KARACHI, Aug 5: Granted that the Karachi Stock Exchange is in the throes of an unprecedented bull run with equities rising by 112 per cent last year and almost 48 per cent since January this year. But some of the shares have risen by an incredibly high speed. On January 3 this year, the share in Faysal Bank Limited was priced at Rs14.60; seven month latter the stock is now trading at Rs32.35.

That reflects a gain of a cool 122 per cent. Only D.G. Khan Cement and Nishat Mills have perhaps done slightly better than that. The onus of investigating and deciding whether the share has gathered all that premium on improved fundamentals or is a target of speculative buying falls entirely upon each investor. Timing quite clearly has been of essence. Many early buyers must have made fortunes, but it is not perhaps more important to know when to enter but when to say adieu to greed and seek an exit.

Faysal Bank Limited announced financial figures for the six months ended June 30, 2003, on August 1. The board also declared an interim dividend at Rs2.50 per share. On the ruling market price, it works out to a yield of 7.7 per cent and the interim is already an improvement over the aggregate payout at Rs1.70 per share paid last year.

For the half-year ended June 30, 2003, the bank posted pre-tax profit amounting to Rs1,037 million, which reflected an improvement of 56 per cent over pre-tax profit of Rs664 million earned in the corresponding period of the previous year. And the after tax profit multiplied by 200 per cent to Rs943 million, from Rs314 million in the same time last year. Splendid as that appears, the bank’s profitability waned by two per cent in the second quarter, with pre-tax profit for April-June 2003 at Rs402 million, down from Rs411 million in the corresponding quarter of the previous year.

While the earnings for the bank in the half-year have shown fabulous growth of 200 per cent on the back of higher non-mark up income and lower taxation, the profits for the second quarter had decreased due mainly to a steep rise in provisioning.

The credit for the improved bottom line went entirely to the non- mark up income, which more than doubled to Rs1.219 billion for the six months under review — from Rs529 million in the same time last year. The non-mark up income comprised mainly the dividend income which shot up to Rs481 million, from Rs229 million and the capital gains on sale of shares. The contribution of non- mark up income to aggregate revenue of the bank increased to 53 per cent for the latest half-year, from 23 per cent same time in 2002. Provision for taxation for the six months to June 30, 2003, amounted to Rs94 million, which produced effective tax rate of just 9 per cent, compared with tax provision amounting to Rs350 million for the first half of 2002, which meant effective tax rate of a high 54 per cent. The lower taxation is attributable to higher portion of income from dividend, which is taxable at a low rate of 5 per cent and capital gains, which are exempt from tax. The bank also benefited from write back of Rs22 million in respect of deferred taxation, against provision of Rs57 million in the similar period of 2002.

The results for the second quarter 2003 bear some worrying aspects. Net mark-up income for 2Q03 slipped by 12 per cent to Rs237 million, from Rs268 million in the same time last year. And the bank made huge provision against non-performing financing/lending amounting to Rs226 million, compared with Rs55 million in 2Q02. Provisions of Rs12 million were also made for potential consumer financing losses. The saving grace was the dividend income that rose to Rs346 million, from Rs207 million and ‘other income’, which ought to include capital gains from sale of equities, climbed to Rs152 million, from Rs38 million.

The Faysal Bank stock is giving a dividend yield of 7.7 per cent on current price of Rs32.35, while on the annualized first-half earning per share of Rs3.56, the price-to-earnings (p/e) ratio works out at 4.5x. That may still look to be attractive, but the caveat is the bank’s overwhelming reliance on non-core dividend income and capital gains from sale of equities.