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Table of Contents

Table of Contents...................................................................................1

INTRODUCTION

Faysal Bank (FABL) started its operations in Pakistan in 1987, first as a branch 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.

The bank's widespread and growing network of branches across the country and

Azad Kashmir, together with its corporate offices in major cities, provides efficient

services in an effective manner. Faysal Bank, Pakistan's ninth biggest, has a network

of 107 branches in the country and plans to add 23 more this year. The bank will

increase its number of outlets to 150 by December 2009, and will start Islamicbanking unit recently to take advantage of rising demand for Shariah compliant

products and farm loans.

HOLDING COMPANY

Ithmaar Bank B.S.C., an Investment Bank is the ultimate holding company of Faysal

Bank. However, DMI (Dar Al- Maal Al- Islami) Group continues to be a major

shareholder of Ithmaar Bank B.S.C. with 42% stake.

Ithmaar Bank B.S.C. is licensed by the Central Bank of Bahrain and listedon the Bahrain Stock Exchange. It has a paid-up capital of US$360

million, total equity of US$1.1 billion and is a full investment bank with itsdirect business covering the Middle East and North Africa (MENA) region,as well as South Asia, Asia-Pacific and Europe.

VISION

To be the bank of first choice with the highest ethical principles as our guiding force.

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MISSION

To excel in providing innovative, value-based banking solutions to meet thechanging needs of customers and further strengthen our image of trust and reliability.

MODES OF FINANCING

Faysal Bank Limited is a full service banking institution offering consumer,

corporate and investment banking facilities. Major sources of Faysal Bank financing iscar finance, home finance and personal loans which generate a huge amount of income for

the Bank. Second major source is Corporate & Investment Banking Services for clients,

which include financial and corporate advisory services, along with a wide array of tools

which help clients to achieve their goals.

Faysal Bank major products and Services include:

1. Consumer Loans

Car Finance

Faysal Finance

House Finance

2. Corporate & Investment Banking

Corporate Financing

SME Finance

Trade Financing

Treasury & Capital Markets

Investment Banking

Agricultural Financing Cash Management

3. Deposit Accounts

Faysal Savings Account

Rozana Munafa Plus Account

Basic Banking Account

Faysal Moavin

Faysal Premium

Faysal Izafa

Mahfooz Sarmaya

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FCY Saving Plus

4. Services

PocketMate Visa Debit Card Travellers Cheques

Transfer of Funds

Safe Deposit Lockers

Non-stop Banking

Consumer Loans

Faysal Car Finance

Faysal Car Finance is the cash cow for the bank and it is a most flexible product designed to

meet customer needs. Anyone who holds the Pakistani nationality is eligible for the product

at a 20% down payment.

Housing Finance

Faysal Housing Finance offer the following products for customers

Buy a Home Build a House

Home Renovation

Against house financing the bank pledge the property and finance up to 80% of the market

value of the property.

Faysal Finance

Faysal Finance is short term loans (Rs. 100,000) for those employees who have above

Rs.15,000 salary

Corporate and Investment

Corporate Financing

Faysal Bank Limited is fully geared to meet the changing economic challenges present in

Pakistan. Bank offers the services e.g. Financial advisors and consultants as well as

financiers to its corporate customers.

Small and Medium Enterprise 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. Bank helps its customers grow from strength to strength by acting as

their banker and financial advisor.

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Trade Financing

Faysal Bank has established a strong presence globally in Trade Financing through its

network, affiliates and correspondents. The Bank has Trade Finance services include a fullrange of import, export and guarantee products, thus offering tailor-made solution to fit the

individual need of each customer.

Treasury and Capital Markets

Faysal Banks 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 has earned immaculate reputation in the field of Capital Markets, which is

quite evident from our track record and market share in this area.

Investment Banking

Faysal Bank, offer the leaders of businesses and institutions, corporate advisory services and

a wide array of tools to help them accomplish their goals. Bank advice and facilitate the

arrangement of commercial paper, syndications, mergers, acquisitions and underwriting

arrangements amongst many others. Whether the customers require financing of a project or

managing of investments, bank can guide them through the markets and tailor a solution to

meet their specific needs.

Agricultural Financing

Faysal Bank offers specialized products for the agricultural sector. The 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.

Cash Management

Faysal Bank's Cash Management department has emerged as one of the leading cash

management solution providers in strategic markets such as local corporate, multinational

companies, and mid-tier markets.

