HistoryFaysal Bank started operations in Pakistan in 1987, first as a branch set-up of

Faysal Islamic Bank of Bahrain and since 1995 as a locally incorporated Pakistani bank under the present name of Faysal Bank Limited. On January 1, 2002, Al Faysal Investment Bank Limited, another group entity in Pakistan, merged into Faysal Bank Limited which resulted in a larger, stronger and much more versatile institution. In fact it has the highest share capital amongst private banks in Pakistan and is amongst the largest in terms of equity.

Faysal Bank Limited is a full service banking institution offering consumer, corporate and investment banking facilities to its customers. The Bank’s widespread and growing network of branches in the four provinces of the country and Azad Kashmir, together with its corporate offices in major cities, provides efficient services in an effective manner.

Mission statementFaysal Bank shares its mission statement with the DMI Trust. Our mission being “The introduction of a just and equitable financial system by being a world class multi-purpose financial institution, providing a range of specialized services, working on Shariah principles

H.R.H Prince Mohamed Al Faisal Al Saud Chairman

Farook Bengali President & CEO

Khalid Abdulla Janahi Director

Dr. Said Sa'ad Al-Martan Director

Ziad H. Rawashdeh Director

Sanaullah Qureshi Director

Shahid Ahmad Director

Tariq Iqbal Khan Director (NIT Nominee)

Executive Committee

Khalid Abdulla Janahi Chairman

Farook Bengali Member

Ziad H. Rawashdeh Member

Products and services

Products

Deposit products(Accounts)

The Faysal sahulat accountYou may open a Faysal Sahulat Account with a minimum balance of Rs.5,000/- only. The account has unlimited transaction facilities. As a special feature of this account, with a monthly average balance of only Rs.300,000/-*, you may avail the following banking services absolutely free:

Countrywide cash withdrawal facility Minimum transactional amount Countrywide cash deposit facility Minimum transactional amount Pay-orders per year Cheque leaves per year Demand Drafts drawn on FBL, local network Small Locker (Where available) ATM Card

365 withdrawals per yearUnlimitedUnlimitedUnlimited

365365

365 per year

11

The Faysal Saving Accounts:You may open a Faysal Savings Account with only Rs.10,000/-. There is no restriction on the number of transactions in this account and you get your profit every six months. This account gives you a progressively better profit as the amount in your account grows. Profit will be subject to deduction of Withholding Tax and Zakat as per applicable rules.

Rozana Munafa Account:Why let your money sit idle in a current account when you can profit everyday? To provide simple solutions for businesses and individuals, Faysal Bank’s Rozana Munafa Account offers the perfect combination of savings account matched with the flexibility of a current account. You can open this account with a minimum balance of Rs.200,000/-.To avail high profits the Rozana Munafa Account offers you a tiered profit structure. Your profits will be calculated each day at the month's average balance, profit will be disbursed every six months and will be subject to Withholding Tax and Zakat as per applicable rules. The higher your deposit, the higher the profit.

Rozana Munafa Plus Account:To provide the best possible returns for individual, corporate and business customers, the Rozana Munafa Plus account, offers you the opportunity to earn profit everyday. “Get the advantages of a term deposit with the convenience of a savings account and the flexibility of a current account.” You can open this account with a minimum balance of Rs.500,000/-. To avail high profits we offer you a tiered profit structure. Profits will be disbursed every month and will be subject to Withholding Tax and Zakat as per applicable rules.

Faysal premium & Extra premium account:

This group of accounts is specially designed for high value deposits with very attractive rates of return and special terms. For further details, please contact the Branch Manager at any branch of Faysal Bank near you.

Basic Banking Account:You may open your Basic Banking Account with any amount you like as there is no minimum balance requirement. You can make two deposits and two withdrawals in a month absolutely free. There are no ATM transaction charges on Faysal Bank ATM machines. Also, you will receive the annual Statement of account without any charges.

Faysal Izafa:At Faysal Bank, we realize every customer’s financial needs are different. As a result the Faysal Izafa Term Deposit, provides you with an option of growth or a monthly income plan. Faysal Izafa is a term deposit for corporate and individual customers designed to enable your money to grow securely and swiftly. A deposit can be established with an investment of as low as Rs.25,000/-, which can be invested from one month to five years. Six months, one year, two years and three years deposits also offer monthly disbursement of profit. Faysal Izafa deposits of 3 months and above, additionally offers you high profit rates i.e. the larger the size of your deposit the higher the profit rates. Profits on Faysal Izafa are subject to deduction of Withholding Tax and Zakat as per applicable rules.

