Bank:- FAYSAL BANK LIMITED - Analysis of Financial Statements Financial Year 2004 - Financial Year 2007
Faysal Bank started its operations in Pakistan in 1987, first 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. Its growing and widespread branch network in all the provinces of the country and Azad Kashmir, together with its corporate offices in the major cities, provides efficient services in an effective manner. Presently, it has a nationwide network of 75 branches.
INDUSTRY: The year 2007 was a volatile year for the banking sector in terms of profitability. Each quarter showed a different picture. The profitability increased up to the second quarter. However, after the amendment in SBP's regulation regarding non-performing loans (NPLs) and forced sales value (FSV), total profitability declined in the next two quarters.
The overall profitability of the banking sector in FY07 was at Rs 75.86 billion, declining by 5.6% from FY06. The fourth quarter of the banking sector was not good. Banking sector depicted a growth of 53.2% in profitability until the SBP proposed full provisioning against the NPLs and withdrew the facility of FSV. As a result, banks had to make additional provisioning against their NPLs. The total NPLs of the banking sector reached at Rs 164 billion at the end of September 2007. The net interest income, earned by the banking sector in FY07, posted a growth of 17% due to higher spreads, which remained at 7.3% on average.
ANALYSIS OF FINANCIAL PERFORMANCE (DEC'04-DEC'07)The profit of the bank has declined in the years 2006 onwards. Although the mark-up interest earned increased in 2007, the mark-up interest expensed also increased simultaneously due to an increase in the cost of deposits. As the deposit base of the company outpaced the market growth in deposits. Moreover, the company made a few long-term borrowings and greatly increased its use of the subordinated debt.
The administrative expenses also increased as it focused on branch network expansion. The contribution to profit from non-interest income side was greater than that from the net interest income side. Major growth was recorded in gain from sale of securities. The surplus on revaluation of investments has also increased by Rs 1.1 billion mainly due to increase in unit price (from Rs 44.85 to Rs 59.75) of NIT. This enhancement is reflected as increase in investments and surplus on revaluation.
The NPLs of the bank have increased as have in the entire banking industry. Hence have the provisions specially due to the withdrawal of the FSV benefit. Due to the requirement of full provisioning against NPLs, the provisions have increased that has led to a decline in the profitability of Faysal Bank. Although the efforts to maintain assets quality are evident, the bank may be recommended to further diversify its credit portfolio so as to reduce large exposures in order to contain the credit risk.
The share price of the bank for almost the first of the year 2007 was below that of 2006. However, it increased over it later. The political situation of the country rendered the share price a decline but still somewhat above the 2006 level. The highest achieved during 2007 was Rs 80.25 whereas during 2006 it was Rs 91.00. The increase in the share price and the decline in the EPS due to lower profitability pushed up the P/E ratio. The increase in the share price also pushed up the market to book value ratio. This proposes a favourable picture for the bank. Moreover, the bank has been a consistent distributor of dividends, providing its investors a consistent stream of income.
The deposits outpaced in growth as compared to their market growth. Hence, the ratio witnessed an increase in 2007 whereas the capital increased less than the deposits. The deposits increased by 37% compared to the market growth of 18%. The bank successfully made an IPO of Rs 250 million (Tier II capital) which together with the Pre-IPO of Rs 750 million last year accumulated to Rs 1 billion.
Term deposits, followed by saving deposits and then current and margin accounts form the major portion of the deposits. The financial institutions' deposits form a very small portion.
The liquidity profile of the bank has maintained almost a consistent level, slightly declining in 2007. This was due to the fact that the growth in advances was less than the growth in deposits. This may suggest another of the firm's measures to be tactful in distributing deposits as advances. As evident, the highest proportion of advances comes from the loans, cash and credit finances followed by net investment in finance lease.
As for the industry, the consumer loans growth slowed due to increase in lending rates, high credit standards and restrained lending by banks in order to streamline their risk.
The solvency profile of the bank shows a considerable decline. The shareholders equity increased less than the increase in the deposits of the bank. This may require the bank to increase its capital base to ward off any excessive reliance on debt. This declining trend may hamper long term growth prospects of the bank if appropriate actions are not taken.
The dividend ratios of the bank have declined. Despite the lower earnings this year the bank still distributed cash dividends. This indicates a favourable position for the bank and its investors.
