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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. (email@example.com)
Submitted To Ajmal Waheed Khan Course Facilitator
Department of Administrative Sciences Quaid-e-Azam University Islamabad
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).
• • • • Weaknesses • • • • • • • •
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.
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. • • 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. 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.
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, interbank 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.