Mahfooz Sarmaya:The Mahfooz Sarmaya Account is a tiered account, where the higher your deposit amount, the better the rate of profit. You can now open your account in US $, GBP or Euros with a minimum balance of 1,000 units of that currency. This account offers you the facility of Current, Savings and Term Deposits. There is no restriction on number and frequency of withdrawals in the savings account and profit is declared and paid every six months. The term deposit offers tenors of between 7 days to 1 year with very attractive returns. Profit is paid at maturity. Profit payment is subject to Withholding Tax as per rules.

Consumer Finance ProductsFaysal car finance:Faysal Car Finance is the most flexible product designed to meet customer needs.Now you can swiftly, easily and cost effectively own a car if you are:

A Pakistani National holding the New Computerized Identity Card (NADRA) A National Tax Number (NTN) holder At least 20 years of age at the time of financing and will be less than 60 years old before full

payment is made to the Bank A resident of Karachi, Quetta, Hyderabad, Lahore, Faisalabad, Multan, Sialkot, Gujranwala,

Bahawalpur, Rawalpindi, Islamabad, Peshawar, Mirpur (AK), Gujrat or Gujjar Khan. A Businessman or Self-Employed with a minimum of one year experience in the same

business and profession. A Salaried person with at least two years employment history.

If you meet the above criteria, we offer:

Car Financing for new and used cars Car Financing upto five years Car Financing up to Rs. 1.5 milion Down payment only 20% of the car value Low processing charges Quick processing time Availability of premature termination of financing

Faysal Housing Finance:

Faysal Housing Finance gives you so much more than great financing rates - We help you all the way to make your next move in an easy and timely manner.You can select any scheme of Faysal Bank’s housing finance to meet your need anywhere in Karachi, Lahore, Islamabad, Rawalpindi, Multan, Peshawar, Gujar Khan, Gujranwala and Faisalabad.

Faysal Finance:Faysal Finance gives you an opportunity to liberate yourself from financial anxieties and fulfill your dreams and aspirations in an easy and affordable manner. ‘Faysal Finance’ is based on ‘Morahaba’ mode of financing. It has been designed to cater to financial needs of people from all walks of life:Professional Assistance offers financial support for qualified professionals and to the self-employed to set-up or enhance private practices. Credit Partner can help you build a new business or expand an existing one. Life Sketch can be used to upgrade your life style or you can utilize it as a monetary support for your child’s future. You are eligible for “Faysal Finance” if:You have a Pakistani Computerized NIC. Your age is between 25 & 65 years. Your minimum verifiable monthly income is Rs. 18,000. You have minimum two years of working experience. Tenor of repayment is between 1 month (min.) and 5 years (max.)

Services Cash Management:In recent times, Cash Management has proven to be one of the most productive services offered by Faysal Bank to its Corporate Customers. Why Faysal Bank’s Cash Management Services?Our primary focus is on efficient management of customers’ cash flows along with the financial products designed to fit every client’s specific needs. What does Faysal Bank’s Cash Management Offer?In addition to the customized requirements of our clients, we generally offer solutions pertinent to receivables and payables management, dividend payments/processing and state-of-the-art information systems for product delivery and customized MIS reporting.

What is Faysal Bank’s Client-base?Our Cash Management clientele consists of some of the highly reputed Corporate names from diversified industries, for instance, Unilever, Al-Ghazi Tractors and MCR (Pvt) Limited [Pizza Hut, Pakistan].

ATM & Debit Card:Our FAST ATM and Debit Card, gives you access to all ATMs coutrywide linked to both the M-Net and 1-Link switches. In addition to this your FAST Debit Card allows you the facility to make purchases at over 2,000 retail outlets linked to the ORIX Network countrywide.

FAST ATM Card:Your FAST ATM Card offers you the facility to withdraw cash at all ATMs countrywide, to make balance inquiry and generate mini-statements (on Faysal Bank ATMs only). Using your FAST ATM Card you can withdraw upto Rs.25,000/- per day on both Faysal Bank and all 1-Link ATMs and upto Rs.10,000/- per day on all M-Net ATMs.

