SRI LANKA BANKING SECTOR Pulling through macro challenges
Udeeshan Jonas
Reshan Wediwardana
CAL Research
May 2013 1 See page 83 for important disclaimer
2.2x 2.0x
1.9x 1.8x 1.8x
1.2x 1.2x
0.0
0.5
1.0
1.5
2.0
2.5
3.0
P/B
V (
x)
2012 2013E
11.2%
14.0%
16.4% 16.5%
17.9%
19.6% 20.7%
10%
12%
14%
16%
18%
20%
22%
24%
Avg
. R
OEs
2012 2013E
Regional comparison of banking sector ROEs Regional comparison of banking sector P/BVs
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SRI LANKA BANKING SECTOR
I. Macro variables to challenge banking industry 4
a) Local private commercial banks’ loans to grow at a 2014-16E cagr of 18%
b) Gov’t monetary easing to support a 17% LPCB loan growth in 2013E
II. ROEs of 20% for Sri Lanka banks vs. 16% for regional peers 25
III. CAL’s top 5 picks to provide an avg. 21% total 1- year return 34
IV. CAL’s Banking Basket 55
V. Appendices 61
DuPont Analysis
Summary Financial Statements
2
All figures have been calculated under IFRS
Page
www.randora.lk
CAL’s top 5 picks to avg. 22% vs. our coverage universe avg. of 19%
3
BankCurrent
Price
Target
Price
Price
upside
2013E
ROE
2013E
ROA
Core
profit
growth
2013E
Net
profit
growth
2013E
PBV
2013E(x)
PER
2013E
(x)
Dividend
yield
2013E
Total
Return
Nations Trust Bank 64.4 79 22% 21.7% 1.8% 19% 22% 1.2 6.0 4.3% 26.4%
Hatton National Bank - Non Voting 126.4 149 18% 17.0% 1.9% 30% 14% 0.9 5.4 7.7% 25.6%
Commercial Bank - Non Voting 97.5 112 15% 18.6% 1.9% 26% 4% 1.3 7.6 7.1% 21.9%
Sampath Bank 225.5 254 13% 19.3% 1.6% 51% 5% 1.1 6.2 5.6% 18.2%
Commercial Bank - Voting 118.7 133 12% 18.6% 1.9% 26% 4% 1.6 9.3 5.8% 17.9%
Hatton National Bank - Voting 171 190 11% 17.0% 1.9% 30% 14% 1.1 7.0 5.9% 17.0%
National Development Bank 178 184 3% 13.9% 1.8% 54% 23% 1.1 8.0 5.2% 8.5%
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I. Macro variables to challenge banking
industry in 2013
4
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I. Macro variables to challenge banking industry in 2013
I. a) Local private commercial banks’ loans to grow at a 2014-16E cagr of 18%
CAL expects medium term total private sector credit growth (2013-16E) to be c.16%p.a.…
…as SL approaches the regional private sector credit to GDP avg. of 46% on the back of 6% real GDP
growth
Local private commercial banks (LPCB) account for 42% of commercial banking assets & 54% of private
sector credit
CAL expects an 18% LPCB loan growth cagr (2014-16E) as gov’t and foreign banks continue to lose
market share
In 2013E, CAL expects LPCB loan growth to reduce to 17% as current economic conditions remain
subdued
This is against a LPCB loan growth of 19% in 2012 despite a credit ceiling
Falling vehicle sales and an alternative debt market may further slow loan growth
5
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I. Macro variables to challenge banking industry in 2013 (Continued)
I. b) Gov’t monetary easing to support a 17% LPCB loan growth in 2013E
In 1Q2013, AWPLRs were too high to boost loan growth despite excess liquidity
Govt’s monetary actions may indicate that interest rates may edge lower in the short term
Higher foreign inflows (USD 1.3bn YTD) and an appreciating LKR (+2% YTD) may support lowering of
interest rates
Cap on NBFC deposits may also reduce deposit rates at lower risk banks…
…which may result in a continued reduction in AWPLR during 2Q2013
Higher foreign inflows (USD 1.3bn YTD) and an appreciating LKR (+2% YTD) may provide further support
However, medium term interest rates are likely to revert upwards (+c.1.5-2%) as gov’t debt financing
continues…
…and high inflationary pressure kicks in due to recent energy price hikes
In 2013E, CAL expects industry NIMs to stagnate at 2012 levels (c.4.2%)…
…while industry NPLs remain manageable despite macro challenges (c.3.6%)
6
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I. a) Local private commercial banks’ loans to grow at a 2014-16E cagr of 18%
7
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LKR 2,358bn
LKR 4,307bn
2012 2016E
CAL expects medium term total private sector credit growth (2013-16E) to be c.16%p.a...
8 Source: CBSL & company annual reports
* Private sector credit includes government commercial banks, private local banks and foreign commercial banks
Figure 1: CAL’s estimate of private sector credit growth
SL private credit should grow at a
16% cagr if it were to reach lower
middle income peer avg. of 45% to
GDP by 2016
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…as SL approaches the regional private sector credit to GDP avg. of 45% on the back of 6% real GDP growth
9 Source: CBSL, World Bank & CAL Research estimates
Figure 2: Regional private sector credit to GDP % - 2011
31% 28%
32%
49% 51% 51%
0%
10%
20%
30%
40%
50%
60%
Pri
vate
se
cto
r cr
ed
it t
o G
DP
%
Avg. 45%
8.0% 8.2%
6.4% 6.0% 6.0% 6.0% 6.0%
16% 17%
16% 15%
13% 13% 13%
2010 2011 2012 2013E 2014E 2015E 2016E
Real GDP growth Nominal GDP growth
Figure 3: Real GDP growth vs. Nominal GDP growth
* Lower middle income countries include: Cambodia, India, Pakistan, Indonesia, Bhutan & Sri Lanka
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21%
18%
54%
8%
People's BankBank of CeylonLocal commercial banksForeign banks
1.6%
5.6%
8.4%
9.6%
16.3% 23.4%
28.7%
UBC DFCC Vardhana
PABC NTB
NDB SEYB
SAMP HNB
COMB
Local private commercial banks (LPCB) account for 42% of commercial banking assets & 54% of private sector credit
10
Figure 4: Bank assets* market share 2011 vs. 2012 Figure 5: Private credit market share 2012
* Calculated based on total assets
Total assets = LKR3.7tn
Total assets = LKR4.5tn
Source: CBSL, Bank annual reports & CAL Research
23% 24%
20% 21%
13% 12%
12% 11%
11% 10%
7% 7%
14% 14%
2011 2012
BOC PB Foreign banksCOMB HNB SAMPOther LCPBs
LPCBs
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89.3%
10.7%
Local banks' market share
Foreign banks' market share
92.1%
7.9%
CAL expects an 18% LPCB loan growth cagr (2014-16E) as gov’t and foreign banks continue to lose market share
11
Figure 6: LPCB loan growth Figure 7: Local & foreign banks’ market share
2010 2012
1,114
1,313
1,536
2,492
0
500
1000
1500
2000
2500
3000
2011 2012 2013E 2016E
LKR
bn
18%
Source: CBSL & CAL Research estimates
LPCB loan growth is expected to outpace private sector credit growth of 16% (2013-16E)
www.randora.lk
113.7
111.2
107.5
104.2 104.5
106.5
103.8
98
100
102
104
106
108
110
112
114
116
Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12
Ind
ust
rial
pro
du
ctio
n in
de
x
(IP
I)
In 2013E, CAL expects LPCB loan growth to reduce to 17% as current economic conditions remain subdued
12
-18%
21%
37%
9%
-7%
13% 19%
9%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2009 2010 2011 2012
Gro
wth
Growth in import trade Growth in export trade
Figure 11: Industrial production index
Figure 8: Export and import trade – 2009-12 Figure 9: Perceived Economic Opportunity Index
Figure 10: LMD-Nielson Business Confidence Index
108
121 122
135 134 139
158
140
147
100
110
120
130
140
150
160
LMD
- N
iels
on
BC
I
1.67
1.72 1.74
1.69
1.77
1.66
1.57 1.56
1.5
1.55
1.6
1.65
1.7
1.75
1.8
PEO
I
Source: CBSL, LMD & FEF
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This is against a LPCB loan growth of 19% in 2012 despite a credit ceiling
13
24% 24%
20%
18% 18% 18% 17% 17%
15%
0%
5%
10%
15%
20%
25%
30%
PABC SAMP DFCC NTB COMB HNB UBC NDB SEYB
Average loan growth - 19%
Figure 12: 2012 bank loan growth (using SLAS figures)
In 2012, LPCB’s loans grew 19%, higher than
the overall private sector credit growth of
18% in 2012
Source: CBSL & CAL Research estimates
Max. credit growth for banks borrowing abroad – 24%
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16
43
89
5 7
30
55
2
-
10
20
30
40
50
60
70
80
90
100
Ve
hic
le r
egi
stra
tio
ns
('0
00
)
Jan-Apr 12 Jan-Apr 13
-38%
-56%
-30%
-66%
Falling vehicle sales and an alternative debt market may further slow loan growth
14 Source: Department of Motor Traffic & CAL Research
Figure 14: Debenture issues 2012 & 2013 announced till date
Figure 13: New vehicle registrations
LKR 16bn
LKR 25bn
5
10
-
5
10
15
20
25
30
35
40
45
50
2012 2013 (announced to date)
0
2
4
6
8
10
12
Val
ue
of
deb
en
ture
s -
LKR
bn
No
of
issu
es
Value of the issues No of issues
Incentives provided in the 2013
gov’t budget for debenture issues
provides an avenue for
corporates to borrow long term
at attractive rates
