        2.3

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Courtesy: fnetrade.com
Faysal Bank Limited has posted profit after tax of Rs 1,032 million (2006: Rs 1,251 million) and Rs 2,327 million (2006: Rs 2,275 million) for the third quarter and nine months ended September 30, 2007 respectively. The earning per share for the nine-month period works out to Rs 5.49 versus Rs 5.37 in corresponding period last year. The flat increase can be discounted for by non-recurring increase in the administrative expenses like payment to the outgoing CEO and president in appreciation of his good work. Also, expansion of branch network led to an increase in the administrative expenses.
The net interest income has increased by 33% or Rs 770.3 million. Of this amount Rs 162.1 million was contributed by a reversal of provisions due to recovery of loans. The non-interest income increased only marginally by 1.1%. However, the non-interest expenses increased by 55.4%, because of the above mentioned reasons causing the PAT and PBT to depress.
The total assets of the bank have grown by 25% to Rs 144 billion as at September 30, 2007 compared to December 2006. The increase is mostly funded by deposits, which increased by 43%. There has been a decline in borrowing from the financial institutions, but the shortfall was more than made up by the increase in deposits. The increase in deposits has been contributed by term and savings deposits. Current deposits form a very small proportion of the total deposits. The bank has been relying on high rate deposits to attract funds. This trend shall increase the cost of funds for the bank, as there are only 14.9% of deposits belonging to current and margin financing accounts.
The earning assets of the bank form a higher percentage than the industry trend. Also the ADR remains above 100%; expected to remain steady considering the aggressive stance of the bank.
On the asset side bank's financing portfolio has increased by 7% to Rs 79.8 billion, investments by 47% to Rs 33.2 billion and lending to financial institutions by 1.5 times to Rs 11.6 billion. Main reason for increase in investment and lending to financial institution is placement in government T-bills. Further surplus on revaluation of investments has also increased by Rs 1.9 billion mainly due to increase in unit price (from Rs 44.85 to Rs 55.25) of NIT. Faysal Bank holds the LoC from the government against the NIT shares.
Banks' greater interest in government paper (particularly in longer tenor) was due to a number of reasons, including: (1) their expectations that interest rates have peaked out, and (2) the interest rate differential between lending to private sector and to the government had narrowed. It is to be expected that the trend of investments in the government securities will continue, until and unless the government manages to raise funds through some other sustainable means of financing.
The credit to private sector has seen a deceleration in line with the industry trend. The net credit to the private sector registered a deceleration during Jul-1st December FY08, increasing by 5.4 percent compared to 7.0 percent in the corresponding period of FY07. This shows that the exceptional rises in private sector credit growth seen in past years are converging to long term trends.
FY03-FY06: In terms of assets, FABL ranks 9th amongst the major banks of Pakistan. In percentage terms FABL holds 3% market share. As of FY06, FABL has a share of 2.6% in total deposits of the industry. The break up of these deposits in FY06 is as follows:
1. Fixed deposits-50%
2. Current deposits-20%
3. Savings deposits-27%
4. Margin deposits-3%
Unlike other banks, FABL has consistently increased its reliance on fixed deposits over the years. This augurs well for FABL since a large proportion of term deposits/time deposits signify constant stream of income and better ability to match loans and deposits, thus lowering the credit risk for FABL. Furthermore, the liquidity risk for FABL is on a lower side as only 27% of the total deposits are savings deposits that can be withdrawn any time, thereby posing lesser risk for the bank.
DEPOSITS COMPOSITION: A significant portion of assets is allotted to the investment portion while 6% goes to cash amount. Thus, FABL has a strong liquid portfolio with a continuous stream of income as evident from the investment portion of the analysis. Even the five years' trend shows greater inclination towards the investment side, which shows efficiency on part of the company to utilize its idle cash while keeping an adequate amount of cash to fulfill daily cash transactions. Also, the trend in advances has been increasing while the investment portion remained more or less constant.
ASSET COMPOSITION TREND: Although FABL has a small market share in terms of assets (3%) yet it is constantly increasing its deposit rate to attract the customers. Further innovation in the product line is needed for enhancement of market share.
