Does the FABL-RBS deal cost the investors a pretty penny? Well, it is too early to draw any conclusions on this front and the market should wait until synergies follow through to the merged banks operations. But, it seems that investors seldom hold off their bets until all the cards are revealed.
A fall of 40 percent in the share price of FABL since the start of CY11 suggests that investors have a myopic attitude towards mergers since previous banking marriages in Pakistan have failed to meet stakeholders expectations.
In part, equity analysts also relate tepid share price performance to FABLs low turnover in the market and investors cold attitude towards midsized banks.
With the companys shares now trading close to Rs10; at a significant discount to the book value of Rs23 per share, the better first half-result released on Monday would have a favorable bearing on the banks market value down the line.
Even though FABLs first half bottom-line dropped by more than half compared to same period a year earlier; the banks performance has remained healthy as it had incorporated exorbitant one-off capital gain realised on redemption of NIT-LOC funds of around Rs1.5 billion in CY10.
Consequently, the result surpassed analysts expectations. The benefits of such an acquisition may not be immediately visible; or that is at least what past experiences suggest. However, the growth in revenues along with decline in provisioning cost supported the banks profitability.
The banks earnings on advances and investments, including those from the acquired portfolio of RBS grew by around 58 percent to Rs 13.7 billion year-on-year. The merged entity managed to expand its advance (net) portfolio by around seven percent in the first six month of CY11 to Rs 142 billion. At the same time, its investment portfolio stretched by a whopping 17 percent to Rs101 billion.
The merger with RBS bank has also increased FABLs markup expenses as the banks deposit base surged to Rs 203 billion at the end of 1HCY11, a jump of four percent in the past six month and 50 percent from the deposit portfolio of around 136 billion maintained at the end of 1HCY10.
The ratio of the banks advances and investments to deposits surged by eight percentage points to a whopping 120 percent in the first six months of this calendar year. This has dropped a hint that the bank will expand its deposit base at a much higher rate in the future to increase the size of its earning assets.
Following the footsteps of the big banks FABL has been focusing on accumulation of low cost deposits. In light of 12 percent growth in the current account deposits; the banks CASA ratio inched up by one percentage point to 53 percent. Yet FABL still has a long way to go before its CASA ratio can rival that of the mid-sized and big banks.
Helped by an improvement in earning and CASA ratio, the banks net markup income jumped by around 66 percent year-on-year.
The reversals against non-performing loans, advances and recovery of bad debts written off have eased down the banks provision expense to Rs 128 million. As the banks total NPLs level managed to maintain its inertia at around Rs 24.5 billion, the banks infection ratio inched down by one percentage point to 15 percent.
Ignoring the one-off gain realized on the NIT transaction; the amalgamation of RBS operations helped the bank to witness growth in returns from brokerage activities, dealing in foreign currencies and other income.
Of course nothing comes without a price. The acquisition of RBS operations, along with adoption of RBS administrative staff, has more than doubled FABLs non-markup expenses to Rs 5.6 billion.
Since the bank is still in a transition phase; focusing on operational alignment of the two entities, FABLs operations will take time to reach an optimum efficiency level. Besides, the bank is also likely to gain from its growing stake in Islamic banking along with high rewards from its consumer portfolio- which it inherited from RBS.
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Faysal Bank Ltd.
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P&L Rs(mn) 1HCY11 1HCY10 chg
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Markup earned 13,756 8,705 58%
Markup expensed (9,313) (6,038) 54%
Net markup income 4,443 2,668 67%
Provisioning (128) (603) -79%
Net markup income after provision 4,315 2,065 109%
Other income 2,650 2,043 30%
Operating revenues 7,093 4,710 51%
Other expenses (5,689) (2,578) 121%
Profit before taxation 1,275 1,529 -17%
Profit after taxation 794 1,734 -54%
EPS (Rs) 1.08 2.37
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Source: Company Accounts