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I. b) Gov’t monetary easing to support a 17% LPCB loan growth in 2013E
15
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In 1Q2013, AWPLRs were too high to boost loan growth despite excess liquidity
16
Figure 16: Net injection/ absorption (LKR bn)
-70
-60
-50
-40
-30
-20
-10
0
10
20
Excess liquidity
Figure 15: Private sector credit growth (Jan-Feb 2013)
Private sector credit growth reduced to 1.2% from Dec 2012 to Feb 2013 compared to a 5% growth for
the corresponding period last year
Excess liquidity in the monetary system may also indicate that short term interest rates may edge lower
Source: CBSL
2006 2106
2358 2386
AWPLR - 11.5%
AWPLR - 14.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1000
1500
2000
2500
3000
3500
4000
Dec 2011 Feb 2012 Dec 2012 Feb 2013
LKR
bn
+5% +1.2%
www.randora.lk
Gov’t’s monetary actions may indicate that interest rates may edge lower in the short term
17
• In Jan 2013, CBSL imposed a cap on NBFC deposit rates. Rates cannot exceed AWPLR+2% for
deposits with maturity of <1 year
• The government’s effort to reduce borrowings may support a fall in interest rates
• The government may need to cut interest rates to reach its private credit and economic growth
targets
53% 50% 51%
47% 45%
37% 37% 33%
30% 32% 32%
25%
17%
0%
10%
20%
30%
40%
50%
60%
800
850
900
950
1000
1050
1100
Jan
-12
Feb
-12
Mar
-12
Ap
r-1
2
May
-12
Jun
-12
Jul-
12
Au
g-1
2
Sep
-12
Oct
-12
No
v-1
2
Dec
-12
Jan
-13
LKR
bn
Net Credit to the Government YOY %
Figure 18: Net credit to the government (M2b) Figure 17: Maximum cap on NBFC 1-yr deposit rates
Source: CBSL
13.2%
14.7%
16.3%
15.6%
16.8% 16.7%
14.5%
12%
13%
14%
15%
16%
17%
18%
Jan-Feb2012
March2012
April -May 2012
June - July2012
July - Sep2012
Oct - Dec2012
Jan-March2013
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18
124
125
126
127
128
129
130
131
132
133
LKR
/USD
Figure 19: Exchange rate (LKR/USD) Figure 20: Net foreign inflows (Jan-Mar 2013)
Higher foreign inflows (USD 1.3bn YTD) and an appreciating LKR (+2% YTD) may further support low interest rates
Source: CBSL and Oanda.com
414
1,656
0
200
400
600
800
1000
1200
1400
1600
1800
Jan-Mar 2012 Jan-Mar 2013
USD
mn
USD mn Jan-Mar 2012 Jan- Mar 2013 % Δ
Balance of trade -2,779 -2,129 -23%
Worker remittances 1,508 1,560 3%
Portfolio investment 164 39 -76%
Earnings from tourism 267 318 19%
Inflows to the govt (bills and bonds) 1,255 1,869 49%
Total net foreign inflows 414.1 1656.4 300%
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Cap on NBFC deposits may also reduce deposit rates at lower risk banks…
19
Figure 22: Deposit rate gap in Apr 2013
13.0%
13.5% 13.5%
14.0% 14.0% 14.0% 14.0%
14.5%
15.0%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%
NDB COMB SAMP HNB DFCC NTB SEYB PABC UBC
De
po
sit
rate
s
Avg. 1yr FD rate for NBFCs - 15.92%
Avg. 1yr FD bank rate - 13.9% 20
0b
ps
Figure 21: Deposit rate gap in Jan 2013
13.0%
13.5% 13.5% 13.5% 13.5% 13.5%
14.0% 14.0%
15.0%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
De
po
sit
rate
s
Avg. 1-yr FD rates for banks - 13.7%
75
bp
s
Maximum cap for 1-yr deposit rates for NBFCs - 14.45%
Government’s imposition of maximum deposit rates for NBFCs may drive deposit rates for lower risk
banks downward, thereby reducing cost of funding
Source: Bank websites & CAL Research
www.randora.lk
7.5
8.5
9.5
10.5
11.5
12.5
13.5
14.5
15.5
Inte
rest
rat
es
(%)
T-Bill 364 days AWPLR3
32
bp
s
22
2b
ps
AWLR
…which may result in a continued reduction in AWLR during 2Q2013
20
Figure 23: Gap between 1yr treasury rates and AWPLR
In 1Q2013, the banks remained reluctant to cut lending rates even amidst treasury rates declining c.150bps (Dec 2012- May 2013)
The spread between treasury rates and AWLR likely to reduce towards
mid-year, which is expected to drive the 17% LPCB loan growth
Source: CBSL
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However, medium term interest rates are likely to revert upwards (+c.1.5-2%) as gov’t debt financing continues…
21 Source: CBSL & CAL Research estimates
CAL expects interest rates to rise by 1.5%-2% by year-end as inflation kicks in and gov’t debt is financed
Figure 24: Government foreign & local debt
996 957 1,103 1,326 1,449 1,760 2,025 2,329 2,767
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2004 2005 2006 2007 2008 2009 2010 2011 2012
LKR
bn
Total foreign debt Total debt
6,000
5,133
2139
Figure 25: Government foreign & local debt
-157 -172
-206
-246
-310
-476 -446 -450
-489 -507
-600
-500
-400
-300
-200
-100
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
LKR
bn
The government may need to finance the
budget deficit via borrowings from the local
market which may spike interest rates in the
medium term
www.randora.lk
…and high inflationary pressure kicks in due to recent energy price hikes
22
Figure 26: Colombo Consumer Price Index ( Base: 2006/07=100)
Source: CBSL
156
158
160
162
164
166
168
170
172
Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13
Ind
ex
*Electricity price hike of c. 40%, will take effect starting May 2013
www.randora.lk
23
In 2013E, CAL expects industry NIMs to stagnate at 2012 levels (c.4.2%)…
Source: CBSL and CAL Research
Figure 27: Industry net interest margins
4.4%
4.5%
4.7%
4.8%
4.6%
4.3%
4.2% 4.2%
3.8%
3.9%
4.0%
4.1%
4.2%
4.3%
4.4%
4.5%
4.6%
4.7%
4.8%
4.9%
2006 2007 2008 2009 2010 2011 2012 2013E
NIM
s
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…while industry NPLs remain manageable despite macro challenges (c.3.6%)
24
Source: CBSL
Figure 28: AWLR vs. gross NPLs on a 1-year time lag
19.3% 19.3% 18.2%
15.7% 14.8%
15.4% 16.6%
18.1%
20.1%
17.4%
14.8%
13.4%
15.3% 15.3%
13.7%
9.3%
7.0%
5.6% 5.2%
6.3%
8.5%
5.4%
3.8% 3.6%
3%
5%
7%
9%
11%
13%
15%
17%
0%
5%
10%
15%
20%
25%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Gro
ss N
PL
AW
LR
AWLR (LHS) Gross NPL (RHS)
* The NPLs are plotted with a one year time lag
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II. ROEs of 20% for Sri Lanka banks vs. 16% for regional peers
25
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II. ROEs of 20% for Sri Lanka banks vs. 16% for regional peers
In 2013E, CAL expects industry ROEs of 20% and ROAs of 1.9% (vs. region’s 16% and
1.5%)…
…while NIMs remain stable (avg.c.4.2% vs. region’s 3.5%)
Cost-to-income ratios (53% vs. region’s 49%) are likely to improve as industry-wide
branch additions slow
Fee income from credit cards, remittances and e-banking still have vast scope for growth
(7% vs. region’s 15%)
Sri Lanka banks are also better geared for Basel III implementation…
…and are attractively valued compared to peers
In 2013E, dividend yields are likely to avg. 5.2% vs. region’s 2.8%
26
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15.6% 16.5%
12.0%
14.5%
18.0%
20.8%
22.3%
17.9%
16.5%
11.2%
14.0%
16.4%
19.6%
20.7%
10%
12%
14%
16%
18%
20%
22%
24%
Avg
. R
OEs
2012 2013E
Source: Maybank Kim Eng & CAL Research estimates
In 2013E, CAL expects industry ROEs of 20% and ROAs of 1.9% (vs. region’s 16% and 1.5%)…
27
Figure 29: Regional comp of avg. ROEs
1.3% 1.2% 1.2%
1.8%
1.2%
1.9%
2.4%
1.5% 1.2%
1.0%
1.7%
1.2%
1.9%
2.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Avg
. R
OA
s 2012 2013E
Avg. 1.5%
Figure 30: Regional comp of avg. ROAs
Avg. 16%
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…while NIMs remain stable (avg. c.4.2% vs. region’s 3.5%)
28 Source: CBSL & Maybank Kim Eng Research
Figure 31: Avg. NIMs* of regional peer banks
1.8%
2.6%
3.2% 3.2% 3.4%
4.2%
6.6%
Singapore Malaysia Thailand India Philippines Sri Lanka Indonesia
2012 2013E
Regional avg. 3.5%
* Based on average earning assets
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Cost-to-income ratios (53% vs. region’s 49%) are likely to improve as industry-wide branch additions slow
29
Source: CBSL & CAL Research estimates
Figure 33: Sri Lanka sector wise branch additions 2009-12
53%
43% 44%
49% 50%
57%
0%
10%
20%
30%
40%
50%
60%
Sri Lanka Singapore Malaysia Thailand Indonesia Philippines
Co
st t
o In
com
e
Figure 32: Regional Cost-to-income comparison
COMB, HNB & SAMP expanded branch networks rapidly over the last 2 years and are now in the phase of consolidation. In
2013, CAL expects a total of 12 branches to be added by these three banks.
The smaller banks delayed branch expansions and may see an increase in cost-to-income ratios as branches are added this
year.