FUTURE OUTLOOK: The banking sector profitability may not return to the same level as previously, at least in the near future, but may become better as compared to these times. Faysal Bank's deposits have been increasing which is a healthy sign. However, the performing advances also need to witness an increase so as to increase the turnover of the deposits and reduce the net cost of deposits at the same time decreasing the NPLs. The focus of strategies of the bank should remain on cost efficiencies and prudent asset management. The bank is also eyeing to further expand its branch network.
The cost of deposits is likely to increase in the future following the stricter monetary policy measures undertaken by the SBP earlier this year. The mandatory 5% on the PLS accounts along with an increase in the discount rate is bound to increase the cost of borrowing for the banks. Also the fiscal incentive to increase the rate on saving certificates by 2% and impending introduction of 3m, 6m, 1yr saving schemes is bound to drive the deposit rates upwards.
With a slowdown in consumer financing, supported only by house financing, the banks face a difficult situation to maintain their profitability momentum. Note: the segmentation graphs have been taken from the annual report 2007 of Faysal Bank.
============================================================================
Faysal Bank
============================================================================
Balance Sheet
============================================================================
2004 2005 2006 2007
----------------------------------------------------------------------------
Lendings to Financial Institutions
----------------------------------------------------------------------------
Investments 12,334 24,412 22,525 31,553
Advances 50,542 62,324 74,469 87,346
Total assets 78,538 110,281 115,470 141,277
Deposits 56,460 74,737 74,414 102,067
Total Shareholder's Equity 6,251 8,112 9,132 10,345
----------------------------------------------------------------------------
Faysal Bank
----------------------------------------------------------------------------
Income Statement
----------------------------------------------------------------------------
2004 2005 2006 2007
Mark-up Interest Earned 2,753 6,338 9,728 11,611
Mark-up Interest Expensed 1,118 3,312 6,089 7,459
Provisions against NPLs/Write-Offs 124 -310 622 2,079
Fee, Commission, Brokerage Income 560 677 725 1,058
Dividend Income and Capital Gains 1,267 1,385 1,580 2,337
Profit After Tax 1,753 3,069 2,817 2,272
Earnings Per Share 6.02 8.33 6.65 4.29
----------------------------------------------------------------------------
Faysal Bank
----------------------------------------------------------------------------
Key Financial Ratios
----------------------------------------------------------------------------
Earnings Ratios
----------------------------------------------------------------------------
2004 2005 2006 2007
----------------------------------------------------------------------------
Return on Assets (%) 2.78 3.25 2.5 1.77
Return on Deposits (%) 3.10 4.11 3.79 2.23
Return on Equity (%) 29.57 42.74 32.67 23.33
----------------------------------------------------------------------------
Assets Quality Ratios
2004 2005 2006 2007
----------------------------------------------------------------------------
NPL to Advances 4.8 4 5.2 5.44
Provisions against NPLs/Write-Offs 124 -310 622 2079
----------------------------------------------------------------------------
Market Value Ratios
----------------------------------------------------------------------------
2004 2005 2006 2007
----------------------------------------------------------------------------
Price to Earnings 7.23 8.89 9.1 15.37
Market Value to Book Value 2.03 3.37 2.81 3.38
----------------------------------------------------------------------------
Debt Management Ratios
----------------------------------------------------------------------------
2004 2005 2006 2007
----------------------------------------------------------------------------
Deposit times capital 9.03 9.21 8.15 9.87
----------------------------------------------------------------------------
Liquidity Ratios
----------------------------------------------------------------------------
2004 2005 2006 2007
----------------------------------------------------------------------------
Advances to deposit 0.90 0.83 1.00 0.86
----------------------------------------------------------------------------
Solvency Ratios
----------------------------------------------------------------------------
2004 2005 2006 2007
----------------------------------------------------------------------------
Equity to assets (%) 0.08 0.07 0.08 0.07
Equity to deposits (%) 0.11 0.11 0.12 0.10
----------------------------------------------------------------------------
Dividend Payout Ratios
----------------------------------------------------------------------------
2004 2005 2006 2007
----------------------------------------------------------------------------
Dividend yield 10.34 4.72 8.26 3.79
Dividend Payout 74.75 42.01 75.19 58.27
============================================================================
Comments
Comments are closed.