FOR quite some time now, Faysal Bank — a mid-sized bank with over Rs388bn in assets — has been struggling to get rid of the toxic advances on its balance sheet and book the required amount of provisions against them.

And this has constrained its ability to expand into alternative revenue-generating streams, open new branches and establish a firmer footprint as a mid-sized bank.

Nonetheless, at least on paper, Faysal Bank Ltd (FABL) had a good run through 2014. It declared after-tax earnings of Rs2.48bn for the year, a healthy improvement of 33.6pc from Rs1.85bn in CY13. Its earnings-per-share worked out at Rs2.37, against the prior year’s Rs1.77. The bank declared no cash dividend, but announced a 15pc bonus share issue.

Faysal Bank is still trying to come to terms with the avalanche of toxic debt that had come its way after the RBS acquisition

In addition, the bank pointed out in a ‘statement of material facts’ in its annual report that its “current paid-up capital of Rs10.4bn, against the authorised [capital] of Rs12bn, leaves little room for raising further capital. Keeping in view future capital requirements, it is essential that the authorised capital be increased….to Rs18bn”.

Yet, the firm was mute over how it would raise the additional capital or by when did it hope to do so. Its current paid-up capital of Rs10.4bn is only marginally higher than the State Bank’s minimum capital requirement of Rs10bn for banks.

One sector watcher believed that the decision to increase the capital could be partly due to the management’s plan to convert the bank into a Shariah-compliant entity, which is likely to be a costly endeavour.

In March 2014, the CEO of the bank’s majority shareholder, Ithmaar Bank, had announced that FABL would be converted into a full-fledged Islamic bank ‘within two to three years’. By end-2014, FABL had 58 Islamic banking branches, with over Rs36.2bn in assets. The segment’s profit almost doubled during the year to Rs500m.

However, no fresh updates were available, with Faysal Bank President and CEO Nauman Ansari writing in his annual report to shareholders that “a business transformation plan is being developed with the help of legal experts and consultants, which will be shortly presented to the board for consideration”.

RBS takeover: While stakeholders wait for further clarity on the plans to raise further capital and switch the bank to Shariah-compliant mode, some market watchers acknowledge that the bank’s balance-sheet problems began with its takeover of Royal Bank of Scotland’s Pakistan operations in late 2010.

At the time, sector analysts were surprised that it had gotten the bank for $50.4m, given that MCB Bank had only months earlier bid $87m for the foreign bank but failed to win timely regulatory approval. Around Rs80bn worth of RBS assets were acquired.

Yet, the lower figure makes sense now, as Faysal is still trying to come to terms with the avalanche of toxic debt that had come its way after the acquisition. Non-performing loans (NPLs) on its books (post-RBS takeover) had ballooned to Rs24.7bn by the end of 2010, from Rs10.7bn in 2009.

Exposure to Agritech: The same year (2010) also saw cumulative financing by multiple banks, including FABL, to Azgard Nine and Agritech Ltd go down the dumpster. The ensuing debt restructuring of the two companies led to many financial institutions booking big write-offs and impairment losses. However, the central bank allowed all of them a relaxation of multiple years to completely book their provisions.

FABL had lent Agritech Rs350m, and had also invested a cumulative Rs1.8bn in its term finance certificates, Sukuks and equity shares. It was required to hold provisions worth Rs2.07bn for this exposure by end-2014, but availed the SBP’s relaxation and booked a lower Rs1.55bn.

The bank’s overall NPLs stood at Rs29.3bn, while its provisions against toxic debt amounted to Rs23.5bn. Owing to such hefty provisions, its coverage ratio improved to 78.6pc from 71.9pc.

Core performance: Still smarting from its portfolio of bad loans, FABL reduced its overall net advances to Rs181.2bn from Rs184.2bn. Conversely, its net investments rose 37pc to Rs155.2bn. Virtually this entire increase in investments was a result of the bank’s additional investment in high yield Pakistan Investment Bonds, which took its PIB portfolio to Rs57.6bn.

As a result, its interest income jumped 16.3pc to Rs32.3bn.

“The bank has already booked a majority of its provisions against NPLs of Agritech, and will book the remainder this year, allowing future earnings to rise. Also, its 2014 earnings included the one-off impacts of a severance package of around Rs350m that was paid to its outgoing CEO, and Rs450m in a golden handshake for employees,” noted Taurus Securities analyst Rohit Kumar.

“Look, FABL’s advances-to-deposit ratio is already high [64pc], and so it probably wouldn’t go for much lending. Besides, given that the bank is still booking provisions against NPLs, it is not likely that it will expand its loan book further, owing to the inherent risks involved. Therefore, it is likely to mainly rely on its investment book for its core income,” commented Kumar while discussing the source of the bank’s future earnings.

Published in Dawn, Economic & Business, April 13th, 2015

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