FAST Debit Card:The FAST Debit Card allows you the benefit of making cash free purchases and payments upto Rs.200,000 per day, saving you the hassle and risk of carrying cash around or having to visit your branch or ATM every time you need to make a payment. What benefits will my FAST Debit Card give me?

Free from carrying cash or cheque books Safe, convenient and hassle free More acceptable than personal cheques Higher daily limit of spending No interest as in the case of credit cards 24-hour access to your bank account from anywhere in the country.

Travelers Cheques:You may purchase American Express, US Dollar and Pound Sterling Travelers’ Cheques at selected branches of Faysal Bank.

Transfer of Funds:Inter Branch Transfer of funds

You can deposit and withdraw cash from any branch of Faysal Bank, regardless of which branch your account is in. You need only to carry your chequebook!

SWIFT Money Transfer:Customers of Faysal Bank can now easily and speedily transfer funds in foreign currency through the SWIFT system installed at the Bank.

Western Union Service:Customers who receive money transfers from overseas through the Western Union service can now withdraw their funds through any Faysal Bank branch.

Safe Deposit Lockers:Most branches of Faysal Bank offer lockers for lease, in a variety of sizes at very competitive rentals. Locker facility is available to all customers maintaining minimum balance requirements in their respective account categories. Lockers are placed in a secure environment with pleasant custodians to assist customers.Additionally all lockers are insured through a reputable insurance company.

Non Stop Banking:All branches of Faysal Bank remain open for business from 9 a.m. to 5 p.m. from Monday to Thursday. On Friday, the bank is open from 9 a.m. to 12.30 p.m. and then again from 3 p.m. to 5 p.m. On Saturday, the bank is open from 9 a.m. to 12.30 p.m. only. The Faysal Bank Fast ATM & Debit card provides you round the clock service.

Financing Facilities

Corporate Financing:Faysal Bank Limited is fully geared to meet the changing economic challenges present in Pakistan. We are ever striving to build meaningful relationships with our customers and become partners in their growth and progress by acting as financial advisors and consultants as well as financiers. Our Corporate Finance Group extends both short and long term financing facilities designed to fulfill the individual need of each corporate customer.

SME Financing:Small and Medium Enterprise (SME) unit of the Bank is geared towards catering to the banking requirements of small to medium businesses in a timely and therefore cost effective manner. All the branches of Faysal Bank are equipped to speedily attend incoming financing requests from SMEs. We help our customers grow from strength to strength by acting as their bankers and financial advisors.

Agricultural Financing:Faysal Bank offers specialized products for the agricultural sector. Our branches located in agricultural areas of Pakistan are all equipped to help the local farmers improve their yield and methods of farming by offering timely and affordable modes of financing to suit their needs.To increase its outreach into agricultural regions of Pakistan, Faysal Bank has entered into strategic alliances with other specialized banks through whom it will be financing the needs of farmers.

Trade Financing:Faysal Bank has established a strong presence globally in Trade Financing through it's network, affiliates and correspondents. The Bank has conveniently maintained relationships with major banks in the international financial market and continues to develop new ones wherever needed. Our Trade Finance services include a full range of import, export and guarantee products, thus offering tailor-made solution to fit the individual need of each customer

Investment Banking:

With the ever-changing business environment in Pakistan, companies need expert partners with a keen understanding of business to help achieve profit objectives. At Faysal Bank , we offer the leaders of businesses and institutions, corporate advisory services and a wide array of tools to help them accomplish their goals. We advise and facilitate the arrangement of commercial paper, Modaraba flotation, syndications, mergers, acquisitions and underwriting arrangements amongst many others. Whether the customers require financing of a project or managing of investments, we can guide them through the markets and tailor a solution to meet their specific needs.

Treasury and Capital Markets:Faysal Bank’s Treasury is one of the leading market makers in quoting competitive prices in all major currencies and provides dynamic corporate and institutional marketing teams with up-to-date market information. Our cutting edge is the in-time advice and execution of deals for our customers. Faysal Bank’s treasury team strives to satisfy the customer’s financial needs in a timely and a flawless manner. Faysal Bank has earned immaculate reputation in the field of Capital Markets, which is quite evident from our track record and market share in this area.

