1.

Three Years Financial Statement Analysis:

7.1 Current Performance
In last year, Faysal Bank Limited (FBL), performance was not good, as compared to the past two years. Table in the annexure one shows FBL recent performance. By looking in the table, we found that, after tax profits and Earning per share (EPS) in year 2007 decreased by 19.34% and 35.48% respectively, as compared to the 2006, while in first six months of year 2008, the profitability of FBL has been decreased by 39 % and EPS has been decreased by 53%, as compared to the first six months of 2007. In addition to profitability, most of the objectives have also not been met. Objectives Faysal Bank Limited, (2007). Annual Report. Karachi. The objectives set for year 2008 are as under: Target of opening of 24 branches in year 2008. Prudent growth & Cost efficiencies. Continued investment in technology & infrastructure. Further deepening of the culture of diligence and corporate responsibility.

7.2 External Environment: Opportunities and Threats

7.2.1 Societal Environment Following are the forces which are currently affecting Faysal Bank and the Banking Industry: a) Economic The main things affecting Faysal Bank and the banking industry are increase interest rates, and the rising inflation rate in the economy, for example, currently KIBOR which is benchmark for industry lending is at highest ever point. b) Technological Developments like introduction of oracle financial systems, symbols, and different application are increasing productivity of the Faysal Bank as well as the banking industry, but on the other its initial implementation costs are causing increased administrative cost to FBL. c) Socio cultural Socio cultural forces like values, demographic characteristics, etc. are also affecting FBL as well as the banking sector. Because of these values some professionals dont want to join banking sector, and some people dont keep their money in the banks, because of religious believes. But on the other hand such believes are also helping banks

to introduce Islamic products. FBL has lost various customers because of this reason due to shift from Islamic Banking to conventional banking. d) Political-legal These include the forces like political conditions in country, SBP regulations, etc are also affecting FBL as well as banking sector. For example, SBP is increasing discount rates, Minimum Capital Requirement (MCR), cash reserve ratio, etc. which is causing liquidity problems for FBL as well as banking sector. Due to MCR, various mergers took placed in the banking sector, and few mergers are also expected in near future. 7.2.2 Task Environment (Industry) Many forces in the industry are causing competition, these include, technology i.e. communication system like Symbols, Sun, Oracle, etc, larger branch network, ATM locations, unique products, entry of foreign banks, etc. Task environment of FBL can be discussed through following Porter Model: a) Threat of new entrants Opening of braches by Barclays (which in international reputable bank), threat of entering of Bank of China (BOC) by acquiring SME Bank, and Industrial Development Bank of Pakistan (IDBP), while BOC is also planning to acquire 26% stakes in National Bank of Pakistan. b) Bargaining power of buyers Due to increase in interest rates, small firms are not in a position to take loan from banks, while number of corporations in Pakistan, is limited. Therefore, key customers/buyers (corporate customers) of banks have gained substantial power and now they can bargain the spread with the relationship managers due of availability of the large number of the banks. c) Threat of Substitute products or Service As such there is no significant threat of substitute products or service, but few services like investment related services are offered by various Mutual Funds, and Security Dealers, but these services are limited to big cities. While, on deposits side, National Saving Organization, is providing substitute products to the depositors of the banks through attractive packages, at very attractive rates. d) Bargaining power of suppliers Currently this is big problem for FBL as well as industry, because of liquidity crisis and Pakistans poor international financial rating, all fund suppliers are avoiding to supply credit to Pakistani industry, moreover depositors bargaining power has also been increase due to high mark up rate offered by various banks, and due to dearth of deposits with bank e) Rivalry among competing firms

Banking sector is facing severe competition, due to availability of many national and international banks in the industry. Currently HBL bank, is leading with 40% market share, while MCB with highest profits and National Bank of Pakistan with largest deposits.

7.3 LAST THERE YEARS FINANCIAL STATEMENT SUMMARY

7.4 SWOT Analysis

Strengths Based on financial strength and superior performance, Faysal Bank Limited has been assigned the highest short term rating of A1+ (A One Plus) and AA (Double A) for the long term by JCR-VIS (credit rating Company). Better technology like Symbols, implementation of Financial Oracle, HRMS. Very attractive salary packages to employees. Heavy internal financing i.e. from heavily growing deposits. Attracted big corporations like SNGPL, Attock Group of Companies, Zaver Petroleum, etc. Weak branch network across the country. High employee turnover. Low number of ATMs. Attracting only upper and middle class customers. Market share is declining from new competition. Employees frustration due to excessive work burden.

Weaknesses Opportunities Threats

It can capture agriculture market by offering innovative agri finance products. Impressive print and electronic media campaign highlighting FBLs role in the development of rural economy of Pakistan can give it competitive edge over its competitors. Through re-branching, FBL can capture lot of new customers. Merger with Barclays or Bank of China to become part of larger international banking network and to increase the profit. Declining trend in banking sector, which can affect it to large extent because of its big corporate customers which are few in number. Arrival of Barclays and Bank of China in Pakistan, which can increase the competition in banking sector. Decreasing trend in Earning per share and stock prices. Moving of key employees, e.g. Corporate Relationship Managers, which means moving of corporate clients to other banks.