Avg. 49%
62
95
160
69
-
20
40
60
80
100
120
140
160
180
2009 2010 2011 2012
Bra
nch
ad
dit
ion
s
www.randora.lk
Fee income from credit cards, remittances and e-banking still have vast scope for growth (7% vs. region’s 15%)
30
Figure 35: Worker remittances (USD mn)
7.6% 8.0% 7.6% 7.7% 7.2%
7.9% 8.3% 8.7% 10.1%
0%
2%
4%
6%
8%
10%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2004 2005 2006 2007 2008 2009 2010 2011 2012
Wo
rke
r R
em
itta
nce
s/ C
urr
en
t G
DP
Wo
rke
r's
Re
mit
tan
ces
(USD
mn
)
Workers’ Remittances (Mn) (LHS) Workers’ Remittances / Current GDP (RHS)
Figure 37: Active credit card users - SL
779
862
952
500
600
700
800
900
1,000
2010 2011 2012
No
of
acti
ve c
red
it c
ard
s (0
00
)
4.7% 6.2%
19.3%
28.4%
52%
Sri Lanka Indonesia Thailand Malaysia Singapore
Figure 36: Credit card penetration by country
Source: CBSL & CAL Research
Figure 34: Regional fee income as a % of (Fee + NII )
7%
10% 11% 14%
20% 20%
0%
5%
10%
15%
20%
25%
Fee
bas
ed
inco
me
/Gro
ss
inco
me
Avg. 15%
www.randora.lk
Sri Lanka banks are also better geared for Basel III implementation…
31 Source: Bank Reports & CAL Research
Figure 38: Tier 1 capital ratio of banks Figure 39: Tier 2 capital ratio of banks
20.4% 19.0% 18.8%
14.7% 13.9% 13.8% 13.3% 12.6% 11.9%
0%
5%
10%
15%
20%
25%
UBC DFCC NDB SEYB HNB NTB PABC COMB SAMP
Tier 1 capital minimum requirement - 5%
20.7% 19.5%
18.2% 17.5% 16.6%
15.8% 14.7%
13.8% 13.8%
0%
5%
10%
15%
20%
25%
NDB UBC NTB DFCC HNB PABC SEYB COMB SAMP
Tier 2 capital minimum requirement - 10%
Basel III requires banks to maintain a Tier 1 capital ratio of 7% (vs. 5% at present)
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…and are attractively valued compared to peers
32
Figure 40: Avg. P/BV of regional country banks
2.5x 2.4x
2.1x
1.9x 2.1x
1.3x 1.4x
2.2x
2.0x 1.9x 1.8x 1.8x
1.2x 1.2x
0.0
0.5
1.0
1.5
2.0
2.5
3.0
P/B
V (
x)
2012 2013E
Figure 41: Avg. PER (x) of regional country banks
16.6x
11.1x 11.1x 11.1x 10.9x 10.5x
7.0x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
PER
(x)
2012 2013E
Source: Maybank Kim Eng Research & CAL Research estimates
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In 2013E, dividend yields are likely to avg. c.5.2% vs. region’s 2.8%
33 Source: Maybank Kim Eng Research & CAL Research estimates
Figure 42: 2012 & 2013E dividend yield of banking sector stocks
2.4%
3.8% 3.8%
1.3%
1.9%
5.1%
3.0%
3.7% 3.8%
1.5%
2.1%
5.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Thailand Malaysia Singapore Philippines Indonesia Sri Lanka
Div
ide
nd
yie
ld
2012 2013E
www.randora.lk
III. CAL’s top 5 picks to provide an avg. 19% total 1-year return
34
www.randora.lk
III. CAL’s top 5 picks to provide an avg. 19% total 1- year return
CAL’s top picks to avg. 22% vs. our coverage universe avg. of 19%
Less volatile and improving NIMs – the key to sustainable ROEs
A higher CASA base remains the core advantage for larger banks
Banks with a lower CASA base may witness higher cost of funding if interest rates rise
In 2013, low cost foreign borrowings for the larger banks may contribute marginally to NIM improvements…
…while removal of the credit ceiling may boost growth for smaller aggressive banks
However, maintaining NIMs by lending to high yield, riskier segments may be unsustainable over the long run for aggressive
banks as credit quality deteriorates
However, fee based income may be a viable alternative for NTB and NDB to compensate for low NIMs
Whilst branch consolidation may improve cost-to-income ratios at the larger banks, late entry into branch expansion may
add pressure on smaller banks’ cost-to-income ratios
Core profitability has been on an upward trend for CAL’s banking sector stock picks and in 2013E, are likely to witness avg.
core profit growth of 33%
However, maintaining profitability via lower provisioning is unsustainable at a few smaller banks
CAL’s top 5 banking picks have sustainable ROAEs (Avg. 18%) and superior ROAs (Avg. 1.7%)
CAL’s picks also have attractive trailing valuations and reasonable dividend yields (avg.5.4%)
The fall in gold prices a red herring – A further 10% decline manageable
35
www.randora.lk
CAL’s top 5 picks to avg. 22% vs. our coverage universe avg. of 19%
36
BankCurrent
Price
Target
Price
Price
upside
2013E
ROE
2013E
ROA
Core
profit
growth
2013E
Net
profit
growth
2013E
PBV
2013E(x)
PER
2013E
(x)
Dividend
yield
2013E
Total
Return
Nations Trust Bank 64.4 79 22% 21.7% 1.8% 19% 22% 1.2 6.0 4.3% 26.4%
Hatton National Bank - Non Voting 126.4 149 18% 17.0% 1.9% 30% 14% 0.9 5.4 7.7% 25.6%
Commercial Bank - Non Voting 97.5 112 15% 18.6% 1.9% 26% 4% 1.3 7.6 7.1% 21.9%
Sampath Bank 225.5 254 13% 19.3% 1.6% 51% 5% 1.1 6.2 5.6% 18.2%
Commercial Bank - Voting 118.7 133 12% 18.6% 1.9% 26% 4% 1.6 9.3 5.8% 17.9%
Hatton National Bank - Voting 171 190 11% 17.0% 1.9% 30% 14% 1.1 7.0 5.9% 17.0%
National Development Bank 178 184 3% 13.9% 1.8% 54% 23% 1.1 8.0 5.2% 8.5%
www.randora.lk
Less volatile and improving NIMs – the key to sustainable ROEs
37 Source: Bank annual reports, Maybank Kimeng reports & CAL Research
Figure 44: Net interest margins of SL banks*
*Based on average earning assets
Figure 43: 2012 change in net interest margins – (bps)
25
15
6 6
(17)
(29)
(62)
(80)
-100
-80
-60
-40
-20
-
20
40
HNB COMB NDB SAMP NTB SEYB UBC PABC
20
12
- C
han
ge in
NIM
s (b
ps)
5.2% 4.9%
4.6% 4.6% 4.3% 4.2%
3.9% 3.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
SEYB HNB PABC COMB NTB SAMP UBC NDB
2011 2012
www.randora.lk
A higher CASA base remains the core advantage for larger banks
38
45%
39%
34% 31%
24% 22%
20%
17%
-
50
100
150
200
250
300
10%
15%
20%
25%
30%
35%
40%
45%
50%
COMB HNB SAMP SEYB NDB NTB UBC PABC
No
of
bra
nch
es
CA
SA R
atio
CASA (LHS) Branches (RHS)
Figure 45: Bank CASA Ratios Figure 46: Savings deposit market share of banks
Figure 47: Current deposit market share of banks
Smaller banks are unable to attract a larger CASA deposit base
despite offering higher yields (c.6-9% vs. larger banks’ c.4%) on
savings deposits.
Source: Bank annual reports & CAL Research
35% 36%
29% 27%
17% 17%
9% 9% 3% 5%
2% 3% 2% 2% 2% 1% 1% 1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Savings deposit market share - 2011 Savings deposit market share - 2012
COMB HNB SAMP SEYB NDB NTB DFCC PABC UBC
33% 31%
23% 22%
13% 15%
10% 10% 7% 8% 7% 8% 4% 3% 2% 2% 1% 1%
0%
20%
40%
60%
80%
100%
Current account deposit market share -2011
Current account deposit market share -2012
COMB HNB SAMP SEYB NDB NTB PABC UBC DFCC
www.randora.lk
Banks with a lower CASA base may witness higher cost of funding if interest rates rise
39
Figure 48: Change in cost of funding in 2012
7.2% 7.2%
8.0% 8.3% 8.6%
9.6% 9.6% 9.7%
1.7% 1.6%
2.0% 1.9%
2.1%
2.8% 2.9%
3.3%
5%
7%
9%
11%
13%
15%
17%
19%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
COMB HNB SEYB SAMP NDB NTB PABC UBC
Co
st o
f fu
nd
ing
20
12
%
Ch
ange
in c
ost
of
fun
din
g %
in 2
01
2
A c.300bps increase in interest rates in
2012 resulted in banks with a lower CASA base
witnessing higher increases in cost of funding
With demand deposit rates at 0% and savings
deposit rates remaining almost flat (at c.4%), the
change in cost of funding for larger banks with
a larger CASA base was relatively small
Source: Bank annual reports & CAL Research
www.randora.lk
In 2013, low cost foreign borrowings for the larger banks may contribute marginally to NIM improvements...
40
Figure 49: Foreign borrowings as a percentage of gross loans and advances
6,735 6,940
8,791 3,853
1,943
11,644
6,606 4,228
6,559
-499
8.4%
4.4%
3.4%
9.3%
1.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
-5,000
0
5,000
10,000
15,000
20,000
SAMP HNB COMB NDB DFCC
F. b
orr
ow
ings
as
a %
of
gro
ss lo
ans
Fore
ign
bo
rro
win
gs -
LK
R m
n
Incremental foreign borrowings in 2012 (LHS)
Foreign borrowings (LKR mn) in 2011 (LHS)
Foreign borrowings as a percentage of gross loans in 2012 (RHS)
In 2013, NDB intends to raise
USD250mn according to the
provisions mentioned in the
gov’t budget
In 2013, COMB raised USD75mn
via a 10yr subordinated debt
agreement from IFC
In 2013, SAMP
raised
USD100mn
loan via a
syndicated loan
from HSBC
which may
increase
foreign
borrowings as
a % of total
loans to 14%
In 2013, HNB intends to raise
USD150mn (provisional) In 2013, DFCC raised USD45mn via
a syndicated loan by HSBC. DFCC is
likely to raise USD250mn as
mentioned in the gov’t budget
COMB & SAMP may only have to partially hedge for exchange rate risk as they hold foreign assets which
may be used to match foreign loans.
COMB, HNB and SAMP have the ability to raise foreign loans at lower rates (<c.6%) compared to peers due
to their size, ratings and credit quality. Higher swap costs (c.8-10%) make foreign borrowings unaffordable
for smaller banks
www.randora.lk
...while the removal of the credit ceiling may boost growth for smaller aggressive banks
41
17% 17% 17% 18% 19%
20% 20%
22%
24%
SEYB UBC NDB HNB COMB NTB DFCC SAMP PABC
Figure 50: Gross loan book growth under IFRS - 2012 Figure 51: Loan growth for selected banks – 2013E
15%
17% 17%
19%
20%
22%
NDB HNB COMB DFCC NTB SAMP
CAL’s assumptions on loan growth are based on a recovery
in credit growth in 2H2013
DFCC, SAMP , NTB & PABC have maintained 5-yr loan growth
cagrs above 20%, as they started from lower loan book bases.
