Karachi, March 04, 2022 (PPI-OT): FABL: Conversion to Islamic banking still in progress
We highlight Faysal Bank Limited (FABL) as one of the only three bets from the banking space that could be obtainable by Shariah investors beyond CY22. The conversion timeline is set for 2HCY22, which can lead to re-rating over higher demand from Shariah based investors.
We maintain our ‘Buy’ stance with a TP of Rs35, where our justified P/B of the stock computes to 0.8x, compared to CY22F P/B 0.6x at current levels.
In its Corporate Briefing yesterday, the management apprised that 67% of the total deposits were Islamic (Sep-2021: 53%) while 89% (Sep-2021: 83%) of the total advances now comprise of Islamic loans. With higher Sukuk auctions in 4QCY21 (FABL added Rs120bn), the Investment mix in Shariah increased from 20% in Sep-2021 to 47% as at Dec-2021 end.
Complete Islamic banking operations targeted by CY22 end
We highlight Faysal Bank Limited (FABL) as one of the only three bets from the banking space that could be obtainable by Shariah investors beyond CY22. The conversion timeline is set for 2HCY22, while management’s initial target was CY23. We believe the stock may witness re-rating over higher demand from Shariah based investors, however, this would be subject to when the conversion completes. We maintain our ‘Buy’ stance with a TP of Rs35, where our justified P/B of the stock computes to 0.8x, compared to CY22F P/B 0.6x at current levels.
Going forward, a key trigger to the bank’s ROE improvement should stem from improvement in Cost to Income ratio as FABL’s operating at one of the most inefficient Cost to Income ratios which has limited the bank’s potential ROE. In addition, any implementation of Minimum Deposit Rate (MDR) on Islamic Banking is likely to impact FABL on the lower side as the bank already carries a higher cost of deposit ratio as compared to existing Islamic banks.
Jump in profits and controlled payout supports CAR
FABL posted CY21 earnings at Rs8.2bn (EPS Rs5.37), up 25% YoY, while 4QCY21 earnings clocked in at Rs2.1bn (EPS Rs1.4), up 109% YoY/2% QoQ. The jump was largely led by increase in low-cost deposits volume and strong growth in fee income across all product lines. With controlled operating expenses, Cost to Income ratio for the year was reported at 60%. This has resulted in the bank’s ROE to increase up to 14-15%, while the management targets for 18-20% in the coming years. Alongside result, the bank announced total DPS of Rs1.50. FABL’s Tier II CAR has reached to 17.5%, where the management intends to maintain a healthy CAR in the future too.
Two-third of deposits converted to Shariah
Updating on the Islamic conversion, the management apprised that 67% of the total deposits were Islamic (Sep-2021: 53%) while 89% (Sep-2021: 83%) of the total advances now comprise of Islamic loans. The management is optimistic that Islamic banking will contribute around 80% of the balance sheet by 2023. With higher Sukuk auctions in 4QCY21 (FABL added Rs120bn), the Investment mix in Shariah increased from 20% in Sep-2021 to 47% as at Dec-2021 end. The management expects 85%-90% of profitability contributed by Shariah operations during CY22, while around 85% of the Deposit size is likely to convert to Islamic banking by Jun-2022.
Deposits clocked in at Rs644bn for the year where the deposit mix comprised of current, savings and term with 33%, 42% and 25%, respectively. During the same period, Advances increased by 25% YoY, while Investment book expanded by 29% YoY. The management shared its view of at least 50 bp to 100 bp interest rate hike in the near future. The Investment book has accordingly been largely parked in liquid government securities. 73% of the advances were from the CIBG book on back of increase in economic activities whereas the Retail segment comprised of 12% of total advances. NPL ratio clocked in at 5.6% for CY21 compared to 7.7% for CY20.