Despite high discount rates and a flood-hit economy, the banking sector has managed to raise profits by 11% by the end of 3Q10, as compared to the same period last year. According to the financial results of the banking sector by the end of the third quarter, the local and foreign banks profits increased to Rs 50. 2 billion as against Rs 45 billion during the same period last year. The improved profitability is attributed to the growth in net interest income earned, with a 7. 5% increase in interest income earned. Combined with a 23% decline in provision against advances, the position of the banking sector is seen to have improved considerably under the given circumstances.

For Faysal bank, net markup income for the period stood at Rs 3. 975 billion, a 7% rise over 3Q09 (3Q09: Rs 3. 71 billion). Provisioning fell in line with the industry, dropping from Rs 1. 25 billion at the end of 3Q09 to Rs 941 million at the end of 3Q10; resulting in net mark-up after provisioning to stand at Rs 3. 04 billion (3Q09: Rs 2. 58 billion). Non-mark-up income witnessed a rise of 12%, largely due to a gain on the sale of securities. Non-mark-up expense rose in a similar fashion, the cause of which is attributed to an increase in administrative expenses due to inflation and rising costs of business. Profit after tax for the period thus stood at Rs 1. 81 billion, a rise of almost 100% over 3Q09 (3Q09: Rs 918 million). The combined effect of increasing income, declining provisions, and a tax refund of Rs 162 million translated into the doubling of profit and an EPS of Rs 2. 97 per share (3Q09: Rs 1. 51 per share).

Deposits for the period stood at Rs 132 billion, a rise of 21% over 3Q09 (3Q09: Rs 109 billion). The greatest proportional change was seen within Fixed Deposits, which rose by 30%, followed by Current Accounts and then Savings Deposits which rose by 22% and 12% respectively. Borrowings dropped by 42%, dampening the increase in Total Liabilities to a meager 0. 85%.

On the Assets side, earning assets, which comprise 89% of Total Assets, rose by almost 4%, to stand at Rs 148 billion (3Q09: Rs 143 billion). The most significant change was seen within investments, which contributes 35% to earning assets and rose by 9%. There was only a nominal change within the structure of earning assets and the banks composition of earning assets is similar to that of the industry.

NPLs for Faysal Bank rose by 30%, a considerable rise given the steps being taken by the sector to control NPLs. The company s NPLs now stand at Rs 12. 2 billion (3Q09: Rs 9. 37 billion), while advances stand at Rs 94. 7 billion (3Q09: Rs 94. 2 billion). The NPLs to advance ratio thus deteriorated from 10% to 13%, a poor sign for the otherwise well performing company. Due to the relative stability of advances as compared to deposits the advance to deposit ratio fell from 86% to 71% by the end of the period.According to the latest monetary policy decision, as of November 30th, SBP has announced further tightening of the monetary policy, setting the policy rate at 14. 0%; a rise of 0. 5% from the previous monetary policy review at the end of September. Lending rates will as a result go up, further dampening private sector investment and thus reducing advances for banks. While banks are currently profiting as a result of the wide interest spread, this is a negative sign for the economy as a whole and will eventually cause trouble for the banking sector as well.

   2009   2008

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                       Rupees in millions

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Operating Profit                 3,492  3,843

Provision for non performing advances       1,940  1,456

Provision for diminution in value of investments  252   591

                         2,192  2. 047

Profit before tax                 1,300  1,196

Provision for taxation               100   681

Profit after tax                 1,200  1,115

Faysal Bank posted a Rs 1200 million PAT in the CY09, which is 8% higher from the last year largely due to the large deferred tax asset posted in the current year, however the PBT has on the other hand shown a decline of 28% from the last year. The reason was primarily an increase in mark-up expense, which grew by 42% from the last year and represented 71% of interest earned in CY09, compared to 63% last year.

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Net Interest Margin (Rs  000)    2008     2009

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Interest Revenue        13,404. 00  16,958. 00

Yield on Earning Assets        11%     13%

Interest Expense         8,455. 00  11,968. 00

Cost of Funding             8%     11%

Net Interest Income       4,949. 00   4,990. 00

Net Interest Margin           3%     2%

the sizeable interest expense had a significant negative impact on the net interest income that as a result only increased by 1%, however FBL performed in terms of interest revenue which increased by 27% in CY09. Faysal Bank was able to achieve this growth owing to both a rise in advances of 9% and an increase in average yield on Earning Assets of 200 basis points. Nevertheless the steep rise in interest expense of 300 basis points cannot be ignored either. The reason for such changes in bid and ask rates was owing to the high volatility of KIBOR in CY09. As a snap shot KIBOR decreased by 330 basis points from Dec 08 to February 09, and then rose by 175 basis points in Mar 2009; then again fell by 101 basis points in Jul 2009. It looks as if Faysal was successful at times but also undone by the rise and fall of KIBOR and as a result could not create the right maturity gaps in its balance sheet.