These banks were able to easily reach the 18-23% credit ceiling
imposed by the Central Bank in 2012.
Source: Bank annual reports
www.randora.lk
However, maintaining NIMs by lending to high yield, riskier segments may be unsustainable over the long run for aggressive banks...
42
15.3% 15.2% 14.7%
14.0% 13.3% 13.0%
12.4% 11.9%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
PABC NTB UBC SEYB SAMP HNB COMB NDB
2011 2012
Smaller aggressive banks maintain higher NIMs by providing loans to higher risk clients in the
SME, pawning and personal loan segments.
NTB’s higher yields are attributable to higher interest on credit card loans and providing value
added services to high yield corporate clients.
Figure 52: Yield on Assets for banks – 2011 vs. 2012
Source: Bank annual reports & CAL Research
www.randora.lk
…as credit quality deteriorates
43
1.3% 2.1%
2.8% 3.4% 3.7% 4.2% 5.4%
13.0%
0%
2%
4%
6%
8%
10%
12%
14%
NDB SAMP NTB COMB HNB PABC UBC SEYN
Gro
ss N
PLs
-2
-58
3
-6 -27
59
136
-125 -150
-100
-50
0
50
100
150
NDB SAMP NTB COMB HNB PABC UBC SEYNCh
ange
in g
ross
NP
Ls
Figure 53: 2012 Bank NPLs
Figure 55: 2012 Change in NPLs (bps)
Source: Bank annual reports
6.2%
4.7% 4.2% 4.0%
3.4% 2.6% 2.5% 2.4%
0%
2%
4%
6%
8%
10%
SEYB UBC PABC COMB SAMP NDB HNB NTB
Imp
aire
d lo
ans/
Gro
ss lo
ans
2011 2012
Figure 54: Impaired loans as a percentage of gross loans
With the introduction of IFRS accounting from
2013, loan loss provisioning was replaced with
impairment accounting where a loan asset is
impaired (reduced in value) if the carrying value of
the loan exceeds the future expected cash flows
from the customer
www.randora.lk
However, fee based income may be a viable alternative for NTB and NDB to compensate for low NIMs
44
26.9%
21.8%
17.9%
15.7% 15.5% 14.4%
13.6%
10.5%
0%
5%
10%
15%
20%
25%
30%
NTB NDB PABC SEYB SAMP HNB COMB UBC
Fee
& C
om
mis
sio
n in
com
e/N
et
Inte
rest
, fee
&
com
mis
sio
n in
com
e
2011 2012
NTB has been successful in increasing its fee based
income (e.g. credit cards) compensating for the decline in
NIMs
NDB signed a bankassurance agreement with AIA which
may contribute to fee based income.
Figure 56: Fee and commission based income
Source: Bank annual reports
www.randora.lk
Whilst branch consolidation may improve cost-to-income ratios at the larger banks...
45
Figure 57: Cost-to-income ratios of local banks
51%
60% 60% 63%
68% 68% 68%
82%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
COMB NDB NTB HNB SAMP PABC SEYB UBC
Op
erat
ing
cost
/ N
et
inte
rest
, fee
& c
om
mis
sio
n
inco
me
2011 2012
COMB, HNB & SAMP rapidly expanded their branch network during the last 2 years and
now are in the phase of consolidation.
The other smaller banks delayed branch expansion and will see the impact in the cost-to-
income ratios from increased branch additions during the year.
Source: CBSL & CAL Research
www.randora.lk
…late entry into branch expansion may add pressure on smaller banks’ cost-to-income ratios
46
Figure 59: Estimated branch additions for 2013 Figure 58: Branch penetration by region (Western vs. Non Western province)
0
5
6
10 10 10
0
2
4
6
8
10
12
SAMP COMB HNB NTB NDB DFCC
No
of
targ
et
bra
nch
ad
dit
ion
s fo
r 2
01
3
Source: Annual reports, bank data & CBSL
58 51 66 117
172 158 162
343
98 128 120
253
370 425
688
760
-
100
200
300
400
500
600
700
800
HNB COMB SAMP SEYB PABC NDB NTB UBC
No
of
bra
nch
es/
(p
op
ula
tio
n ‘000)
Wetern Province Outside Western province
Smaller banks have lower branch penetration outside the Western province
www.randora.lk
Core profitability has been on an upward trend for CAL’s banking sector top picks...
47
2.3%
2.6%
1.7%
1.1%
2.3%
3.2%
1.3%
1.1%
2.8% 2.7%
2.3%
1.9% 1.9% 1.8%
1.6%
1.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
NTB COMB HNB SEYB NDB PABC SAMP UBC
Co
re p
rofi
t a
s a
% o
f av
era
ge a
sse
ts
2011 2012
Figure 60: Core profit as a percentage of average assets
Source: Annual reports, bank data & CBSL
With one-off gains and subjective
impairment provisioning having
the ability to boost profits and
ROE’s, CAL believes core profits to be a good indicator of
underlying bank profitability.
SEYB shows an increase due to
the inclusion of VRS cost in 2011
*Under IFRS, CAL defines core profits as (Net interest income + Fee based income – operating expenses
www.randora.lk
...and in 2013E, are likely to witness avg. core profit growth of 33%
48 Source: Annual reports, bank data & CBSL
Figure 61: Core profit as a percentage of average assets
51%
38%
30%
26%
19%
0%
10%
20%
30%
40%
50%
60%
SAMP NDB HNB COMB NTB
Avg.33%
www.randora.lk
However, maintaining profitability via lower provisioning is unsustainable at a few smaller banks
49
Figure 62: Provisioning coverage under SLAS
100%
80%
44%
36% 36% 31%
28%
15%
0%
20%
40%
60%
80%
100%
120%
NDB SAMP HNB COMB NTB UBC SEYB PABC
Pro
visi
on
ing
Co
vera
ge
2011 2012
Source: Bank annual reports
Providing lower impairment charges for bad losses to boost profitability may
not be sustainable over the long run
www.randora.lk
CAL’s top 5 banking picks have sustainable ROAEs (Avg. 18%) …
50
21.7% 20.8% 20.7%
17.4%
14.1% 13.9%
10.4% 9.8%
0%
5%
10%
15%
20%
25%
30%
PABC NTB COMB HNB SAMP NDB SEYB UBC
RO
AE-
Re
curr
ing
2011 2012
Figure 63: Recurring ROEs of banks – 2012
Source: Bank annual reports
www.randora.lk
2.1%
1.9% 1.9% 1.9%
1.7% 1.7% 1.7%
1.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
COMB HNB NDB SAMP NTB UBC PABC SEYB
Ave
rage
RO
A
…and superior ROAs (Avg. 1.7%)
51
Figure 64: Average ROAs for 2012
Source: Bank annual reports
www.randora.lk
CAL’s picks also have attractive trailing valuations…
52
Figure 65: 2012 PER (x) and PBV of banking sector stocks
Source: CSE & CAL Research
0.98 1.11 1.15
1.31 1.39 1.39 1.39 1.42 1.52
1.89 6.2x
9.3x
10.9x
8.3x
7.1x 7.2x 6.9x
16.2x
8.0x
9.8x
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
HNB.X NDB SEYB HNB SAMP NTB PABC UBC COMB.X COMB
PER
(x)
P/B
V (
x)
P/BV (x) PER (x)
www.randora.lk
…and reasonable dividend yields (avg.5.4%)
53
Figure 66: 2012 dividend yield of banking stocks
Source: CSE & CAL Research
8.8%
6.7% 6.6%
5.6% 5.4% 5.2%
4.9%
4.4%
3.3%
2.8%
0.8%
NDB HNB.X COMB.X COMB SAMP HNB SEYB.X PABC NTB SEYB UBC
www.randora.lk
The fall in gold prices a red hearing – A further 10% decline manageable
54
Figure 67: Banks exposure to pawning loans
24.9%
16.4% 15.8%
13.1% 11.2%
3.6% 3.2%
0%
5%
10%
15%
20%
25%
30%
SAMP PABC HNB SEYB UBC NDB COMB
Paw
nin
g lo
ans/
Gro
ss L
oan
s
Figure 68: World market gold prices
Declining gold prices reduces the collateral value of gold loans, but the impact is not reflected in the income statement or balance sheet
immediately.
Giving out c.80-85% (LTV) of the gold value through pawning loans has provided a buffer for banks. However, HNB indicates that a
further 10% reduction from current gold prices (c.USD1400/Oz) may reduce the collateral value below loan values.
The sensitivity analysis in the SAMP annual report indicates that gold prices at current levels (USD1400/Oz) will lead to a mark-to-market
loss of LKR6.4bn on its pawning portfolio.
However, an impact on the income statement will only occur when the collateral on defaulted loans are sold at auction at a lower price.
Sentimental value for jewelry may reduce customer default rates on pawning loans as they aren’t generally refinanced even when gold
prices collapse. However, banks may increase their impairment provisioning in 2Q2013 if the downward trend in gold prices continue.
1200
1300
1400
1500
1600
1700
1800
1900
Ap
r-1
2
May
-12
Jun
-12
Jul-
12
Au
g-1
2
Sep
-12
Oct
-12
No
v-1
2
De
c-1
2
Jan
-13
Feb
-13
Mar
-13
Ap
r-1
3
USD
/Oz
www.randora.lk
IV. CAL’s Banking Basket
55
www.randora.lk
Commercial Bank –1 yr. total return of +18%: BUY – TP LKR133 Consolidation phase for industry leader
Commercial Bank (COMB V LKR 119, NV LKR 98; Market Cap USD748mn): COMB is the largest private sector commercial bank in SL with a loan book of LKR373bn (+19 YOY) and a c.29% private bank market share. CAL forecasts COMB’s loan book to grow in line with industry loan growth at 17% for 2013E.
COMB’s larger CASA base (c.42% for 2013E), low cost IFC loans and foreign deposits may enable COMB to maintain NIMs at 2012 levels (c.5.4%) despite lower yields from higher liquid assets. COMB borrowed USD75mn via a subordinated loan from IFC in 2012 consequent to raising USD65mn in 2012. Benefits from recent branch additions (2010-12) and consolidation of bank branches will enable COMB’s cost-to-income ratios to improve to 48% in 2013E from 51% in 2012. CAL expects COMB’s core profitability to grow 26% to LKR 16.1bn in 2013E.
