Faysal Bank Limited

Faysal Bank Limited (PSX: FABL) was incorporated in Pakistan as a public limited company in 1994. The bank surrendered its conventional banking license on December 31, 2022 and kicked off 2023 under Islamic banking license from the SBP. FABL’s operations are spread in 270 cities across the country with 700 branches offering Islamic corporate, commercial and consumer banking services. Daar Al Maal Al-Islami Trust (DMIT), the holding company of Ithmaar Holding B.S.C is the ultimate parent company of the bank.

Pattern of Shareholding

As of December 31, 2022, FABL has a total of 1517.696 million shares outstanding which are held by 16,260 shareholders. Associated companies, undertakings and related parties have the largest stake of 72.07 percent in the bank. This category is dominated by Ithmaar Bank B.S.C which holds 48 percent shares of FABL. Local general public accounts for 15.30 percent shares of the bank followed by Modarabas and Mutual Funds holding 3.21 percent shares. Banks, DFIs and NBFIs have a representation of 2.38 percent in the outstanding shares of the bank while Directors, CEO, their spouse and minor children own 1.70 percent shares of FABL. Foreign general public and insurance companies account for 1.48 and 0.57 percent shares respectively. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

The asset base of FABL has been posting steady growth since 2018. The growth came on the back of both advances and investments except in 2019 where investments posted a marginal 5 percent year-on-year downtick.AD ratio which clocked in at 78 percent in 2018 inched down to 60.59 percent in 2022, however is still much better than many industry counterparts.ID ratio which stood at 52 percent in 2018 climbed up to 60 percent in 2022. FABL’s non-performing loans (NPLs) posted a year-on-year growth of 14 percent in 2019 and started shrinking thereafter. Infection ratio which stood at 8.33 percent in 2018 peaked in 2019 to clock in at 9.11 percent and then started ticking down since 2020 to stand at 4.58 percent in 2022. The bank has been maintaining adequate provisions for its NPLs. FABL’s coverage ratio which stood at 86.69 percent in 2018 tumbled to 77.20 percent in 2019. While provisions kept growing in 2019, the drop in coverage ratio was on account of an increase in the NPLs during 2019. Since 2020, the coverage ratio took an upward flight to reach 85.62 percent in 2022. It is pertinent to note that Islamic financing and related assets which had a share of 25 percent in FABL’s gross advances in 2018 staggeringly grew to 93 percent of its gross advances in 2022. Conversely, majority of FABL’s NPLs are chipping in from conventional loans, cash credits and running finances. As of December 2022, only 23 percent of FABL’s total NPLs of Rs. 21,698 million belonged to Islamic financing despite it having a lion’s share in the gross advances portfolio of the bank. Delving into further details shows that Islamic financing and related assets have an infection ratio of 1.15 percent as of December 2022 while conventional financing portfolio has a whopping infection ratio of 52.38 percent as of December 2022.Better asset quality of Islamic financing might be the reason why FABL switched to a full-fledged Islamic bank from 2023. Sector-wise breakup of FABL’s advances shows that as of December 2022, FABL had a major stake in textile sector which makes up 17.5 percent of its total advances. This is followed by power, gas, water and sanitary sector (15.5 percent) and individuals (11.8 percent).

The liabilities side of the bank also posted an unabated growth over the course of five years. The deposit base of FABL which stood at Rs.409,384 million in 2018 grew to Rs.781,571 million in 2022. The good part about deposit growth is that it came on the heels of current and saving accounts (CASA). The CASA ratio of the bank which stood at 68.83 percent in 2018 jumped up to 80 percent in 2022. However, in all the years under consideration, saving account deposits conveniently stayed above current account deposits. As of December 2022, current account deposits account for 35 percent of its total deposits while saving account deposits have s share of 45 percent in FABL’s total deposits. Amidst current economic backdrop, where discount rate has reached an unprecedented level of 21 percent coupled with the imposition of MDR, saving deposits have turned to be very costly and hence not viable for any conventional bank.

Talking about the financial performance, FABL’s topline which posted a robust 64 percent year-on-year growth in 2019 plunged by 4 percent year-on-year each in 2020 and 2021 and then posted a strong rebound in 2022 where it grew by a stunning 94 percent year-on-year. While both advances and investments grew in 2020 and 2021, low discount rate played its trick to keep FABL’s topline subdued in those two years. The spread ratio of FABL which stood at 46 percent in 2018 dropped to 36 percent in 2019. In the subsequent two years, it grew to reach 48 percent in 2021. However, it tumbled to 38 percent in 2022 owing to high share of saving deposits amidst monetary tightening and MDR.