Another reason for the rise of interest expense can be associated to a much higher rise in deposits and borrowing of 24% compared to just 9% of advances.

On a positive note The CASA ratio (Current and Saving deposits to total deposits) showed improvement for Faysal Bank as it stood at 50% this year compared to 43% last year. Yet it is still not even near to what some big players in the industry have with MCB and UBL leading the lot with CASA ratios as high as 88% and 75% respectively which allow them to operate very cost effectively.

FBL also showed an encouraging headway in terms of non-interest income which grew by 22% and represented 36% of the total income of the bank. However it must be noted that the increase should be seen as just a relative improvement from last year s dismal performance in non-interest income because the fact is that the dividend income which on average represents 11% of the prime earnings of the bank declined by 45% this year. Nonetheless focusing on the positives, Faysal was able to make good the Rs 134 million losses on sale of securities sustained in CY08 by earning a gain on sale of securities of Rs 825 million in CY09.

The non-interest expenses, especially administration cost cannot be ignored as they represent a substantial portion of the interest earned (25%). They also chipped in to reduce the banks profit by growing at a rate of 31% from last year. Another factor that reduced the profitability was the provision against non-performing loans which increased by 27% largely due to the poor economic conditions of the country.

BANKING SECTOR PERFORMANCE IN CY09

As analyzed in the Financial Sector Review of the SBP CY08 was a challenging year for the banking sector when adverse developments in various risk factors severely tested its resilience. Although the overall banking system was able to withstand these shocks by escaping any serious threat to its stability, a few small banks are still reeling from the impact, while a number of financial indicators deteriorated visibly during the year. Consequently, the banking sector

stepped into CY09 with a few financially weak small banks, a potential threat to the erosion of the capital base with the lagged impact of deterioration in asset quality, heightened market and credit concentration risks, and a difficult macroeconomic environment.

Notably, government s decision to implement an aggressive macroeconomic stabilization program with the help of IMF s Stand-By Arrangement from November CY08 played its role in stemming the rapid deterioration of economic fundamentals in the initial months of CY09. Gradual improvement in the economic environment observed in recent months is a source of comfort for the banking sector, as various risk factors seem to be dissipating. Some of the favorable developments include the reversal of the monetary stance due to the easing off of inflationary pressures, restoration of the regular functioning of the Karachi Stock Exchange and relative stability in the exchange rate. These developments not only helped in stemming the rapid deterioration in some of the financial indicators of the banking sector, but also signaled gradual improvement in the stability of the banking sector in H1-CY09, as against the position at end-CY08.

ASSET GROWTH

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TABLE 4. 15: KEY FINANCIAL INDICATORS

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                  Percent

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             CY07   H1-   CY08   H1-

Risk Weighted CAR*    13. 2   12. 1   12. 3  13. 5

Tier 1 Capital to RWA*  10. 5   9. 7   10. 3  11. 3

NPLs to total loans    7. 2   7. 7   10. 5  11. 5

Provisions to NPLs    85. 1    84   69. 6  70. 2

Net NPLs to capital    5. 6   6. 9   19. 4  19. 0

ROA after tax       1. 5   1. 7   0. 8   1. 0

ROE after tax      15. 5   16. 7   7. 8   9. 7

Liquid to total assets  33. 6   31. 6   28. 6  31. 2

Advances to Deposits   69. 8   69. 8   75. 5  69. 6

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* Figures for CY08 & H1-CY09 are based on Basel II

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Sources: BSD, SBP

Banking sector assets increased by 14% percent during CY09, compared to 12% percent in CY08. Given the industry performance, Faysal Bank s assets showed a great improvement increasing by 24%from the CY08. FBL posted a growth in advances of 9% and growth in investment of 56% thus outperforming the banking sector growth of advances and investment of 8% and 31% respectively.