COMB also provides an attractive dividend yield of 5.6% for the voting and 6.9% for the non voting share. COMB’s size and higher than avg. liquidity (+2.3x) makes it investible for foreign investors. COMB has one of the highest ROEs in the sector which stands at 19% for 2013E. Larger dominant banks in regional peer countries trade at a 47% premium to their smaller counterparts which may justify a c.40% premium for COMB. CAL’s 2013E target price for COMB is LKR133 (+12%) and LKR112(10%) for the non-voting share. COMB currently trades at a PER of 7.8x on 2013E and PBV of 1.4x.
56
FYE Mar - LKR mn FY11 FY12 FY13E FY14E
Net interest income 18,678 22,852 26,821 32,147
Net interest income growth 22% 17% 20%
Core Profit* 10,479 12,882 16,172 20,702
Core Profit growth 23% 26% 28%
Profit attributable to equity holders 7,932 10,080 10,504 12,890
Profit growth 27% 4% 23%
EPS (LKR) 9.2 13.4 12.4 15.2
NAVPS 52.0 62.4 70.4 80.2
PER (x) (Voting) 12.9 8.8 9.6 7.8
P/BV (x) (Voting) 2.3 1.9 1.7 1.5
PER (x) (Non Voting) 10.5 7.2 7.8 6.4
P/BV (x) (Non Voting) 1.9 1.6 1.4 1.2
DPS (LKR) 5.8 6.4 6.7 8.2
Dividend Yield % (Voting) 4.9% 5.4% 5.6% 6.9%
Dividend Yield % (Non Voting) 6.0% 6.6% 6.9% 8.5%
FY11 FY12 FY13E FY14E
Net interest margin 5.10% 5.39% 5.34% 5.36%
Cost-to-income 52% 51% 48% 44%
Average ROE 20.2% 20.8% 18.6% 20.2%
Average ROA 1.95% 2.11% 1.87% 1.95%
Loan Growth 26.5% 18.6% 18.2% 18.0%
85
90
95
100
105
110
115
120
125
May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13
COMB.N ASPI COMB.X
Market Cap (USD): 748mn
1 Year Avg. Daily T/O (USD): 604k
1 Year Price H/L (LKR): 119.5/96.8
Free Float: 85%
Current Price (LKR): 118.50
www.randora.lk
Hatton National Bank–1 yr. total return of +17%: BUY – TP LKR190 New branch additions to start contributing to profitability
Hatton National Bank (HNB V LKR 171, NV LKR 126; Market Cap USD432mn):
HNB is the second largest private commercial bank with a loan book of LKR 304bn (+18%YoY) and a c.23% private bank market share. Despite witnessing the highest improvement in NIMs in 2012 to 5.83%, HNB may continue to maintain NIMs at current(5.83%) levels supported by their relatively larger CASA base (39%) and repricing of assets. Higher deposit growth compared to loan growth may put marginal pressure on NIMs if current interest rate regime continues.
CAL estimates HNB’s loan growth to remain at c.18% for 2013E and fee based income to grow c.25% during the year with the initiation of new products which may lead to net income growing 15% to LKR 32bn in 2013E. The bank will also witness improvements in its cost-to-income ratios as branches added during the last 2 years start contributing to profitability. HNB targets to improve cost-to income ratios to 60% by 2013E.
CAL anticipates HNB’s earnings to grow 14% to LKR9.3bn in 2013E which may translate into a PER of 7.2x and PBV of 1.2x at current prices. HNB may maintain a dividend payout close to 42% which may provide a dividend yield of 5.7% at current prices for the voting share and 7.7% yield for the non-voting share. CAL’s target price for HNB Voting is LKR and LKR149 for the non-voting share. CAL Recommends a BUY
57
FYE Mar - LKR mn FY11 FY12 FY13E FY14E
Net interest income 16,920 22,444 26,362 27,848
Net interest income growth 33% 17% 6%
Core Profit* 6,207 9,699 12,577 13,093
Core Profit growth 56% 30% 4%
Profit attributable to equity holders 6,819 8,111 9,240 10,079
Profit growth 19% 14% 9%
EPS (LKR) 9.1 29.3 23.6 25.7
NAVPS 104.6 129.9 143.9 160.5
PER (x) (Voting) 18.9 5.8 7.2 6.6
P/BV (x) (Voting) 1.6 1.3 1.2 1.1
PER (x) (Non Voting) 13.9 4.3 5.4 4.9
P/BV (x) (Non Voting) 1.2 1.0 0.9 0.8
DPS (LKR) 7.3 8.5 9.8 10.6
Dividend Yield % (Voting) 4.3% 5.0% 5.7% 6.2%
Dividend Yield % (Non Voting) 5.8% 6.7% 7.7% 8.4%
FY11 FY12 FY13E FY14E
Net interest margin 5.24% 5.83% 5.80% 5.23%
Cost-to-income 69% 63% 60% 61%
Average ROE 18.1% 17.4% 17.0% 16.7%
Average ROA 1.91% 1.94% 1.88% 1.75%
Loan Growth 27.7% 18.1% 17.9% 16.9%
80
90
100
110
120
130
140
150
HNB.N ASPI HNB.X
Market Cap (USD): 432mn
1 Year Avg. Daily T/O (USD): 282k
1 Year Price H/L (LKR): 176/130
Free Float: 67%
Current Price (LKR): 171
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Sampath Bank– 1 yr. total return of +18%: BUY – TP LKR 254 Foreign funding to improve NIMS
Sampath Bank (SAMP LKR 226; Market Cap USD300mn): SAMP is the third largest private commercial bank in Sri Lanka with a loan book of LKR 224bn (25% YoY) and a c.16% private bank market share. In 2013E, SAMP is likely to maintain loan book growth at c.23%. SAMP’s net interest margins are likely to marginally improve from 4.89% in 2012 to 5.00% in 2013E on the back of higher low-cost foreign borrowings raised during the year and above average CASA base (c.33% for 2013E vs. industry avg. of 27% for 2012). SAMP raised USD100mn in 2013 which may reduce the average cost of funding by 6bps as hedging costs are partly reduced due to assets in Bangladesh.
The cost-to-income ratio of the bank is also likely to improve on consolidation of the branch network as the extensive branch expansion (+80 branches from 2009) slows down. SAMP’s higher exposure to the pawning segment (c.25%) may require a higher impairment charge for possible loan losses if the fall in gold prices continue. CAL expects SAMP’s recurring earnings to decline 5% in 2013E to LKR5055mn which translates into a 6.5x PER and 1.2x PBV on 2013E. However, the LKR2bn foreign translation gain resulting from the 15% LKR depreciation is likely to reverse in 2013E which may bring down net profitability by 5%.
CAL’s target price for SAMP is LKR254 (+13%) with a dividend yield of 5.4% for 2013E.
58
FYE Mar - LKR mn FY11 FY12 FY13E FY14E
Net interest income 9,288 12,039 15,189 17,997
Net interest income growth 30% 26% 18%
Core Profit* 2,975 4,622 6,981 8,927
Core Profit growth 55% 51% 28%
Profit attributable to equity holders 3,683 5,343 5,626 7,007
Profit growth 45% 5% 25%
EPS (LKR) 22.8 32.8 34.6 43.1
NAVPS 140.1 167.1 192.0 222.0
PER (x) 9.9 6.9 6.5 5.2
P/BV (x) 1.6 1.3 1.2 1.0
DPS (LKR) 8.8 12.0 12.1 15.9
Dividend Yield % 3.9% 5.3% 5.4% 7.1%
FY11 FY12 FY13E FY14E
Net interest margin 4.77% 4.89% 5.00% 4.90%
Cost-to-income 73% 68% 60% 57%
Average ROE 16.3% 21.4% 19.3% 20.8%
Average ROA 1.67% 1.89% 1.63% 1.69%
Loan Growth 34.5% 25.5% 23.1% 21.6%
86
96
106
116
126
136
146
SAMP.N ASPI
Market Cap (USD): 300mn
1 Year Avg. Daily T/O (USD): 277k
1 Year Price H/L (LKR): 242/148.50
Free Float: 85%
Current Price (LKR): 231.10
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Nations Trust Bank –1 yr. total return of +18%: BUY - TP LKR 79 Reverting to aggressive growth
Nations Trust Bank (NTB V LKR 64; Market Cap USD118mn): NTB is one of the smaller listed private banks with a loan book of LKR 73bn (20% YoY) representing a market share of c.6%. NTB’s deposit base stood at LKR86bn (+37% YoY) representing a market share of c.6.2% among private sector banks.
CAL expects NTB’s loans to grow 21% in 2013E and NTB’s higher fee based income from its growing credit card business and bond trading to supplement relatively stable NIMs for 2013E (5.7%). However, NTB’s cost-to-income ratios are anticipated to remain higher (c.61%) as NTB initiates its branch expansion program to improve its CASA base which currently stands at c.20%. NTB intends to open 10 branches during the year.
For 2012, NTBs earnings were LKR1.95bn (+21% YoY) and CAL expects earnings to reach LKR2378mn for 2013E which translates into a PER of 6.2x and PBV of 1.2x at current prices. CAL’s 2013E target price for NTB is LKR79, +23% from current prices and we expect a dividend yield of 4.2%.
59
FY11 FY12 FY13E FY14E
Net interest margin 5.37% 5.80% 5.70% 5.78%
Cost-to-income 66% 60% 60% 59%
Average ROE 20.9% 20.8% 21.7% 23.1%
Average ROA 1.74% 1.74% 1.78% 1.90%
Loan Growth 39.3% 20.0% 20.9% 20.0%
FYE Mar - LKR mn FY11 FY12 FY13E FY14E
Net interest income 4,404 5,755 6,741 8,080
Net interest income growth 31% 17% 20%
Core Profit* 2,093 3,118 3,723 4,619
Core Profit growth 49% 19% 24%
Profit attributable to equity holders 1,607 1,951 2,378 2,993
Profit growth 21% 22% 26%
EPS (LKR) 7.0 8.5 10.3 13.0
NAVPS 37.4 43.8 51.4 61.0
PER (x) 9.2 7.6 6.2 4.9
P/BV (x) 1.7 1.5 1.2 1.1
DPS (LKR) 2.0 2.1 2.7 3.4
Dividend Yield % 3.1% 3.3% 4.2% 5.3%
87
97
107
117
127
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May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13
NTB.N ASPI
Market Cap (USD): 117.50mn
1 Year Avg. Daily T/O (USD): 89k
1 Year Price H/L (LKR): 65.5/43.5
Free Float: 80%
Current Price (LKR): 64
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National Development Bank –1 yr. total return of +9%: HOLD TP LKR 184 USD250mn loan- the next game changer
National Development Bank (NDB V LKR 178; Market Cap USD232mn): NDB is the 5th largest private sector bank with a loan book of LKR 121bn (+19% YoY) and a c.8.4% private bank market share. The bank commenced operations as a development bank and now functions as a fully fledged commercial bank. NDB was able to grow its assets by 17% in 2012. CAL expects NDB’s loan book to grow c.15% in 2012 due to subdued economic conditions and low take up of loans in the SME sector.
