Mid Term Paper

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

Department of Administrative Sciences

Quaid-e-Azam University
Islamabad
Introduction
Faysal Bank Limited (FBL) started its operations in 1995 as a local bank of Pakistan. On January 1,
2002, Al Faysal Investment Bank Limited, another group entity in Pakistan, merged into Faysal Bank
Limited which resulted in a larger institution. The majority share holding of Faysal Bank Limited is held
by Ihtmaar Bank B.S.C an investment bank listed in Bahrain, while it has one subsidiary i.e. Faysal
Management Services (Pvt.) Limited (FMSL). Until 2005, FBL’s growth was very impressive, but from
year 2006, its profits are declining, and currently it is in big trouble and facing problems like
deteriorating profits, decreasing EPS, liquidity problems, increasing provisioning for Non Performing
Loans (NPLs), etc
In order to know, why FBL is going downward, and what can be done in order to put it on track of
growing bank again, its strategic audit, situational analysis, performance audit has been conducted in
this assignment, and finally recommendations and implementation have been given.
1.0 Strategic Audit
Strategic Audit includes the following:
1.1 Current Performance
In last year, Faysal Bank Limited (FBL), performance was not good, as compared to the past two years.
Table in the annexure one shows FBL recent performance. (See annexure 1)
By looking in the table, we found that, after tax profits and Earning per share (EPS) in year 2007
decreased by 19.34% and 35.48% respectively, as compared to the 2006, while in first six months of
year 2008, the profitability of FBL has been decreased by 39 % and EPS has been decreased by 53%, as
compared to the first six months of 2007. In addition to profitability, most of the objectives have also not
been met.
1.2 Strategic Posture
1.2.1 Mission: “To excel in providing innovative, value-based banking solutions to meet the changing
needs of customers”.
1.2.2 Objectives: Faysal Bank Limited, (2007). Annual Report. Karachi. The objectives set for year
2008 are as under:
• Target of opening of 24 branches in year 2008.
• Prudent growth & Cost efficiencies.
• Continued investment in technology & infrastructure.
• Further deepening of the culture of diligence and corporate responsibility.
1.2.3 Strategies: FBL’s mostly strategies are totally confidential, because of severe competition in the
market. But few strategies stated by top management in annual report are as under:
• To offer banking products and services which are needed, convenient and marketable.
• To grow as an institution with prudence and profitability in view.
• To base relationships on trust and mutual benefit with customers and shareholders.
• To maintain highly efficient and motivated employee base.
• To continue being a socially conscious organization.