DEPOSIT GROWTH

Encouragingly, the expansion in assets was funded by healthy growth in the deposits of the banking sector during CY09, which increased by 10% percent. As in case of assets, the increase in deposits was observed only in Q2-CY09 , which can be attributed to the reviving confidence (of the depositors) in the banking sector, the multiplier impact of credit expansion for commodity finance, and banks effort to mobilize deposits, especially to meet end June targets. FBL s results show a deposit growth twice that of the market of 20%.

SURPLUS/DEFICIT ON REVALUATION

Another contributory factor is the improvement in the surplus/deficit on revaluation of assets account which increased by Rs 26. 2 billion due to the declining revaluation losses (charged to capital) on investments in government securities and equities. This encouraging development is the upshot of the reversal of the direction of interest rates following the gradual easing of monetary policy and the steady rise in equity prices during CY09. Similarly Faysal Bank also posted surpluses on revaluation as it increased by 128% from the last year.

ASSET COMPOSITION

The asset composition of the banking sector has undergone significant changes during CY09, as the investment portfolio grew by 31% percent during this time, pushing its share in investments to 30% percent as against 26% percent at end CY08. Faysal Bank also follows suit with the industry as in the CY09 the investment and advances represented 31% and 51% of total assets as opposed to 26% and 60% in CY08. These divergent trends in two key components of banks asset base are attributed to a variety of factors including, substantial investments in fixed income government securities in a bid to lock-in funds at higher rates in a declining interest rate environment; investments in the GoP TFC issued in March CY09 to resolve the mounting problem of circular debt - this was primarily a shift in banks assets from loans to investments; and banks efforts to tighten their lending standards due to the marked slowdown in economic activities and the associated incremental quantum of NPLs. To some extent these factors contributed to what can be termed as crowding out of the financing needs of the private sector.

NON-PERFORMING LOANS

Weak economic activities have taken a heavy toll on banks asset quality. The impact of both mounting NPLs and restrained lending is clearly visible from the increase in the NPLs to loans ratio, which has reached 11. 5 percent in CY09 as against 10. 5 percent for CY08 Faysal Bank was no exception in these asset quality issues with its non-performing loans (NPLs) rising by 42% and representing 15% of total advances compared 10% last year.

PROFITABILITY

Given the favourable developments in the risk factors, banks risk bearing capacity has also witnessed changes during H1-CY09. The banking sector earned a profit after tax of Rs 90. 4 billion during CY09. This was substantially higher than the profit of Rs 63 billion in H1-CY08. Standard indicators of profitability also depict some improvement during the year. The after-tax ROA and ROE of the banking sector for CY09 are 1. 5 percent and 14. 5 percent respectively, as against 1. 2 percent and 11. 4 percent for CY08. This modest improvement in profitability indicators bodes well for the banking sector, especially in view of the increased expense on provisioning. Faysal Bank s profitability results also paint a similar picture with its ROA and ROE being 1% and 9% respectively, however in terms of profits after tax Faysal Bank was able to do better as its PAT increased by 8% to Rs 1. 2 billion.

In sum, key financial soundness indicators used to gauge the stability of the banking sector have shown some improvement during the CY09. This is also visible from the slight improvement in the Financial Soundness Index (FSI) from 0. 1 in CY08 to 0. 3 by end CY09. It is important to note that although the risk profile as well as the risk-bearing capacity of the banking sector has improved during CY09, its profitability is likely to remain subdued on account of the volume of provisioning expenses. The presence of a few small weak banks in the banking system is also an indication of persistent weaknesses in the banking system. Notably, banks have to focus on their core business activities ie channelize funds to private sector business enterprises, instead of diverting funds to government securities and extending loans to the PSEs and the government sector. While this strategy may work well in improving the risk profile of the banking system, it can have potentially negative consequences in an economy which is gradually getting back on its feet.

FINANCIAL PERFORMANCE (CY05-CY09)

The difficult macroeconomic environment of the last 2 years had an equally negative impact on Faysal Bank as it had for the industry as a whole. Although it was able to show encouraging improvements this year, its results depict a stark difference from levels achieved 5 years ago.

The profits after tax are 61% lesser in CY09 than in CY05. The primary reason for this plummeting decline in profits has been a steady increase in costs and the fact that the earnings have not been able to keep pace with them. The reason being the high cost components of the bank have kept on increasing.