In 2013E, net interest margins for NDB may improve to 4.53% from 4.11% on the backdrop of low cost foreign funding and LKR 5.9bn capital gain from the Aviva-NDB transaction. The dependence on higher cost deposit funding is likely to reduce further as NDB borrows USD 250mn from foreign sources as provided in the gov’t budget. The forex risk on loan of the amount will be borne by the gov’t. CAL expects core profit to grow 54% in 2013E driven by improving net interest margins, despite higher cost-to-income ratios resulting from rapid branch expansion. The LKR4.3bn currently sitting on the books of NDB gives the opportunity to lookout for lucrative business opportunities.
With NDB’s share price rising 45% (2012-13), NDB currently trades at a forward PER of 7.9x on 2013E earnings and 1.1x PBV. CAL’s target price is 184/share. NDB may also provide a dividend yield of 5.2%.
60
FYE Dec - LKR mn FY11 FY12 FY13E FY14E
Net interest income 4,909 5,896 8,164 10,269
Net interest income growth 20% 38% 26%
Core Profit* 2,845 3,043 4,677 6,175
Core Profit growth 7% 54% 32%
Profit attributable to equity holders 2,527 8,854 3,641 4,592
Profit growth 250% -59% 26%
EPS (LKR) 16.8 54.4 22.6 28.5
NAVPS 103.1 151.5 167.4 187.2
PER (x) 10.6 3.3 7.9 6.2
P/BV (x) 1.7 1.2 1.1 1.0
DPS (LKR) 7.5 15.0 9.3 11.7
Dividend Yield % 4.2% 8.4% 5.2% 6.6%
FY11 FY12 FY13E FY14E
Net interest margin 4.33% 4.11% 4.53% 4.81%
Cost-to-income 58% 60% 54% 51%
Average ROE 15.7% 14.1% 13.9% 15.8%
Average ROA 2.01% 1.87% 1.85% 1.98%
Loan Growth 43.2% 17.7% 15.6% 15.7%
80
90
100
110
120
130
140
150
160
May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13
NDB.N ASPI
Market Cap (USD): 232mn
1 Year Avg. Daily T/O (USD):126k
1 Year Price H/L (LKR): 181/96
Free Float: 96.12%
Current Price (LKR): 178
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IV. Appendices
61
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DuPont Analysis - 2012 HNB COMB SAMP NDB NTB SEYB PABC UBC
Average Return on Equity 17.42% 20.75% 14.13% 13.92% 20.84% 10.43% 21.74% 9.82%
Average Return on Assets 1.94% 1.62% 1.25% 1.91% 1.74% 1.18% 1.67% 1.67%
Leverage 8.96 9.82 11.30 7.27 11.99 8.84 13.03 5.86
Average Return on Equity 17.42% 15.91% 14.16% 13.92% 20.84% 10.43% 21.74% 9.82%
Average Return on Assets 1.94% 1.62% 1.25% 1.91% 1.74% 1.18% 1.67% 1.67%
Core profit margin 2.78% 3.17% 2.05% 2.48% 2.85% 2.01% 2.32% 1.80%
Impairment multiplier 0.90 0.79 0.99 1.10 0.86 0.91 0.96 0.86
Tax multiplier 0.77 0.65 0.62 0.70 0.71 0.65 0.75 1.08
Average Return on Assets 1.94% 1.62% 1.25% 1.91% 1.74% 1.18% 1.67% 1.67%
Core Profit Margin 2.78% 3.17% 2.05% 2.48% 2.85% 2.01% 2.32% 1.80%
Net interest margins 6.11% 5.39% 4.89% 4.11% 5.80% 5.97% 5.43% 5.70%
Avg interest earning assets % 0.86 0.89 0.87 0.91 0.88 0.86 0.86 0.85
Net interest margin as a % of avg assets 5.28% 4.79% 4.26% 3.72% 5.13% 5.12% 4.67% 4.84%
Non-interest income as a % of Avg assets 1.68% 1.64% 1.60% 1.98% 2.35% 1.41% 1.91% 1.75%
VAT expense % 0.29% 0.42% 0.41% 0.39% 0.39% 0.38% 0.41% 0.34%
Operating expense % 3.88% 2.84% 3.40% 2.84% 4.24% 4.14% 3.86% 4.45%
Non interest expense as a % of avg assets) 4.18% 3.26% 3.81% 3.23% 4.63% 4.52% 4.26% 4.79%
Core profit margin % 2.78% 3.17% 2.05% 2.48% 2.85% 2.01% 2.32% 1.80%
Appendix 1: Summary of DuPont analysis for banks -2012
62 * The analysis is after excluding Non-recurring items Positive factors Negative factors
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Dupont Analysis
ROAE - Net Profit/Average Equity
ROAA- Net Profit/Average Assets
Core Profit Margin- Core Profit/Average Assets
Net interest income- Net Interest income/
Average Assets
Net interest Margin- Net interest income/Average interest earning Assets
Assets Multiplier- Average interest earning
Asset/Average Assets Non interest income-
Non interest income/Average Assets
Non interest expenses-Non interest Expenses/
Average Assets
Impairment Ratio- Profit before Tax/ Core Profit
Tax Ratio- Net Profit/Profit before Tax
Leverage - Average Assets/Average Equity
Appendix 2: DuPont analysis for banks - 2012
63
Calculation methodology
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Dupont Analysis – COMMERCIAL BANK
Dupont Analysis – HATTON NATIONAL BANK
HNB
ROAE -17.42%
ROAA- 1.94%
Core Profit Margin-2.78%
Net interest income- 5.28%
Net interest Margin- 6.11%
Asset Multiplier-
0.86x Non interest income- 1.68%
Non interest expenses -
4.18%
Impairment Ratio- 0.9x
Tax Ratio- 0.77x Leverage - 9x
COMB
ROAE -20.75%
ROAA- 1.62%
Core Profit Margin-3.17%
Net interest income- 4.79%
Net interest Margin- 5.39%
Assets Multiplier-
0.89x Non interest income- 1.64%
Non interest expenses -
3.26%
Impairment Ratio- 0.8x
Tax Ratio- 0.65x Leverage -
9.82x
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Dupont Analysis – SAMPATH BANK
Dupont Analysis – NATIONAL DEVELOPMENT BANK
SAMP
ROAE -14.13%
ROAA- 1.25%
Core Profit Margin-2.05%
Net interest income- 4.26%
Net interest Margin- 4.89%
Asset Multiplier-
0.87x Non interest income- 1.60%
Non interest expenses -
3.18%
Impairment Ratio- 0.99x
Tax Ratio- 0.62x Leverage -
11.3x
NDB
ROAE -13.92%
ROAA- 1.91%
Core Profit Margin-2.48%
Net interest income- 3.72%
Net interest Margin- 4.11%
Asset Multiplier-
0.91x Non interest income- 2.4%
Non interest expenses -
3.57%
Impairment Ratio- 1.09x
Tax Ratio- 0.70x Leverage -
7.27x
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NTB
ROAE -20.84%
ROAA- 1.74%
Core Profit Margin-2.85%
Net interest income- 5.13%
Net interest Margin- 5.80%
Asset Multiplier-0.88x
Non interest income- 2.35%
Non interest expenses - 4.63%
Impairment Ratio- 0.87x
Tax Ratio- 0.71x Leverage - 12x
Dupont Analysis – SEYLAN BANK
SEYB
ROAE - 10.43%
ROAA- 1.18%
Core Profit Margin-2.01%
Net interest income- 5.12%
Net interest Margin- 5.97%
Asset Multiplier-86x
Non interest income- 1.41%
Non interest expenses -
4.52%
Impairment Ratio- 0.91x
Tax Ratio- 0.65x Leverage - 8.8x
Dupont Analysis – NATIONS TRUST BANK
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Dupont Analysis – PANASIA BANK
Dupont Analysis – UNION BANK OF COLOMBO
PABC
ROAE - 21.7%
ROAA- 1.67%
Core Profit Margin-2.32%
Net interest income- 4.67%
Net interest Margin- 5.44%
Asset Multiplier-
0.86x Non interest income- 1.91%
Non interest expenses -
4.3%
Impairment Ratio- 0.96x
Tax Ratio- 0.75x Leverage - 13x
UBC
ROAE - 9.82%
ROAA- 1.67%
Core Profit Margin-1.80%
Net interest income- 4.84%
Net interest Margin- 5.70%
Asset Multiplier- 0.85x
Non interest income- 1.75%
Non interest expenses - 4.79%
Impairment Ratio- 0.86x
Tax Ratio- 1.08x Leverage - 5.9x
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Appendix 3: Bank fixed deposit market share
68
23% 23%
23% 22%
17% 17%
9% 9%
5% 5%
7% 7%
4% 4% 2% 2%
10% 10%
0%
20%
40%
60%
80%
100%
120%
Fixed deposit market share - 2011 Fixed deposit market share - 2012
COMB HNB SAMP NDB DFCC NTB PABC UBC SEYB
Figure 67: Fixed deposit market share of banks - 2012
Source: Bank annual reports
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Appendix 4: Bank cost management
69
775
1028 1029 1032
1,253
1,518 1612.5 1,641
1,703
0
200
400
600
800
1000
1200
1400
1600
1800
PABC UBC NTB DFCC SAMP HNB NDB SEYB COMB
Pe
rso
nn
el c
ost
/em
plo
yee
(LK
R 0
00
)
11,105
14,980
21,662 23,486
25,307
31,346
37,521 38,100
41,595
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
DFCC PABC UBC COMB SAMP NDB SEYB HNB NTB
Ge
ne
ral &
OH
co
st/b
ran
ch (
LKR
'00
0)
Source: Bank annual reports
Figure 68: Personnel cost per employee -2012 Figure 69: General & OH cost per branch - 2012
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Appendix 5: Bank loan-to-deposit rates
70
103% 96% 92% 90% 89% 88% 85% 85%
0%
20%
40%
60%
80%
100%
120%
140%
NDB COMB SAMP PABC HNB UBC NTB SEYB
LDR
2011 2012
Figure 70: Loan-to-deposit rates of banks
Source: Bank annual reports
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Appendix 6: Change in AWPLR (Jan – April 2013)
71
Figure 71: Bank AWPLR (April 2013)
Figure 72: Change in AWPLR from Jan –April 2013
Source: CBSL
13.9 13.9 13.9 14.1 15.0
16.0 16.5 17.7 17.9
8
10
12
14
16
18
20
AW
PLR
%
-3 -26
-49 -69
-94
-171
-200 -200
-224 -250
-200
-150
-100
-50
0
Ch
ange
in b
ps
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Appendix 7: Summary Financial Statements
72
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73
Commercial Bank - Income Statement
As at 31 December 2011 2012 2013E 2014E
Income 45,839 63,374 70,949 84,778
Interest income 38,314 52,663 64,175 76,964
Less: Interest expenses 19,635 29,811 37,354 44,817
Net interest income 18,678 22,852 26,821 32,147