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Risk Management

A wider array of Risk Management tools and practices are available for financial institutions

today. It is the Banks policy to manage such risks effectively by way of mitigating orminimizing with a view to maximize the return to all its stakeholders. In this regard, the

Bank has recognized the fact that continuing development of the Risk Management

infrastructure in terms of systems, procedures and the necessary skills and expertise among

the relevant staff to handle these risks professionally is the most effective strategy and

consequently allocated sufficient resources for developing the necessary infrastructure and

skills.

RISK MANAGEMENT FRAMEWORK OF FAYSAL BANK

Abreast with recent developments in risk management, the Bank has strengthened its risk

management setup. Under the revisited setup, a Board level sub committee, Board Risk

Management Committee has been constituted to oversee risk management of the Bank atmacro level. Chief Risk Officer of the Bank, reporting to Board Risk Management

Committee, is responsible for managing credit, market & operational risk whereas liquidity

risk management shall continue to be performed by Asset Liability Management Committee

(ALCO), of which Chief Risk Officer is an essential member. A detailed Risk Management

Policy was approved by the Board of Directors setting the broad guidelines for the

management for taking risk exposures.

Credit Risk Management Department is responsible for conducting independent risk reviews

as per mandate provided by the Board Risk Management Committee. In accordance with

requirements of State Bank of Pakistan, a comprehensive Internal Risk Rating Model was

developed in-house, which has since been implemented in all significant credit areas.Pricing decisions have been systematically correlated with the level of risk being taken,

maintaining trade-off between risk and return. A Treasury Mid Office was also constituted

during the year, which is responsible for independent day-to day monitoring of treasury

operations of the Bank. Market Risk Management Committee (MRMC) was constituted

during December 2007.

RATINGS FOR RISK MANAGEMENT

Faysal Bank is rated "AA" (Double A) for the Medium to Long Term and "A-1+ " (A One

Plus) for the short term by JCR-VIS and PACRA.

Medium to Long Term "AA" (Double A)

High credit quality. Protection factors are strong. Risk is modest but may vary slightly from

time to time because of economic conditions.

Short Term "A-1+" (A-One Plus)

Highest certainty of timely payment. Short-term liquidity, including internal operating

factors and / or access to alternative sources of funds, is outstanding and safety is just below

risk free Government of Pakistan's short-term obligations.

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Major Risk Faced by the Bank and Strategies for Mitigate themThe Banks risk management focuses on the major areas of credit risk, liquidity risk and

market risk.

1-Credit Risk

Credit risk is the risk that companies, financial institutions and other counterparties will be

unable to meet their obligations which may result in financial losses. The major risk that

Faysal Bank faced is credit risk. Credit risk arises principally from the Banks loan book but

can also arise from other on and off balance sheet activities.

As credit risk has been the risk, causing major losses for Faysal Bank. The Board of

Directors is responsible for formulating a well-defined credit policy. The senior

management develops policies, systems and procedures and establishes an organizational

structure to measure, monitor and control credit risk, which should also be duly approved by

the board. The loan origination function is most important thing, which needs proper

analysis of the borrowers creditworthiness and financial health. This aspect is reinforced by

the credit administration function that not only ensures that activities conform to a banks

policies and procedures, but also maintains credit files (with help of CIB), loan documents

and monitors compliance of loan covenants. The banks are encouraged to assign internal

credit ratings to individual credit exposures. The loan portfolio should be monitored

regularly and a report prepared at periodic intervals both for the aggregates as well as

sectoral and individual loan levels.

The Faysal Bank mitigates credit risk by: Focusing on business sectors it knows well or has an established connection.

Limiting the size of exposures to any particular entity / group.

Limiting the aggregate size of exposures to any particular sector or sub sector.

Obtaining security cover and where appropriate personal guarantees for the

exposure.

Regularly reviewing the credit risk grading of each exposure.

2-Interest Rate Risk

When interest rate changes in the money market, banks face interest rate risk. Faysal Banks

revenue comes from interest income from investment activities. Their expenses are incurredto meet interest cost on deposits. Interest rate changes in the money market change the

market value of banks assets and liabilities. In this way, with the change of market interest

rate, Faysal banks net worth also changes.