As depicted in the graph the interest expense has grown at a much higher pace (261%) than the interest revenue (168%) from CY05 to CY09. Furthermore the administration cost that represented 25% of interest earned in CY09 increased by 200% from CY05 to CY09. The non-

interest income declined by 33% in CY08 from CY07, but was able to recover a little bit by increasing to Rs 2. 8 billion in CY09, but has not reached to the level where it once was. On the other hand the administrative cost have not subsided with the decrease in non-interest income, but has increased at a much higher rate thus showing inefficiency as part of the bank s operations.

However on a more positive note, although Faysal has been lagging on the non -interest income, it has shown improvement in terms of net interest income represented 64% of total revenue in CY09. The net interest income has grown by 65% since CY05. However due to poor economic conditions rising interest rates and inflation resulted in shrinking of net interest margins, as the cost of funding interest bearing liabilities increased more steeply than the yield on interest earning assets.

As a result the net interest margins have declined by 100 basis points from CY08 to CY09. One of the reasons that could be associated with this is the combination of high and low cost debt held by Faysal in its portfolio.

As depicted in the graph the high cost liabilities that include Fixed Deposits, Margin Accounts and Advances to FIs as high as the Low cost liabilities which include Savings deposits and Current deposits. This explains why the net interest margin shrunk from the last year, although the yield on earning assets had risen by 200 basis points. However going forward it seems positive from the point of view that the low cost savings and current accounts grew in CY09 by 41% and the high cost liabilities just increased by 5%.

EARNINGS RATIOS

Return on equity, return on assets and return on deposits all decreased from the previous years. In fact all these ratios have been deteriorating continuously since FY05.

The return on equity particularly is gone consistently low due to stringent capital requirement posed by the SBP.

BALANCE SHEET GROWTH

The overall liabilities and assets of Faysal increased by 32% and 31% respectively from CY09 to CY08, however when looked closely the interest earning assets of the bank increased by 24% while the interest bearing liabilities grew by 37%.

From the chart above there seems to be clear policy followed by Faysal of increasing its investments in government fixed income securities as to take advantage of the higher interest rates prevailing currently. Furthermore the growth in investment could also be a result of increasing NPL and so to invest in safer securities. The investment increased by 68% while the advances only increased by 9%.

Faysal Bank s borrowings have increased by 134% from CY05, although it remained somewhat at the same level from the last 4 years. This hints that Faysal Bank was more in need of liquidity than the last 4 years, due to a much higher level of Non Performing Loans compared to CY05

(242% higher than CY05).

CASA RATIO

The CASA ratio of FBL has more or less remained at 45-50% from the last 5 years. This ratio although seems to be increasing going forward however it is no where near the CASA levels of 75% and 88% of UBL and MCB.

Faysal Bank s comparatively low CASA ratio also explains the low net interest margin of 3-2%. High CASA ratio banks such as Allied bank have a much higher margin of 5-6%. Higher CASA reduces the cost of funding and thus increases the profitability.

ASSET QUALITY

The NPLs of the banking system witnessed an astonishing rise of 64. 8 percent during CY08 to Rs 359. 3 billion by the end of the year. This is the biggest increase in a single year since CY97. Therefore, the NPLs to loans ratio increased by 290 bps, from 7. 6 percent in CY07 to 10. 5 percent by end-CY08. Bank level information reveals that 31 out of 40 banks with asset share of 89. 7 percent in overall assets, recorded an increase in the NPLs to loan ratio.

As can be seen from the graph, the NPLs for FBL rose steeply from CY07 onwards and now stand at Rs 1. 4 billion. Similarly the NPLs to advances or also increased in the same manner.

MARKET VALUE RATIOS

The average prices as quoted in the Karachi Stock Exchange have reflected the banks drop in profitability expectations. The price has fallen to Rs 17. 53 from Rs 74. 1 in CY05. Although it recovered somewhat from Rs 11. 51 level in FY08, it has still a lot to gain a lot.

DEBT MANAGEMENT

The debt to equity ratio has jumped from 8 to 12 times for CY07 to CY08 and further 13 times in CY09. However the Capital Adequacy Ratio (CAR) has stayed varied from 13. 6 to 10. 2% in the 5 year period. The increase in debt to equity was witnessed because both increasing level of debt and also because of decrease in equity of 33% in FY08 due to losses on sale of securities and losses on revaluation.