Fee and commission income 3,765 4,147 4,769 5,484
Less: Fee and commission expenses 440 549 620 713
Net fee and commission income 3,325 3,598 4,149 4,771
Net interest, fee and commission income 22,004 26,450 30,970 36,919
Net loss from trading 462- 2,494 - -
Net gain from financial investments 38 32 - -
Other operating income 4,184 4,038 2,005 2,330
Total Operating income 25,764 33,014 32,975 39,249
Less: Impairment charge/(reversal) for loans and other losses 1,747 3,158 1,544 2,708
Less: Impairment gain / ( loss) on financial investments - - - -
Net operating income 24,017 29,856 31,431 36,541
Personnel expenses 6,346 7,837 8,597 9,533
Other operating expenses 5,178 5,731 6,201 6,684
11,525 13,568 14,797 16,217
Operating profit before value added tax (VAT) 12,492 16,288 16,634 20,324
Less: Value added tax (VAT) on financial services 1,523 1,987 2,044 2,418
Operating profit after value added tax (VAT) 10,969 14,301 14,590 17,905
Share of profit/(loss) of Associates (net of income tax) 11 12 14 16
PROFIT BEFORE INCOME TAX 10,980 14,313 14,590 17,905
Less: Income tax expense 3,048 4,232 4,085 5,013
PROFIT FOR THE YEAR 7,932 10,081 10,505 12,892
Profit attributable to Equity holders of the bank 7,932 10,080 10,504 12,890
Non-controlling interest 0 1 1 2
PROFIT FOR THE YEAR 7,932 10,081 10,505 12,892
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74
Commercial Bank - Statement of Financial Position
As at 31 December 2011 2012 2013E 2014E
ASSETS
Cash and cash equivalents 12,935 19,752 4,933 5,308
Balances with Central Banks 17,343 18,168 28,647 34,131
Placements with banks 11,674 16,163 17,779 19,557
Derivative financial instruments 40 1,351 6,172 7,283
Other financial assets held for trading 6,418 6,041 7,035 8,301
Loans and receivables to banks 580 629 629 629
Loans and receivables to other customers 314,327 372,857 440,858 520,213
Financial investments - Available-for-sale 61,415 57,963 84,420 99,615
Investments in associates 120 94 104 114
Property, plant & equipment 8,503 8,947 8,158 7,357
Intangible assets 475 506 464 420
Leasehold property 113 112 110 109
Deferred tax assets 364 458 458 458
Other assets 7,290 9,179 10,787 10,787
Total assets 441,598 512,221 610,554 714,282
LIABILITIES
Due to banks 11,574 4,764 65 65
Derivative financial instruments 435 84 100 118
Due to other customers 323,698 390,569 468,998 553,418
Other borrowings 49,455 47,566 64,210 72,542
Current tax liabilities 1,307 2,822 2,043 2,507
Deferred tax liabilities 1,640 1,890 1,890 1,890
Other provisions 1 2 2 2
Other liabilities 8,214 10,417 12,344 14,566
Subordinated term debts 1,106 1,106 1,109 1,109
Total liabilities 397,429 459,220 550,761 646,217
EQUITY
Stated capital 16,474 18,009 19,920 22,253
Statutory reserves 2,890 3,433 3,999 4,683
Retained earnings 2,588 4,173 4,698 5,343
Other reserves 22,187 27,353 31,143 35,751
Total equity to equity owners of the Bank 44,139 52,968 59,760 68,030
Non-Controlling Interest 30 32 34 35
Total equity 44,169 53,001 59,793 68,065
441,598 512,221 610,554 714,282
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Hatton National Bank - Income Statement
As at 31 December 2011 2012 2013E 2014E
Income 40,123 55,160 57,430 61,342
Interest income 33,547 47,940 58,542 68,762
Less: Interest expenses 16,626 25,496 32,179 40,915
Net interest income 16,920 22,444 26,362 27,848
Fee and commission income 2,987 3,833 4,792 5,750
Less: Fee and commission expenses 56 64 86 104
Net fee and commission income 2,931 3,769 4,705 5,647
Net interest, fee and commission income 19,852 26,213 31,068 33,494
Net loss from trading -426 -1,624 -1,701 -1,936
Net gain from financial investments 391 114 0 0
Other operating income 3,624 4,897 4,666 6,088
Total Operating income 23,440 29,600 34,033 37,645
Less: Impairment charge/(reversal) for loans and other losses 501 -1,162 -1,567 -1,993
Net operating income 23,941 28,438 32,466 35,653
OPERATING EXPENSES
Personnel expenses 5,526 7,104 7,861 8,671
Premises, equipment and establishment expenses 2,956 3,481 3,968 4,382
Other overhead expenses 5,163 5,929 6,662 7,348
13,645 16,514 18,490 20,401
Operating profit before value added tax (VAT) 10,296 11,924 13,976 15,252
Less: Value added tax (VAT) on financial services 1,224 1,248 1,485 1,627
Operating profit after value added tax (VAT) 9,072 10,676 12,491 13,625
Share of profit/(loss) of Associates (net of income tax) -16 17 17 18
PROFIT BEFORE INCOME TAX 9,056 10,693 12,508 13,644
Less: Income tax expense 2,156 2,421 3,127 3,411
PROFIT FOR THE YEAR 6,900 8,271 9,381 10,233
Profit attributable to Equity holders of the Bank 6,819 8,111 9,240 10,079
Profit attributable to Non-controlling interests 81 160 141 153
PROFIT FOR THE YEAR 6,900 8,271 9,381 10,233
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Hatton National Bank - Statement of Financial Position
As at 31 December 2011 2012 2013E 2014E
ASSETS
Cash and cash equivalents 7,576 8,849 11,967 14,381
Balances with central banks 18,698 19,950 24,448 28,731
Placements with banks 8,244 11,667 12,834 14,118
Derivative financial instruments 497 345 358 419
Other financial assets held for trading 2,408 1,078 1,994 2,333
Non-current assets held for sale 3 3 3 3
Loans and receivables to other customers 257,435 303,922 358,433 418,937
Financial investments - Available-for-sale 51,435 58,929 69,789 81,653
Financial investments - Held-to-maturity 1,698 1,644 1,994 2,333
Financial investments - Loans and receivables 15,362 20,904 23,928 27,995
Investments in Associates 384 386 404 422
Investment properties 169 165 160 155
Property, plant and equipment 15,416 17,815 18,285 18,881
Intangible assets 671 690 710 731
Deferred tax assets 319 372 372 372
Other assets 10,982 12,680 14,755 17,264
Total assets 391,297 459,399 540,434 628,727
LIABILITIES
Due to banks 19,885 30,401 39,184 48,609
Derivative financial instruments 618 1,436 2,551 3,319
Due to other customers 290,912 340,848 398,792 466,586
Dividends payable 170 223 272 296
Other borrowings 8,876 6,747 7,886 9,217
Debt securities issued - 150 150 150
Current tax liabilities 1,094 1,840 1,876 2,047
Bills payable 1,404 1,431 1,431 1,431
Subordinated debentures 4,989 4,563 8,813 8,813
Insurance provision - Life 3,021 3,626 4,170 4,796
Insurance provision - General 944 969 1,018 1,069
Deferred tax liabilities 1,225 1,556 1,556 1,556
Other provisions 5,877 4,400 5,377 6,284
Other liabilities 9,924 8,614 9,045 9,497
Total Liabilities 348,940 406,805 482,120 563,670
EQUITY
Stated capital 11,451 12,579 12,579 12,579
Statutory reserves 2,778 4,531 4,715 4,917
Retained earnings 3,504 5,322 8,371 12,201
Other reserves 23,841 29,193 31,538 34,096
Total equity attributable to equity holders of the Bank41,575 51,624 57,204 63,794
Non-controlling interests 782 969 1,110 1,264
Total Equity 42,357 52,594 58,314 65,057
Total Liabilities and Equity 391,297 459,399 540,434 628,727
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Sampath Bank - Income Statement
As at 31 December 2011 2012 2013E 2014E
Income 28,268 39,725 46,495 55,385
Interest income 21,565 32,712 40,444 48,510
Less: Interest expenses 12,278 20,673 25,255 30,513
Net interest income 9,288 12,039 15,189 17,997
Fee and commission income 2,796 2,877 3,107 3,355
Less: Fee and commission expenses 862 675 699 738
Net fee and commission income 1,934 2,202 2,408 2,617
Net interest, fee and commission income 11,222 14,241 17,597 20,614
Net loss from trading 314 6 0 0
Other operating income 3,592 4,130 2,944 3,520
Total Operating income 15,128 18,377 20,541 24,134
Less: Impairment charge/(reversal) for loans and other losses -399 -152 -857 -1,221
Less: Impairment gain / ( loss) on financial investments -189 72 0 0
Net operating income 14,540 18,297 19,684 22,913
OPERATING EXPENSES
Personnel expenses 3,699 4,329 4,777 5,256
Depreciation of property & equipment 551 588 615 629
Amortisation of intangible assets 40 47 56 64
Other operating expenses 3,957 4,654 5,168 5,739
Other Operating Expenses 8,247 9,619 10,616 11,688
Operating profit before value added tax (VAT) 6,293 8,678 9,068 11,226
Less: Value added tax (VAT) on financial services 918 1,161 1,246 1,483
PROFIT BEFORE INCOME TAX 5,376 7,517 7,822 9,742
Less: Income tax expense 1,670 2,172 2,190 2,728
PROFIT FOR THE YEAR 3,705 5,346 5,632 7,014
Profit attributable to Equity holders of the Bank 3,683 5,343 5,626 7,007
Profit attributable to Non-controlling interests 22 3 6 7
PROFIT FOR THE YEAR 3,705 5,346 5,632 7,014
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Sampath Bank - Statement of Financial Position