Since the market interest rate is determined by the monetary policy of the State Bank of

Pakistan, Faysal bank has nothing to do except to make adjustment of its interest rates for

lending, and on borrowed funds for maximize the profit. When market interest rate rises,

market values of fixed-rated loans invested by banks fall. In this situation if the State Bank

directs the commercial banks not to increase the lending rate on industrial loans as well as

credits for commercial and service sectors, the Banks will have to accept capital losses. To

offset the losses, the Banks will have to decrease the interest rate on deposits.

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To recoup the expected losses due to rise in market-based interest rate, the Faysal Bank will

use discount rate that equalizes the current market value of total investment with the

expected income to be generated from investment activities. Loan portfolio mix includes

investment loans of different maturities. Therefore, yield to maturity will have to becalculated for the expected cash flow of different tenor. For example, term loans for five

years will generate income for five years tenor. Expected cash flow for the first to the fifth

year will have to be calculated to equate the current market price of the amount of term

loans so that the Faysal Bank can avoid any loss.

Since banks portfolio of assets and liabilities are sensitive to interest rate movement, the

management of Faysal Bank seeks to hold the banks net interest margin, fixed. If the net

interest margin is lower, banks profit will be reduced. Lower net interest margin which will

cause lower profit for the bank will be further reduced after deduction of expenses against

salaries and expenses against overhead. No matter whether market interest rate goes upward

or downward, bank will want to maximize its profit. For this reason, the management mustconcentrate on the banks portfolio of assets and liabilities and their extent of sensitiveness

to the interest rate movements. To protect the goal of achieving the desired level profit, the

management will have to use a variety of interest rate hedging methods.

The following techniques used by bank to mitigate interest rate risk:

Banks portfolio of loans is relatively short term. Approximately 75% of loan

portfolio has maturity dates of 12 months or less, and therefore the bank offer new

facilities on a fixed or floating basis.

When there is any condition of inflation, the bank will have to take a higher

inflation-risk premium from the borrower to reduce the risk.

Faysal Bank funded, primarily from retail deposits that enable the bank to structure a

range of deposit accounts and rates.

3-Liquidity Risk

Liquidity risk is the risk that the Bank encounters difficulty in releasing assets or otherwise

raising funds to meet commitments associated with liabilities or financial obligations.

There is a requirement to keep a balance between the funding maturity profile and the

funding requirement derived from the run-off of Banks loan receivables. While the Bank is

significantly funded from shareholders funds, there is still a need to keep a balance between

the deposit maturity profile and the loan book maturity profile such that the bank always

have at least a 3 month window in which new funds could be sourced. Faysal Bank believes

that additional funding deposits and, at a price, bank funding could be obtained within 3months. This period has been chosen as it would allow reasonable time to put a facility in

place, at a time of limited availability of funding.

The Banks Asset and Liability Management Committee manages the liquidity position on a

continuous basis. The Bank's liquidity risk management process, as carried out within the

Bank and monitored by management of the Bank, includes:

Day-to-day funding, managed by monitoring future cash flows to ensure that

requirements can be met. These include replenishment of funds as they mature or are

borrowed by customers. The group maintains an active presence in money markets

to enable this to happen;

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Bank monitors closely the activity levels of its deposits and has the flexibility to

quickly amend the amount and structure of interest rates on offer if necessary to

obtain the required profile of deposits.

Maturities of Assets and Liabilities

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Financial Statement Analysis (2004-2007)

PROFITABILITY

Profit of the bank has declined in the years 2006 onwards. Although the mark-up interest

earned increased in 2007, the mark-up interest expensed also increased simultaneously due

to an increase in the cost of deposits. As the deposit base of the company outpaced the

market growth in deposits. The deposits of the company outpaced in growth as compared to

their market growth. Hence deposits increased by 37% as compared to the market growth of

18%.

Moreover, the company made a few long-term borrowings and greatly increased its use of

the subordinated debt. The administrative expenses of the company also increased as it

focused on branch network expansion.

Financial Income & Expenses (Rs. In Millions)

Segment 2004 2005 2006 2007

Mark-up/Interest

Earned

2,753 6,338 9,728 11,611

Interest Expense 1,118 3,312 6,089 7,459

Provisioning 124 (310) 622 2,079

Profit 1,753 3,069 2,817 2,272

The contribution to profit from the non-interest income side was greater than that from the

net interest income side. Major growth was recorded in gain from sale of securities.