2.0 Corporate Governance

2.1 Board of Directors (BoD)
Syed Naseem Ahmed is Chairman; Naved A. Khan is President & CEO of FBL, while directors are
Graham Roderick Walker, Mohamed A. R. Hussain, Mohammad A. Rahman Bucheerei, Farooq
Rahmatullah, Tariq Iqbal Khan and Shahid Ahmad. Only one director, i.e. Tariq Iqbal Khan is external,
while remaining are internal and hold substantial shares of stock (common stock as no preferred stock is
issued by bank), which is traded on the Karachi and Lahore Stock Exchange. Current Board of Director
contributes significantly to in terms of knowledge, skills, and connections. 50% of BoD has served less
than six months to the FBL.
2.2 Top Management
Top management of FBL includes BoD, Head Office Management, Southern Region Management,
Central Region Management, and Northern Region Management. The current CEO & President of FBL,
Mr. Naved A. Khan is the previous CEO of ABN AMRO Bank (new name RBS Bank), he possess 23
year working experience in this field, moreover he is also chairman of ECH Task Force of State Bank of
Pakistan (SBP). He has also been associated in senior management positions with Bank of America.
Current Top management has not been responsible for the FBL’s past few years’ performance, because
most of the top managers have been in their position for less than one year. Current Top management is
very professional as compared to the past rubber stamped acting management (mostly acting/temporary
in nature).
3.0 External Environment: Opportunities and Threats
3.1 Societal Environment
Following are the forces which are currently affecting Faysal Bank and the Banking Industry:
a) Economic
The main things affecting Faysal Bank and the banking industry are increase interest rates, and the rising
inflation rate in the economy, for example, currently KIBOR which is benchmark for industry lending is
at highest ever point.
b) Technological
Developments like introduction of oracle financial systems, symbols, and different application are
increasing productivity of the Faysal Bank as well as the banking industry, but on the other its initial
implementation costs are causing increased administrative cost to FBL.
c) Socio cultural
Socio cultural forces like values, demographic characteristics, etc. are also affecting FBL as well as the
banking sector. Because of these values some professionals don’t want to join banking sector, and some
people don’t keep their money in the banks, because of religious believes. But on the other hand such
believes are also helping banks to introduce Islamic products. FBL has lost various customers because of
this reason due to shift from Islamic Banking to conventional banking.
d) Political-legal
These include the forces like political conditions in country, SBP regulations, etc are also affecting FBL
as well as banking sector. For example, SBP is increasing discount rates, Minimum Capital Requirement
(MCR), cash reserve ratio, etc. which is causing liquidity problems for FBL as well as banking sector.
Due to MCR, various mergers took placed in the banking sector, and few mergers are also expected in
near future.
B. Task Environment (Industry)
Many forces in the industry are causing competition, these include, technology i.e. communication
system like Symbols, Sun, Oracle, etc, larger branch network, ATM locations, unique products, entry of
foreign banks, etc. Task environment of FBL can be discussed through following Porter Model:
a) Threat of new entrants
Opening of braches by Barclays (which in international reputable bank), threat of entering of Bank of
China (BOC) by acquiring SME Bank, and Industrial Development Bank of Pakistan (IDBP), while
BOC is also planning to acquire 26% stakes in National Bank of Pakistan.
b) Bargaining power of buyers
Due to increase in interest rates, small firms are not in a position to take loan from banks, while number
of corporations in Pakistan, is limited. Therefore, key customers/buyers (corporate customers) of banks
have gained substantial power and now they can bargain the spread with the relationship managers due
of availability of the large number of the banks.
c) Threat of Substitute products or Service
As such there is no significant threat of substitute products or service, but few services like investment
related services are offered by various Mutual Funds, and Security Dealers, but these services are limited
to big cities. While, on deposits side, National Saving Organization, is providing substitute products to
the depositors of the banks through attractive packages, at very attractive rates.
d) Bargaining power of suppliers
Currently this is big problem for FBL as well as industry, because of liquidity crisis and Pakistan’s poor
international financial rating, all fund suppliers are avoiding to supply credit to Pakistani industry,
moreover depositors bargaining power has also been increase due to high mark up rate offered by
various banks, and due to dearth of deposits with bank
e) Rivalry among competing firms
Banking sector is facing severe competition, due to availability of many national and international banks
in the industry. Currently HBL bank, is leading with 40% market share, while MCB with highest profits
and National Bank of Pakistan with largest deposits. But many other banks like UBL, Meezan, and
Alfalah are also emerging and are causing competition for Faysal Bank. Moreover, foreign banks like
Citi Bank, RBS Bank (previously ABN Amro), Saudi-Pak Bank, Al Barakah Bank, etc. are also creating
competition in the banking sector..
IV. Internal Environment: Strengths and Weaknesses
A. Corporate Structure
In year 2006, FBL made many changes in the corporate structure. Now there is combination of
centralized and decentralized authority structure. In a recent interview ( A. Nasir, personal
communication, October 23, 2008) it was found that FBL is very close to centralize all those activities
and processes, which requires management expertise and SBP requirements, e.g. account opening, credit
administration, letter of credit, disbursement approval, etc. The main purpose of centralization is to
increase specialization, improve efficiency and to tackle the threats posed by competition. For example,
before centralization, all branches were doing their Credit Administration Activities (which are very
technical in nature) separately, therefore, no experts were available in each branch and these activities
were burden for branch manager. So in this way FBL has increased efficiency and specialization by