As at 31 December 2011 2012 2013E 2014E
ASSETS
Cash and cash equivalents 10,747 10,442 14,596 13,534
Balances with Central Bank of Sri Lanka 13,232 17,201 19,403 23,103
Placements with Banks 5,337 8,788 9,843 11,024
Reverse repurchase agreements 4,606 3,300 4,084 4,901
Derivative financial instruments 204 279 262 319
Financial investments held -for- trading 23,053 35,181 36,698 44,657
Financial assets held-for-trading pledged as collaterals 4,003 2,856 4,376 5,251
Loans and receivables from banks 442 816 729 875
Loans and receivables from other customers 171,977 212,480 262,129 318,979
Other loans & receivables 5,736 10,224 12,252 14,702
Financial investments- available- for- sale 2,025 1,924 2,097 2,552
Financial investments- held - to- maturity 19 10 15 18
Property and equipment 6,691 6,764 6,397 6,114
Intangible assets 73 316 261 490
Deferred tax asset 2 12 12 12
Other assets 2,847 3,731 4,104 4,514
Total assets 250,995 314,326 377,256 451,045
LIABILITIES
Due to banks 1,176 668 875 1,050
Securities sold under re-purchase agreements 4,101 2,751 3,670 4,466
Derivative financial instruments 311 382 646 646
Due to other customers 195,094 243,088 291,706 350,047
Debt issued and other borrowed funds 21,490 32,218 40,839 49,007
Unclaimed dividend 37 49 49 65
Current tax liabilities 1,881 3,036 2,628 3,273
Deferred tax liabilities 396 431 431 431
Provisions 138 180 199 219
Other liabilities 3,503 4,247 4,884 5,617
Total Liabilities 228,128 287,051 345,927 414,820
EQUITY
Stated capital 2,744 3,564 3,674 3,797
Statutory / risk reserve funds 858 1,199 1,480 1,831
Revaluation reserve 2,879 2,876 2,876 2,876
Available-for-sale reserve 1,798 1,465 1,465 1,465
Revenue reserves 14,529 18,110 21,767 26,182
Total equity attributable to equity holders of the Bank 22,807 27,214 31,262 36,151
Non-controlling interests 60 61 67 74
Total Equity 22,867 27,275 31,329 36,225
Total Liabilities and Equity 250,995 314,326 377,256 451,045
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Nations Trusts Bank
Income Statement
As at 31 December 2011 2012 2013E 2014E
Income
Interest Income 9,795 15,113 17,244 20,425
Interest Expense -5,391 -9,358 -10,502 -12,346
Net Interest Income 4,404 5,755 6,741 8,080
Fees and Commission Income 1,850 2,285 2,772 3,325
Fees and Commission Expense -144 -163 -208 -249
Net Fees and Commission Income 1,706 2,122 2,564 3,076
Net Trading Income 72 288 291 327
Other Operating Income 312 228 270 323
Total Operating Income 6,494 8,392 9,866 11,806
Impairment Charge / (Reversal ) for Loans and Advances -235 432 453 455
Net Operating Income 6,728 7,960 9,413 11,351
Personnel Expenses 1,901 2,097 2,607 3,206
Depreciation of Property, Plant and Equipment 230 267 289 326
Amortization of Intangible Assets 95 113 130 141
Other Operating Expenses 1,791 2,283 2,557 2,863
Total Operating Expenses 4,017 4,759 5,583 6,536
Operating Profit Before Value Added Tax (VAT) 2,712 3,202 3,831 4,815
Value Added Tax (VAT) on Financial Services 376 435 528 658
Profit Before Income Tax 2,336 2,766 3,303 4,157
Income Tax Expense 729 815 925 1,164
Profit for the Year 1,607 1,951 2,378 2,993
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Nations Trusts Bank - Statement of Financial Position
Statement of Financial Position
As at 31 December 2011 2012 2013E 2014E
Assets
Cash and Cash Equivalents 3,694 2,534 4,352 2,730
Balances with Central Bank of Sri Lanka 4,284 5,089 6,619 7,943
Reverse Repurchase Agreements 6,614 2,712 3,103 3,723
Derivative Financial Instruments 255 328 399 479
Financial Assets - Held for Trading 6,550 21,088 20,686 24,823
Financial Assets - Held to Maturity 11,818 10,238 12,411 14,894
Other Financial Assets 2,898 1,893 2,069 2,482
Loans and Advances to Customers 61,188 73,424 88,773 106,527
Other Assets 2,280 2,591 3,196 3,835
Property, Plant and Equipment 1,891 1,908 2,013 2,121
Intangible Assets 600 642 513 601
Total Assets 102,073 122,447 144,133 170,159
Liabilities
Due to Banks 1,277 2,796 3,076 3,445
Repurchase Agreements 14,480 11,833 14,204 17,044
Derivative Financial Instruments 316 528 592 663
Due to Customers 67,633 86,190 103,428 124,114
Debt Issued and Other Borrowed Funds 5,409 6,334 6,168 5,798
Current Tax Liabilities 235 544 607 744
Other Liabilities 3,859 3,846 3,923 4,001
Deferred Tax Liabilities 236 280 280 280
93,444 112,352 132,278 156,089
Equity Attributable to Equity Holders of the Parent
Stated Capital 5,101 5,101 5,101 5,101
Statutory Reserve Fund 224 314 423 561
Retained Earnings 3,034 4,044 5,267 6,805
Other Reserves 269 636 1,064 1,603
8,628 10,095 11,855 14,070
Total Liabilities and Equity 102,073 122,447 144,133 170,159
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National Development Bank
Income Statement
As at 31 December 2011 2012 2013E 2014E
Interest income 11,655 17,150 21,811 26,114
Interest expense -6,745 -11,254 -13,647 -15,845
Net interest income 4,909 5,896 8,164 10,269
Net fee and commission income 1,916 1,644 1,975 2,284
Net trading income/(expense) 448 1,272 950 1,064
Other operating income 648 6,127 501 561
Total operating income 7,922 14,938 11,590 14,177
Impairment charge/ (reversal) for loans and other losses -88 51 311 500
Net operating income 8,010 14,887 11,280 13,677
Less: Operating Expenses
Personnel expenses 2,118 2,333 2,862 3,286
Depreciation of property, plant & equipment 199 205 228 248
Amortisation of intangible assets 51 96 112 145
Other operating expenses 1,613 1,862 2,260 2,698
Total operating expenses 3,981 4,496 5,463 6,377
Operating profit before value added tax 4,030 10,391 5,817 7,300
Value Added Tax (VAT) on financial services -505 -622 -781 -953
Operating profit after value added tax 3,525 9,769 5,036 6,347
Share of associate companies’ profit 331 439 -15 -15
Profit before tax 3,855 10,207 5,021 6,333
Income tax expense -1,093 -1,275 -1,306 -1,647
Profit for the year 2,763 8,932 3,716 4,686
Profit attributable to equity holders of the parent 2,527 8,854 3,641 4,592
Profit attributable to minority interest 235 78 74 94
Profit for the year 2,763 8,932 3,716 4,686
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National Development Bank
Statement of Financial Position
As at 31 December 2011 2012 2013E 2014E
ASSETS
Cash and cash equivalents 2,519 3,635 4,161 2,992
Balances with Central Bank 4,614 6,075 7,354 8,423
Placements with banks 518 3,559 4,040 4,646
Securities purchased under resale agreements 912 3,325 9,794 8,448
Financial assets held for trading 7,106 983 6,121 5,632
Derivative financial instruments 1,402 1,706 2,449 2,816
Other financial assets held for trading 2,087 10,412 11,142 9,979
Loans and advances to banks 1,640 1,183 6,121 7,040
Loans and advances to customers 93,166 109,649 126,779 146,684
Lease rentals receivables 4,650 6,390 8,480 10,338
Other financial assets classified as loans and receivable 2,563 3,764 4,407 4,928
Financial assets - held to maturity 15,666 19,223 24,486 26,751
Financial assets - available for sale 186 174 612 704
Investments in associate companies 1,797 33 19 19
Other assets 963 1,155 1,347 1,549
Intangible assets 318 319 356 421
Property, plant & equipment 1,185 1,223 1,338 1,533
Investment properties 1,296 1,296 1,296 1,296
Goodwill - - - -
Total assets 142,588 174,103 220,304 244,197
LIABILITIES
Due to Banks 5,924 2,320 2,719 3,145
Securities sold under repurchase agreements 10,133 12,516 13,946 16,135
Derivative financial instruments 1,022 1,737 1,902 2,200
Due to customers 82,094 107,394 122,429 140,793
Debt securities issued and other borrowed funds 19,466 17,802 43,582 42,182
Tax liabilities 356 634 653 823
Other liabilities 3,286 3,657 4,311 4,987
Subordinated term debts 2,428 2,255 2,303 2,111
Deferred Tax 41 79 79 79
Total liabilities 124,750 148,394 191,923 212,457
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF PARENT
Stated capital 864 864 864 864
Statutory reserve fund 879 879 879 879
Investment Fund 387 924 1,335 1,843
Retained Earnings 14,796 22,216 24,402 27,160
16,925 24,883 27,480 30,745
Non-controlling interests 913 826 901 994
Total Equity 17,838 25,709 28,381 31,740
Total liabilities and total equity 142,588 174,103 220,304 244,197
NAVPS 103.1 151.5 167.4 187.2
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Disclaimer
This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited it’s directors, officers, consultants, employees, outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorney’s fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.
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