Brief Introduction: Faysal Bank Limited (FABL) was incorporated in Pakistan in 1994 as a public limited company under the Companies Ordinance, 1984. With its roots in corporate, commercial, retail and Islamic banking activities, FABL now has its presence in over 70 cities.
As of CY12, FABL had a network of 265 branches (including 52 Islamic banking branches) and a combined asset base of over Rs 300 billion. After the acquisition of RBS in October 2010, the bank continued to focus on three major areas namely: reduction in costs, mobilising core deposits and proactively managing credit costs / NPLs.
As part of its cost cutting strategy, the bank has been opening branches in smaller towns leading to generation of low-cost core deposits for the bank and position itself to serve agriculture-based sectors. During CY12, the bank opened/relocated 19 conventional branches adding footprint to nine more cities namely Yazman Mandi, Ahmedpur East, Gojra, Liaquatpur, Renela Khurd, Larkana, Ghotki, Patoki and Gilgit. Besides successful conventional banking, innovative Islamic products and services were added to product menu to complement distribution growth.
FINANCIAL PERFORMANCE, 1QCY13: Faysal Bank Limited didn't tag along the industry-wide practice of effortless banking. FABL's 1QCY13 result speaks volumes of the bank's inclination towards core banking activities, as substantiated by its healthy ADR. Conversely, investments took a dip of six percent year-on-year in 1QCY13 with a substantial drop in IDR.
During 1QCY13, the bank undertook several diversified lending transactions to broaden its credit mix. These include funding power sector, agri-corporate farming, textile and real estate projects, to name a few. FABL has been doing what banks should essentially do. However, private sector lending is hardly a scot free exercise. The bank's non-performing loans have been surging of late, with its infection ratio standing at a worrying 16 percent in 1QCY13.
Amid declining discount rate scenario, high private sector lending didn't bear fruit for FABL as its top line slid by three percent year-on-year in 1QCY13. However, reduced cost of deposits provided a much needed breather. With a sizeable growth in its low cost deposits (see CASA ratio), FABL's cost of funds dropped to 5.4 percent in 1QCY13. This pushed FABL's spread ratio close to mid-sized banks' average of around 40 percent.
What largely spoiled the bottom line growth was the provisioning charge that grew by a whopping 129 percent. According to the bank's management, the increase in provisioning is mainly due to subjective provisioning, additional provisioning upon downgrading and withdrawal of FSV benefit during the quarter.
During 1QCY13, FABL has sought relaxation from the SBP to hold back the provision of its two classified loans of nearly Rs 576 million advanced to Agritech and Azgard Nine. Had the SBP not granted this exemption, the profit before taxation for the current period would have been lower by Rs 1368.103 million. To shield its bottom line from further slide, FABL wisely managed its administrative expenses and was able to keep it constant despite inflationary pressures.
As FABL is booking provisions on the NPLs of Agritech and Azgard Nine in a phased manner, the provisioning expense is likely to grow further. However, the bank's laudable performance to garner low-cost deposits will surely keep FABL's bottom line healthy.
SUMMING UP PAST PERFORMANCE (CY11-12): Despite a growth of eight percent year-on-year in earning assets, top line remained almost constant owing to low interest rate backdrop.
Against the industry-wide trend, the investments of FABL dropped by six percent year-on-year while advances grew by 16 percent taking ADR to 72 percent while IDR plunged to 37 percent. The bank has the highest exposure in production and transmission of energy (17.94 percent of gross advances), textiles (14.52 percent) and consumer financing (7.92 percent).
To turnaround the impact of weak top line, the bank efficiently garnered low cost deposits which boosted its CASA ratio in CY12. However, weak top line didn't enable bank to improve its spread ratio, which in fact shed 100 basis points in CY12. In accordance with the requirements of approved accounting standard applicable in Pakistan, the bank was required to maintain a provision of Rs 1900.49 million as at December 31, 2012 against the non-performing outstanding facilities (NPLs) of AGL and ANL and impairment loss on acquired shares of AGL. The SBP, later provided relaxation to banks under which they can make provisioning against their outstanding exposure in a phased manner.
As a result of the relaxation, the bank recorded total provision of Rs 423.394 million in respect of outstanding exposure of AGL and ANL and recorded impairment loss of Rs 20.69 million. Had the SBP not provided this exemption, the profit before taxation for CY12 would have been lower by Rs 1456.40 million and the provision against advances and investments would have been higher by Rs 351.847 million and Rs 1104.553 million respectively.
Although NPLS of FABL grew by six percent year-on-year in CY12, however, due to fresh lending during the year, infection ratio seems to have improved. During the year, bank's non-mark-up income boosted considerably, especially on account of gain on sale of securities which fetched considerable capital gains due to discount rate cuts. This greatly buttressed the bottom line amid radical expansion witnessed by provisioning expenses over the year.
The bank was also able to cut its non-markup expenses despite growth in branch network over the year. During the year, bottom line grew by over 11 percent, largely on the heels of its cost cutting measures, high non-markup income and fairly controlled non-markup expenses.
OUTLOOK: With monetary policy announcement due in few days, low inflation numbers, high expected foreign flows and investor sentiments (as evident in the recent T-bill and PIB auctions) signal rate cut expectations, at least in the short-term.
Further monetary easing might prompt banks to turn their gaze towards high yielding private sector advances to earn sufficient returns. The opportunity cost of higher yielding private sector advances will be relatively higher toxic assets on their books.
Even if SBP cuts discount rate in the short-term, the same might not continue for long. Question marks loom over high budgetary borrowings target set by the new government in FY14 which will increase the net domestic assets (money supply), hence triggering inflation. Moreover, increase in inflation is also foreseen due to recent taxation measures in federal budget, and expected hike in energy prices.
Given inflation inch up, which seems an inevitable phenomenon, monetary tightening would be unavoidable to contain money supply. The weak top lines of banks will harvest much support from higher discount rates. However, that could further prompt the banks to effortlessly park their funds in government securities and earn sufficient risk-free returns while ignoring private sector. How the new government materialises its vision to boost private sector credit off-take in the monetary tightening backdrop is a moot issue.
==================================================
Faysal Bank Limited
==================================================
Indicators CY11 CY12 1QCY13
==================================================
Infection Ratio 18% 16% 16%
Coverage Ratio 67% 67% 69%
Spread Ratio 32% 31% 35%
Capital Ratio 7% 7% 6%
IDR 44% 37% 36%
ADR 69% 72% 72%
CASA 49% 57% 62%
ROA 0.44% 0.45% 0.08%
ROE 6.7% 6.8% 1.3%
==================================================
Source: Company Accounts.
===============================================================
Faysal Bank Limited
===============================================================
(Rs mn) CY11 CY12 1QCY13
===============================================================
Mark-up Earned 28,825 28,802 6,583
Mark-up Expenses 19,619 19,839 4,292
Net Mark-up Income 9,206 8,963 2,290
Provisioning 695 1,401 457
Net Mark-up Income after provision 8,511 7,563 1,833
Non Mark-up/Interest Income 4,070 5,282 1,046
Operating Revenues 12,581 12,844 2,879
Non Mark-up/Interest Expenses 11,103 11,004 2,560
Profit Before Taxation 1,478 1,840 319
Taxation 198 417 56
Profit After Taxation 1,280 1,423 263
EPS (Rs) 1.38 1.53 0.28
===============================================================