-- FABL has around 3.2% of the total loans of the sector. The composition of the loans (financing) stood as follows in 2006:
-- 41% bills discount (less than 3mth) 21% short-term loans (greater than 3mth and less than 1 yr)
-- 33% medium term loans (greater than 1 yr and less than 5 yr)
-- 5% long term loans (greater than 5 yr)
42% share of bills discount is in line with the industry trend. Larger bills discount signifies lower default risk in case of loans along with lower liquidity related issues. Advances for FABL are not typical loans that most of the other banks offer. Instead FABL offers financing such as margin financing, reverse repo agreements, Ijara financing and lending to financial institutions.
Tight monetary policy stance has been a little unfavourable to FABL, as non-performing loans have increased since the most of the consumers defaulted owing to high interest rates. As a result, loan loss provisions have also increased in 2006.
Government securities form the major portion of investment portfolio for FABL. This shows lesser volatility in the bank's income with a continuous stream of payments. Asset composition is gradually shifting to investment side, which means that idle cash is being utilized efficiently while generating investment incomes as well.
Surprisingly, Net Interest Revenue (NIR) forms a smaller part of the FABL's revenue account as opposed to other players in the industry. However, that is not a major concern for the bank since its Net Interest Margin (NIM) has been improving.
Lower NIM in 2005 can be attributed to the larger provisions made for NPLs, which significantly depressed the Net Markup Income for the bank. Net Interest Margin (NIM) is also on a lower side as compared to the industry owing to a smaller branch network and higher deposit rates that FABL has to offer thereby increasing the mark-up expense.
Lower NIR can be attributed to the high trading income for the bank. Amongst the four largest banks ie MCB, NBP, HBL and BOP, FABL has the highest trading revenue. Subsequently dividend income from NIT investment is the largest component of FABL's non-interest revenue. On the other hand, fee income contributes around 11% while capital gains on equity are insignificant.
Trading gains have decreased over the years as FABL's interest income started to increase. Thus the FABL is relying more on spread income than the trading as most of the loans are at a floating rate. Thus, tight monetary policy has been favourable for the bank so far as it has spurred growth in spread as well as profit margins.
The overall risk profile of the bank has increased as non-performing loans have decreased. Also, the interest coverage ability of FABL is very weak, as the rates on deposits are higher. Furthermore the asset quality of the bank has a relatively less risk exposure as FABL opts for investment in its asset portfolio unlike loans found in other major banks. The capital adequacy ratio although improved for FABL, but hovers around 13%, which is still below the minimum capital requirement consideration. Due to its smaller size, FABL has been a borrower in the interbank market. The proportion of funding for FABL is highest amongst NBP, MCB, UBL and HBL.
The return on assets has depressed over the years as FABL is constantly struggling to increase its deposits base. As a result, the bank has to offer higher rates to attract customers thereby increasing its costs and decreasing its overall profit. Moreover, the high base effect has also played a significant part in lowering the ROA. ROE has followed the same trend and has declined considerably in 2006.
FUTURE OUTLOOK: SBP stressed upon further tightening the monetary policy in its recent statement by raising the discount rate by 50bps to 10.5%. Increase in CRR by 100 bps strives to reduce liquidity in the market. Faysal Bank shall not be highly affected by this measure, as most of its deposits are term deposits. Rather it shall benefit from the zero rating of CRR on the >1 year deposits by having more to lend as is evident from its high earning asset ratio.
The recent drive by the regulator to reduce the banking sector spreads shall result in a decline in the profitability of the sector. The banking sector spreads have declined, but only marginally. The stricter provisioning requirements and withdrawal of FSV implemented by the SBP will 1) reduce the profits and 2) make the banks cautious in their lending, as is evidenced by the deceleration of credit as mentioned above.
If the government continues to finance its deficit though the commercial banking sector, it will crowd out the private sector. Endeavors taken in this direction by the SBP may yield results if complemented by policies elsewhere.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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Copyright Business Recorder, 2008