Result Preview: Faysal Bank (16102008)

Target price: Rs 32
Investment strategy: Buy
Faysal Bank is scheduled to announce its 3Q08 result today. We expect that the bank will post its 3Q EPS of Rs1.62 and PAT of Rs855.6 (9M08 EPS Rs3.01 and PAT Rs1.59 billion). This will also include the dividend income of Rs976 million from NIT. Total markup income is expected to stand at Rs3.35 billion, while total non markup expense is expected to fall at Rs2.25 billion.
On the basis of PE and PBV valuations, we have estimated Rs32 target price for FABL considering the FY08 expected EPS of Rs3.96. The scrip is currently trading at discount PE multiples of 6x and counts an upside potential of 33 percent in medium term. During 1H08, the bank posted the after-tax profit of Rs740 million and EPS of Rs1.4 showing a decline of 42 percent (yoy). The reason behind the decline was high provisioning against NPLs and low dividend income from investments.
Bank’s administrative expense during 9M is expected to increase by almost 5 percent (yoy) to Rs2.230 billion because of branch network expansion as bank opened 6 branches in 1H with 18 other in pipe line that will be opened during 2H08.
As second tier bank with low advances, bank’s financing portfolio is not well diversified as both the risky sectors, textile and finance, contributes the major chunk of 20 percent in the portfolio basket. During FY08 bank’s advances are expected to grow by just 3 percent (yoy) to Rs89.9 billion, while provisions against NPLs are expected to stand at Rs900 million.
Total deposits of the bank are expected to increase by just 2 percent (yoy) to Rs104.1 billion during FY08, the reason for which is the stringent liquidity situation in the financial sector as well as high returns on NSS schemes.
During 1H08, the bank maintained the ADR of 88 percent which is quite high compared to sector peers, however this ratio is expected to decline by 2ppt to 86 percent in FY08. On the other side the bank is managing the average spread of 2.2 percent which stood at the lower side in the sector.
Because of financial turmoil, investments of the bank declined by 9.6 percent during 1H08, while in 2H08, investments are expected to recover to conclude at Rs31.8 billion in FY08 showing the growth of just 1 percent yoy.