FACTORS EFFECTING ON PROFITABILITY

Provisioning and Cost of Borrowings

Non Performing Loans are the biggest risk and item which affect the profitability of the

bank. NPLs have increased in Faysal Bank as have in the entire banking industry. Hence

bank has the provisions. This most likely indicates that the bank is taking measures to

adequately cover its NPLs to protect its assets and manage them prudently e.g. ROE shows

that the bank manages its loan portfolio very carefully. So, that avoids any future losses.

The bank reviews its advances portfolio to assess amount of non-performing advances and

provision required there against on a quarterly basis. The provision is made in accordance

with Prudential Regulations issued by the State Bank of Pakistan. Due to the requirement of

full provisioning against NPLs, the provisions have increased that has had a decline in the

profitability of Faysal Bank. Although the efforts to maintain assets quality are evident, the

bank may be recommended to further diversify its credit portfolio so as to reduce large

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exposures in order to contain the credit risk. The Bank record the NPLs as 25% in 1 st year,

25% in 2nd year, after that bank record 10% per year to record loss.Provisioning

200720062004 2005

2,079

622

-310124

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Year

Rs.

inMilli

The banks cost of borrowings from other banks is very low because the major portion of

Faysal Banks assets consists of short term loans which are approximately 70% of all assets.

Maturity profile of assets and liabilities shows the banks ability to maintain its liquidity

very effectively and efficiently. This maturity model also describe that due to short maturity

the Faysal Bank faces a low interest rate risk.

Maturity Profile Percentages (Assets Liabilities)

Financial RatiosSegment 2004 2005 2006 2007

Gross Spread Ratio

(Net Mark-up Income)

59.39% 47.75% 37.40% 35.75%

ROE 29.75% 42.74% 32.67% 23.33%

ROA 2.78% 3.25% 2.50% 1.77%

Price Earning Ratio 7.23% 8.89% 9.10% 15.37%

Capital Adequacy Ratio 12.20% 13.60% 11.42% 11.76%

TATO 67.80x 63.89x 51.57x 56.17x

Equity Multiplier 7.69x 7.73x 8.36x 8.74x

Total Debt Ratio 86.99% 87.10% 88.10% 88.56%

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Gross Spread Ratio, ROE, and ROA shows that the profitability of bank is declined which

reduces these ratios. Other reason of low return includes the increase in interest rate by State

Bank of Pakistan which results in low investment. ROE also shows that the bank is very

carefully planed its Loan portfolio so, that the bank will be save its assets from any futureloss. Despite the lower earnings this year the bank still distributed cash dividends. This

indicates a favorable position for the bank and its investors.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2004 2005 2006 2007

ROA

ROE

The liquidity profile of the bank has maintained almost a consistent level, slightly declining

in 2007. This was due to the fact that the growth in advances was less than the growth in

deposits. This may suggest another firm measures to be tactful in distributing deposits as

advances. As evident, the highest proportion of advances comes from the loans, cash and

credit finances followed by net investment in finance lease. As for the industry, the

consumer loans growth slowed due to increase in lending rates, high credit standards and

restrained lending by the banks in order to streamline their risk.

The solvency profile of the bank shows a considerable decline. The shareholder's equity

increased less than the increase in the deposits of the bank. This declining trend may hamper

long term growth prospects of the bank if appropriate actions are not taken.

Segment 2004 2005 2006 2007

Earning Per Share Rs. 6.02 Rs. 8.33 Rs. 6.65 Rs. 4.29Price Per Share - - Rs. 91 Rs. 80.25

The share price for almost the first year 2007 was below that of 2006. However, it increased

later. The political situation of the country rendered the share price a decline but still

somewhat above the 2006 level. The highest achieved during 2007 was Rs 80.25 whereas

during 2006 it was Rs 91.00. The increase in the share price and the decline in the EPS due

lower profitability pushed up the P/E ratio. This proposes a favorable picture for the bank.

Moreover, the bank has been a consistent distributor of dividends, providing its investors a

consistent stream of income.

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BALANCE SHEET ITEMS (in %age)

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Liabilities and Shareholder Equity

72%7%1%

7%

4%9%

Deposits & other account

Borrowing from Financial Institutions

Sub-Ordinate Loans

Shareholder Equity

Revaluation Reserves

Other Liabilities

Assets

62%22%

8% 5% 3%

Advances

Investment

Cash & Bank

Balances

Lending to

Financial

Institutions

Other Assets

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