FABL: PKR 100 Target Driven by Islamic Conversion and Strong Growth

BMA Capital Management has provided analysis on Faysal Bank Limited (FABL) with a fabl target price of PKR 100 per share, projecting an 83% upside. This valuation is based on a PB ratio of 1.46x, citing the anticipated BVPS of PKR 68.2 for the year 2024. The key influences justifying this valuation include the following:

Islamic Conversion and Higher Multiples

FABL’s effective shift to an Islamic bank has been instrumental in attaining this valuation. Islamic banks generally draw higher valuation multiples as a subject to their distinctive market opportunities and growth potential. FABL’s recent transition to Islamic banking positions for greater returns and a more stable growth trend.

Return on Equity and CASA Optimization

The expected return on equity (ROE) of the bank is set to achieve an impressive 31% by CY26. This robust ROE projection is the basis of this valuation. Furthermore, BMA underscores the potential for CASA optimization. The current CASA ratio of FABL has fluctuated during the transition period. However, with the conversion now finalized, a renewed focus on optimizing CASA levels could significantly improve profitability.

Deposit Growth and Branch Network Expansion

FABL’s deposit growth is another key metric driving its valuation. The bank is projected to achieve a 25% to 30% deposit growth rate, driven by the growing branch network and the potential of Islamic banking. This growth rate substantially exceeds that of other banks, indicating a strong prospect for a rise in earnings in the years ahead.  The bank has also maintained industry-leading NPL management.

Comparison with other banks:

BMA’s analysis highlights that banks with higher deposit growth, like FABL, are incorrectly valued.  While mainstream banks such as HBL, MCB, UBL, and ABL show a linear correlation between deposit growth and P/B ratios, banks like FABL, BAHL, and BAFL do not follow this trend. FABL, particularly, stands out with its leading deposit growth potential among these banks, justifying a re-rating and a higher valuation.

BMA provides detailed financial projections for FABL, including:

Indicator	Dec-21	Dec-26 (E)	Change (%)
Total Revenue (PKR)	34,343	159,922	+366
Profit after tax (PKR)	8,153	42,532	+422
EPS (PKR)	5.37	28.02	+422
DPS (PKR)	1.50	10	+567
ROE (%)	12.9	30.9	+140
ROA (%)	1.0	1.8	+80

While BMA acknowledges the significant upside potential, they also caution about the uncertainties tied to the rapid deposit growth observed during the Islamic conversion. Much of this growth can be attributed to deposit conversions rather than organic growth, complicating future projections.

In the nutshell, BMA’s fair value assessment of PKR 100 per share for FABL reflects a strong belief in the bank’s growth potential post-Islamic conversion, the high valuation multiples associated with Islamic banks, and the substantial projected ROE and deposit growth. Despite the risks associated with rapid transition phases, FABL’s strategic positioning and financial health make it a compelling investment opportunity in Pakistan’s banking sector.