7.5 Performance
7.5.1 Performance evaluation in the light of financial objectives The main financial objectives of FBL are: increase in profitability, increase in EPS, increase in share price, increased / better cash flows, and decrease in provisioning of loans and bad debts by improving risk management procedures. Following facts are found from FBLs ratio analysis, common size balance sheet analysis, and income statement analysis, (See annexure 5, 4 and 3.). Findings/Facts 1) Foremost objective of increase in profitability was not achieved, as it is evident from decreasing after tax profit and decreasing profitability ratios of year 2007 as compared to year 2006. (See annexure 6). 2) Second objective of increase in EPS was also un-attained i.e. decrease from Rs. 6.65 in 2006 to Rs.4.29 in year 2007. (See annexure 6). 3) Third objective of share price was partially achieved, i.e. increase in share price from Rs. 60 at the year end of 2006, to Rs. 67 at the end to year 2007 (Faysal Bank, 2007). 4) Increased cash flow objective was achieved by FBL, i.e. increase of 12.77% cash flows in year 2007 as compared to 2006. 5) Fifth objective was not achieved, as in the year 2007 provisioning for consumer and general advances increased from Rs. 622332 to 1871969 thousand, showing an increase of 201%. It is important to discuss current financial performance of the FBL by comparing its half yearly financials of 2008 with half yearly financials of 2007. (See annexure No. 2). By looking at the half yearly performance, one can find that current performance is very bad as compared to last year performance. For example, Profit has been decreased by 42.39%, while EPS has been decreased by 53.46%. 7.5.2 Performance Evaluation in the light of other Objectives Before evaluating performance, it is better to mention objectives (other than financial objectives) set for year 2007. Other objectives of FBL includes; geographic expansion, entering into niche market like agriculture, consumer finance, and SME finance, opening of separate Islamic Banking branches, implementation of Symbols system, cost efficiencies, introduction of new MTO program with new approach of tests, interviews, etc. (Faysal Bank, 2006). Findings/Facts 1) First objective of branch expansion was achieved as FBL opened 19 more branches in 2007.

2) This objective was partially achieved as FBL entered in consumer and SME finance, but not in agriculture finance. 3) Third objective of opening of separate Islamic branch was not achieved. 4) Objective of implementing Symbols was achieved. 5) Objective of cost efficiencies was achieved as administrative expenses increased from 19.4% of the sale to 24.1%, which is normal because of opening of 19 new branches. (see annexure) 6) In an interview (B. Naila, personal communication, October 29, 2008) it was found that HRM department successfully introduced new methodology for MTO program. While comparison of objectives set for year 2008, with half yearly performance reveals the following facts: 1) Up till June, only 6 new branches have been opened as compare to the target of 24. 2) Heavy decline in profits, EPS, share prices, as shown in the table at previous page. 3) 758% increase in the provisioning for NPLs. 4) In an interview (Z. Abbasi, personal communication, October 14, 2008) it was found that, no single event of corporate social responsibility arranged or no other example of any form of Corporate Social Responsibility. 5) While only obvious objective achieved is continuous investment in technology, e.g. HRM department of FBL is going to implement HRMS, in order to effectively manage HR issues. After evaluating the performance of FBL, it was found that FBL performed poor as compared to the targets it set, however, it also achieved many objectives, but the main objectives were not achieved, like profitability related objectives. It is necessary to find out why FBL is not performing well, or why it is not performing according to the expectations. Reasons for Poor Performance The main reason behind low profitability is provisioning for non performing loans (NPLs). Provisioning was increasing at disastrous rate of 201% in 2006-08, and 758% in 2007-08 (as per half yearly results, i.e. till June 2008). Liberal credit policy in year 2005, whose results are being seen in year 2006, 2007, and 2008, in the form of bad debts, NPLs, and provisioning. (See annexure 7). Delay in branch expansion decision, i.e. in 2006 instead of taking in 2003/04, when other banks were also expanding branch networks, thus competitors gained edge. Change in provisioning guidelines by SBP in December 2006, which doubled its provisioning, because of very tough criteria. In an interview (A. Nasir, personal communication, October 23, 2008) it was found that , liquidity problems due to increasing interest rates, i.e. increase in

KIBOR to approximately 17%, while, inter-bank rate touched highest ever level in Pakistan history i.e. 47%. High employee turnover rate i.e. 41%. Increase in overall cost of production of industries, electricity problems, which is causing low productivity, and profitability, thus discouraging expansion, which as a result is hurting banking industry, especially FBL, because its main focus is on corporate lending.