centralizing activities at regional branch with the help of Symbols software.
In an interview (A. Saeed, personal communication, October 23, 2008) it was found that, the present
structure is not clearly understood by everyone in the corporation, because of complexities in the
processes. But in the specific department, unit, etc. everybody clearly understands his/her duties and
responsibilities and the procedures, and about the structure of the whole department and region.
B. Corporate Culture
In an interview (B. Naila, personal communication, October 29, 2008) it was found that, the present
culture of the FBL is ideal one. There is strong interaction of employees with in a unit, because of the
same kitchen and dinning table for officers as well as employees, where employees with their bosses
take lunch, tea parties, etc. in an informal way. These informal gatherings are allowing employees to
adapt to changing conditions and to increase productivity, and quality. Moreover, due to attractive salary
packages, employees are motivated, but heavy work load is causing frustration to not only employees,
but to officers as well.
C. Corporate Resources
1. Marketing
The current marketing objectives, strategies, and policies and not clearly stated, instead these are very
confidential. FBL is offering very attractive products and very competitive prices, at almost all branches.
But the problem is with promotional activities, and management of FBL is taking no serious step in this
regard. FBL’s advertising is very poor; in fact it is nil on electronic as well as print media. It only
advertises its products through pamphlets, banners, etc. in its branches and in ATMs. In a recent
interview (K. Naved, personal communication, October 29, 2008) it was found that, this is also one of
the reasons, that its consumer finance department is loosing money despite of attractive products. One
can predict that, if such marketing practice continued, then FBL will loose many customers, because if
people are unaware of the products, places, etc. then there is no need to offer such products. From the
marketing of FBL, one can infer that it don’t have any competitive advantage in marketing, moreover no
proper marketing techniques, even suggestion card is not introduced in order to improve or evaluate the
product performance, just performance is evaluated through the profits generated through the product.
2. Finance
Basically FBL is a financial institution, therefore, its financial objectives are very obvious i.e. increase in
EPS, increase in share prices, distribution of dividend, highly return owners. (Faysal Bank, 2007). FBL’s
finance people are complying with the rules and regulations of Securities and Exchange Commission of
Pakistan (SECP), SBP, and international accounting standards.
3. Research & Development (R&D)
There is no formal research and development department in the FBL, because of the nature of the
industry.
4. Information System (IS)
Information system of FBL is very good and very effective (Business Recorder, 2008). The company is
using Information System for various purposes, for products, for financials, for credit approval,
communication, for human resources, etc. In this regard, FBL has implemented the Symbols system and
it is near to implement completely the Oracle Financials system. FBL has presence on the internet, and it
is providing E banking facilities as well. FBL’s Information system is very competitive as compared to
its direct competitors like Meezan bank, Bank Alfalah, NIB Bank, because these banks are not using
systems like HRMS presently.
5. Human Resources Management (HRM)
FBL’s current HRM policies, strategies, etc. are very confidential. But they can be implied from the
practices. HRM department of FBL advertises its Management Trainee officer (MTO) batch for twice in
a year. HR department is also following the policy of directly hiring experienced persons from other
banks. The HRM department of FBL is managing diversity very well. It has proper training programs for
MTO and TO (trainee officer) batch. In past many years, FBL experienced no strikes, etc. Interview with
(A. Ibrar, personal communication, October 23) indicated that, Quality of work life is very good. There
is no employee union in FBL. But the main problem it facing is increasing employee turnover rate which
is more than 41%, HRM section (personal communication, October 14). In past HRM dept of FBL was
providing competitive edge to bank, but now its policies are disturbing overall company, because of
rapid increase in employee turnover rate and direct hiring.
V. Analysis of Strategic Factors (SWOT)
A. Situational Analysis: Here is the SWOT analysis of the Faysal Bank Limited:
SWOT Analysis
Strengths
• Based on financial strength and superior performance, Faysal Bank Limited has been
assigned the highest short term rating of A1+ (A One Plus) and AA (Double A) for the long
term by JCR-VIS (credit rating Company).
 • Better technology like Symbols, implementation of Financial Oracle, HRMS.
• Very attractive salary packages to employees.
• Heavy internal financing i.e. from heavily growing deposits.
• Attracted big corporations like SNGPL, Attock Group of Companies, Zaver Petroleum, etc.
Weaknesses
• Weak branch network across the country.
• High employee turnover.
• Low number of ATMs.
• Attracting only upper and middle class customers.
• Market share is declining from new competition.
• Employees’ frustration due to excessive work burden.
Opportunities
• It can capture agriculture market by offering innovative agri finance products.
• Impressive print and electronic media campaign highlighting FBL’s role in the
development of rural economy of Pakistan can give it competitive edge over its
competitors.
• Through re-branching, FBL can capture lot of new customers.
• Merger with Barclays or Bank of China to become part of larger international banking
network and to increase the profit.
Threats
• Declining trend in banking sector, which can affect it to large extent because of its big
corporate customers which are few in number.
• Arrival of Barclays and Bank of China in Pakistan, which can increase the competition in
banking sector.
• Decreasing trend in Earning per share and stock prices.
• Moving of key employees, e.g. Corporate Relationship Managers, which means moving of
corporate clients to other banks.

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.