Faysal Bank Projects Earnings to Double in Three Years

We are initiating coverage on Faysal Bank Limited (FABL) with a target price of PKR 100 per share. This valuation is based on a Price-to-Book (P/B) ratio of 1.46x and a projected Book Value Per Share (BVPS) of PKR 68.2 for the fiscal year 2024. Our optimistic outlook for Faysal Bank Earnings is driven by several key factors: the bank’s ongoing conversion to Islamic banking, which typically commands higher multiples; a projected Return on Equity (ROE) of 31% by 2026; and significant potential for optimizing Current Account Savings Account (CASA) ratios and achieving substantial deposit growth.

Strong Growth Potential for Faysal Bank Earnings

Faysal Bank stands out for its remarkable deposit growth potential, particularly when compared to other traditional banks. While mainstream banks like HBL, MCB, UBL, and ABL show a linear relationship between deposit growth and P/B ratios, Faysal Bank, along with BAHL and BAFL, appears to be undervalued. Faysal Bank’s aggressive branch network expansion and its Islamic banking model are key drivers of this growth.

Impressive Deposit Growth Rates

Over the past three years, Faysal Bank has achieved a Compound Annual Growth Rate (CAGR) of 23.5% in deposits, outpacing many of its peers. The transition to an Islamic banking model has further accelerated this growth. On an Islamic-only basis, the bank’s deposits have grown at an astonishing 60% CAGR, from PKR 248 billion in 2020 to PKR 1 trillion by 2023. This rapid growth highlights the bank’s potential to continue attracting significant deposits and enhancing its market position.

Investment Portfolio and Yield Dynamics

Faysal Bank’s investment portfolio, largely comprising Sukuk, has shown sensitivity to short-term interest rates. Approximately 14% of this portfolio has maturities ranging from 2 to 5 years. As older Sukuks mature and new ones are acquired at current market rates, the bank’s portfolio is expected to shift towards shorter durations, potentially improving yields and reducing the drag on ROE caused by Fixed Ijarahs.

Strategic Valuation and Future Prospects

Our fair value estimate for Faysal Bank is PKR 100 per share, representing an 83% upside. This valuation reflects not only the bank’s successful conversion to Islamic banking but also the broader benefits of higher spreads and improved operational efficiencies. Key areas of focus include enhancing deposit-to-branch ratios, sustaining high Islamic deposit growth rates, and maintaining industry-leading Non-Performing Loan (NPL) management.

Faysal Bank’s transformation into a fully Islamic bank positions it for substantial growth. With a robust deposit growth strategy, strong market presence in Islamic banking, and effective management of its investment portfolio, Faysal Bank is poised for a significant increase in earnings over the next three years. Investors should consider the long-term potential of Faysal Bank Earnings as the institution continues to innovate and expand its market presence. This strategic direction underscores Faysal Bank’s commitment to leveraging its strengths in Islamic finance for sustained profitability and growth.