You are currently viewing Faysal Bank exhibits its earnings to double in three years.

Faysal Bank exhibits its earnings to double in three years.

We initiate Faysal Bank Limited (FABL) coverage with a target of PkR 100/share, valuing the bank at a PB of 1.46x based on its projected CY24 BVPS of PKR68.2/share. We justify our valuations based on its conversion to Islamic, relatively higher multiples offered to Islamic banks, 31% projected ROE by CY26, the potential for CASA optimization, and 25 – 30% deposit growth on the back of increasing branch network and the Islamic factor.

Banks with higher deposit growth are grossly mispriced, including FABL: While traditional banks like HBL, MCB, UBL, and ABL seem to be priced in a linear correlation between deposit growth and P/B, the same isn’t the case for BAHL, FABL, and BAFL. We’ve excluded Meezan Bank from the calculation as its 55% ROE, 21% Deposit growth, and 2.2x P/B multiple places it in a field of its own.

FABL likely has the highest deposit growth potential within the unloved trio and, therefore, deserves further re-rating.

How fast will Faysal Bank’s deposits grow?: FABL has a 3-year CAGR deposit growth of 23.5% and has a lower valuation than mainstream banks with slower growth. FABL’s rapid conversion to the Islamic model complicates gauging sustainable deposit growth rates. On an Islamic-only basis, FABL’s deposits grew at a 60% CAGR over the last three years, rising from PKR 248bn in CY20 to PKR 1.0tn as of CY23.

Investment yield is below KIBOR because of Fixed Ijarahs. Drag on ROE will reduce as rates decline and portfolio matures: Most of Faysal Bank’s Sukuk portfolio of PKR 580bn is sensitive to short-term rates. However, 14% of the portfolio has maturities between 2 and 5 years. The portfolio’s profile should further concentrate on the shorter duration as the older portfolio matures, and balance sheet expansion leads to the accumulation of new Sukuks at current pricing.

Valuation: Our Fair Value for FABL is PKR 100/share (upside: 83%). Over the past few years, we have seen Faysal Bank pull off a monumental organizational feat by converting the entire bank to Islamic. In addition to the benefits this brings in terms of higher spreads, what is often overlooked is the improvements in other areas. We highlight the potential Improvement in deposits/branches, a high Islamic deposit growth rate, and Industry-leading NPL management.

Courtesy – BMA Capital Management Ltd.

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