While Non-funded income of FABL posted growth since 2018; its share in total income of the bank which stood at 28.80 in 2018 massively dropped to 18.3 percent in 2022. This shows that over the course of years, FABL has been becoming overtly reliant on its markup income. The main contributors of non-funded income are fee and commission income, foreign exchange income and gain on securities. In 2020, during the outbreak of COVID-19, fee and commission income shrank by 6 percent year-on-year due to slowdown of economy which put pressure branch banking activities, card related fees, as well as consumer financing and commission fee. Dividend income, foreign exchange income and derivatives income also considerably dropped during 2020. Gain on securities worth Rs.1697 million came to the rescue which pushed the non-funded income up by 15 percent year-on-year in 2020. In 2022, when all the components of non-funded income boasted tremendous growth particularly fee and commission income which grew mainly on the back of card-related fee and foreign exchange income which grew on account of steep depreciation in the value of Pak Rupee, FABL posted a huge loss on securities worth Rs.1559.66 million which primarily includes the realized loss on investment in shares.

As the branch network of FABL is constantly growing, so are its operating expenses. In 2022, FABL branch network grew from 606 branches to 700 branches resulting in a 31 percent year-on-year surge in its operating expenses mainly on account of payroll expense followed by software maintenance fee, utility cost as well as security fee. An encouraging fact is that over the course of years, FABL’s cost-to-income ratio has also ticked down from 65.97 percent in 2018 to 56.17 percent in 2022.

FABL’s bottomline has also been showing consistent growth since 2018 with the highest year-on-year growth of 38 percent recorded in 2022 culminating into a profit after tax of Rs.11,233 million and EPS of Rs.7.40 versus net profit of Rs.4,837 million and EPS of Rs.3.19 in 2018. However, PBT margin and PAT margin which had been following a downward trajectory since 2018 peaked to 25 percent and 15 percent respectively in 2021. In 2022, PBT and PAT margin ticked down to 21 percent and 10.7 percent respectively.

Recent Performance (1QCY23)

During 1QCY23, FABL’s assets grew by 5.5 percent when compared to the year-end, December 2022. The growth came on the back of Islamic financing which grew by 7.3 percent while investments shrank by 0.5 percent when compared to the year-end numbers. While majority of FABL’s financing was advanced in terms of Diminishing Musharaka and Running Musharaka, during 1QCY23, major growth was observed in Murabaha facilities. Besides, the bank also made advances against Wakala Istithmar which wasn’t there until the bank hadn’t converted into a full-fledge Islamic bank. NPLs marginally grew by 0.6 percent since December 2022, however, infection ratio dropped from 4.58 percent as of December 2022 to 4.30 percent as of March 2023. Coverage ratio stayed almost intact at 85.6 percent. FABL’s AD ratio grew to 64 percent while ID ratio plummeted to 58 percent as of March 2023. This was despite the fact that there was no ADR based taxation from 2023 onwards. This shows the bank’s inclinationtowards its core function of private sector lending when it could have easily parked its funds in risk-free government securities.

Deposit base grew by 2.3 percent over year-end 2022. CASA grew by 9.8 percent while term deposits plunged by 28 percent during 1QCY23. Current account deposits stood at 37 percent of FABL’s total deposits while saving account deposits had a share of 49 percent in the overall deposit base of FABL as of March 2023 which grew from 35 percent and 46 percent respectively over the quarter.

FABL’s mark-up income posted a staggering rise of 101 percent year-on-year in 1QCY23 which came on the back of high discount rate coupled with increased private sector lending. However, its gross spread ratio ticked down from 41.51 percent in 1QCY22 to 37.43 percent in 1QCY23. 115 percent year-on-year growth in mark-up expense mainly came on the back of securities sold under repurchase agreements and Musharaka acceptances besides mark-up expense on deposits.

Non-markup income grew by 18 percent year-on-year in 1QCY23. While there was a tremendous growth in foreign exchange income as well as fee and commission income during the quarter, FABL recorded 644 percent year-on-year growth in the loss on securities which diluted the superb growth posted by other two components of non-funded income in 1QCY23. Non-funded income to total income also dropped from 22.95 percent in 1QCY22 to 16.17 percent in 1QCY23.

FABL’s cost-to-income ratio considerably improved from 64 percent in 1QCY22 to 51 percent in 1QCY23. The bottomline grew by 51 percent year-on-year in 1QCY23 to clock in at Rs.3211.15 million with an EPS of Rs.2.12. PBT and PAT margin which stood at 20 percent and 12 percent respectively in 1QCY22 inched down to 18 percent and 9 percent respectively in 1QCY23.

Future Outlook

Being an Islamic bank, FABL is no longer required to comply with MDR on saving deposits which makes saving deposits less costly for the bank. This bodes well for the bank’s spread ratio in the coming times which will be further strengthened by its growing focus on the private sector lending. However with growing advances, FABL needs to keep a strict eye on its asset quality and keep its infection ratio in check. The bank should also focus on the mobilization of non-remunerative deposits to have even stronger spread ratio in the coming times.