Professional Documents
Culture Documents
Topic
“Comprehensive Analysis of Faysal Bank Limited i.e. its strategic audit,
performance audit, situational audit, and step by step recommendations
to improve the financial health, administrative system”.
Submitted By
Muhammad Adeel
MBA IV, Section A.
(adeel483@yahoo.com)
Submitted To
Ajmal Waheed Khan
Course Facilitator
Performance Audit
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 FBL’s 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%.
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.
• Shift from Islamic Banking to conventional banking, due to cancellation of Islamic Banking license
by SBP. This is shaking trust of those customers who were assured that with in few months FBL will
obtain license from SBP, but no Islamic Banking license is obtained so far. This is also causing
customers to shift to Islamic Banks.
Strategic Alternatives Available to FBL
The current objectives of FBL can’t be met by implementing of presently used strategies, because of the
continued bad performance, and recent liquidity and business crisis in Pakistan.
In addition, objectives should also be revised in order to stop the downward trend in profitability and to
tackle the current challenges.
Feasible Alternative Strategy available to FBL
Corporate Strategy: Keeping in view the exigency of circumstance, FBL should follow Retrenchment
as corporate strategy for current year. This strategy is justified on the ground that it should eliminate
FBL’s weaknesses, and to convert bad debts losses (provisioning of NPLs) into profits, by focusing on
current issues and challenge instead of creating new challenges for the already troubled bank. In this
regard, FBL should follow turnaround strategy to improve operational efficiencies, because problems are
pervasive but not yet critical. Along with this, FBL should also follow contraction strategy to cut the
unnecessary costs. Although these strategies will affect profits to some extent, but it’s better to scarify
short term benefits for long term benefits.
Recommendations to improve the financial health of FBL & Implementation
1) Management should focus on the collection of overdue/classified loans in order to reduce
provisioning and to increase profitability, e.g. in 2007 NPLs totaled Rs. 3199581 million as compared to
Rs. 1304339 (Faysal Bank, 2007). If FBL offers rebate of 10% to 22% keeping in view the status of
NPL, i.e. Substandard, Doubtful, and Loss, to various defaulters, then this approach will solve following
problems:
i. Many defaulters will return loans in order to avoid legal consequences.
ii. FBL will able to solve the current liquidity problem and it will be in better position to advance those
collections at current higher interest rates.
iii. Instead of direct write off of bad debts, e.g. in 2006-07 it write off Rs.67 Mn , it is better to collect
something rather than getting nothing.
iv. FBL can gain benefits of “time value of money”, e.g. if FBL receives some part of NPLs after many
years by incurring legal expenses, this approach will enable to utilize money profitably.
v. increase in deposits will also help to bring deposits/advances ratio to 70% from 90%, which is
requirement of SBP.
2) FBL should introduce new short term product in order to acquire deposits, e.g. FBL can offer one year
profit rate of 15%, well above the other banks offer rate. In this way FBL can save 2 to 4% in addition to
spread on lending of advances, because of the recent one year KIBOR ranging from 17 to 19%. So this
will contribute to profitability of FBL.
3) Credit policy should be tightened in order to reduce NPLs. In this regard, loans to individual clients
should be extended only on the basis of cash base collateral like Defense saving certificates, National
Saving certificates, Term Finance Certificates, etc. In case of SME clients, maximum collateral, and
security should be obtained, because of the increased risk of default in Pakistan due to increased costs of
production.
4) FBL should contact its holding company i.e. Ihtmaar B.S.C. (whose international financial rating is
AA) in order to acquire funds at cheap rate as compared to local markets. Due to decreasing financial
rating of Pakistan by Standard & Moody, international financial institutions are avoiding loans to
Pakistani institutions, which are causing problems for foreign currency accounts. In this way FBL can
solve its dollar related problems which other banks cannot solve at cheap rates.
Implementation: President and CEO, Mr. Naved A. Khan, with the collaboration of top management,
should take initiative to adopt the retrenchment strategy for a specific period. For the financial
recommendations, Head of Treasury, Head of Risk, with the help of Head of Strategic Development, Mr.
Airaj Ali, should implement the above mentioned options, except the recommendations of increase in
deposits and collection, because these activities should be implemented by Head of Commercial
Banking, Mr. Shahid Mehmood, Head of Retail Banking, Mr. Taimur Afzal, Head of Services, Ahmed
Kamran with the help of Head of Strategic Development, Mr. Airaj Ali.
Recommendations related to Administrative System
1) In order to support the retrenchment strategy and tightening of credit policy, the process of credit
approval should be centralized to great extent. It means that the recent credit limits i.e. Rs. 2,500,000
to Rs.50,000,000 allowed to the RCC (regional credit committee) should be reduced and each credit
approval should be monitored by Country Credit Committee (CCC). This thing will slow down
process to some extent, but it is justifiable on the ground that now a days bank is receiving very low
number of credit requests from customers, so this will not increase burden of CCC.
2) Credit Risk Management (CRM) Department should be centralized, because it will help to detect
discrepancies at regional level by the central CRM, in this way chances of frauds should also be
minimized.
3) To further support the tight credit policy, process of Risk Approval (RA) Sheet should be modified.
It means it should be made mandatory for each RA above the limit of Rs. 25 mn to be reviewed by
CCC. This should only be done for the SME and corporate customers not for individual clients,
whose low loan amount need not to be monitored by CCC.
Implementation: The above mentioned recommendations should be implemented by Head of Risk and
CCM, Mr. Khalid Tirimizey, with the help of Head of Services, Mr. Ahmed Kamran.
Other Performance Related Recommendations
1) Instead of expanding branches of conventional branches, FBL should open separate Islamic Banking
Branches, in which FBL possess core competencies. This is justifiable on the ground that FBL is also
incurring expenses on opening of new branches, then why shouldn’t open Islamic Banking branches.
Moreover, FBL has specialized managers for Islamic Banking like Khalid Tirimizey, ex CEO of
FBL. Moreover, currently FBL is incurring expenses on separate Islamic Banking Department,
which will not cause additional management costs. In addition to this it will strengthen the trust of
customers who are assured that FBL is going to open Islamic Banking branches.
2) Currently due to crisis in financial industry and rumors of downsizing in banking industry is creating
fear in the minds of employees. (((PERSONAL COMM))) so this problem will automatically be
solved. Moreover due to low banking activities, FBL needs rightsizing of its workforce.
3) While as far as cultural transformation is concerned, there is no need to take any action, because
everything is going well, as there is no single incidence of strike is found. Moreover, mostly
employees are committed and happy; therefore, there is no employees union in FBL.
4) FBL should advertise its consumer products and it should organize events on periodical basis.
Implementation: The above mentioned recommendations should be implemented by the DCEO and
Head of Islamic Banking, Mr. Khalid Tirimizey with the support from top management.
Evaluation and Control
The current information system is capable of providing sufficient feedback on implementation activities
and performance, because Symbols is widely used by the prominent financial institutions of the world.
So it can cater the needs of evaluation and control of FBL.
Conclusion:
In nutshell, although the current situation of the FBL is not good, but not so adverse that it can’t be
controlled, if management follows the above proposed recommendations then it is expected that most of
the problems will be solved, but it will take some time and it needs commitment of all employees of the
Faysal Bank.