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 Islamic banking 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 listed on 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 its direct 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 the changing 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 is
car 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 full range 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 or minimizing 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 at macro 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 them
The 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 incurred to 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 be calculated 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 must concentrate 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 3 months. 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 Mark-up/Interest Earned Interest Expense Provisioning Profit 2004 2,753 1,118 124 1,753 2005 6,338 3,312 (310) 3,069 2006 9,728 6,089 622 2,817 2007 11,611 7,459 2,079 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
4500 4000 3500 3000 2500 2000 1500 1000 500 0 Rs. in Millions 2,079 622 124 2004 -310 2005 2006 2007

Year

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 Financial Ratios

Segment Gross Spread Ratio (Net Mark-up Income) ROE ROA Price Earning Ratio Capital Adequacy Ratio TATO Equity Multiplier Total Debt Ratio 2004 59.39% 29.75% 2.78% 7.23% 12.20% 67.80x 7.69x 86.99%

(Assets Liabilities)
2006 37.40% 32.67% 2.50% 9.10% 11.42% 51.57x 8.36x 88.10% 2007 35.75% 23.33% 1.77% 15.37% 11.76% 56.17x 8.74x 88.56%

2005 47.75% 42.74% 3.25% 8.89% 13.60% 63.89x 7.73x 87.10%

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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 future loss. Despite the lower earnings this year the bank still distributed cash dividends. This indicates a favorable position for the bank and its investors.

50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2004 2005 2006 2007 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 Earning Per Share Price Per Share 2004 Rs. 6.02 2005 Rs. 8.33 2006 Rs. 6.65 Rs. 91 2007 Rs. 4.29 Rs. 80.25
ROA ROE

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)

Liabilities and Shareholder Equity
Assets

72%

7% 1% 7% 4% 9%
22%

8% 5% 3%

62%

Advances

Deposits & other account Borrow ing from Financial Institutions Sub-Ordinate Loans Shareholder Equity Revaluation Reserves Other Liabilities

Investment

Cash & Bank Balances Lending to Financial Institutions Other Assets

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