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FC Research SRI LANKA Sector Report Analyst: Atchuthan Srirangan Wediwardana SRI LANKA BANKING SECTOR HOLD “Multiple Shocks Dampen Beat” Recomme ndation Stock Commercial Bank - Voting Commercial Bank - Non-Voting Hatton National Bank - Voting Hatton National Bank - Non Voting Sampath Bank National Development Bank Nations Trust Bank Seylan Bank - Voting Seylan Bank - Non-Voting Banking Sector Universe COMB.N COMB.X HNB.N HNB.X SAMP.N NDB.N NTB.N SEYB.N SEYB.X Mkt. Cap (LKR mn) HOLD BUY SELL HOLD S.BUY SELL S.BUY HOLD HOLD HOLD 107,922 107,922 71,273 71,273 41,591 28,359 17,918 15,856 15,856 Figure 1: 2016 Price Change upto 14th Jun 2016 HNB.N (Source: CSE) HNB.N 2% PABC -2%PABC -3% HNB.X SEYB.N -5% COMB.N -7% COMB.X -9% NDB -10% NTB -12% SEYB.X -13% UBC -17% DFCC -19% -20% -15% -10% -5% 0% Figure 2: Banking Sector vs. ASPI 115 ASPI BFI 105 95 85 (Source: CSE) 75 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Price 129.6 111.7 216.0 175.0 235.0 171.7 77.7 90.1 63.1 Target Upside Price (%) 139.0 120.0 225.0 182.0 291.0 163.0 95.0 101.0 70.0 7% 7% 4% 4% 24% -5% 22% 12% 11% 10% PER (x) PBV (x) 2016E 2017E 2016E 2017E DPS 2016E 8.4x 7.3x 7.3x 5.9x 5.3x 7.7x 6.1x 6.3x 4.4x 7.6x 6.6x 6.3x 5.1x 4.5x 5.8x 5.3x 5.4x 3.8x 1.5x 1.3x 1.0x 0.8x 0.9x 0.9x 1.0x 1.0x 0.7x 1.3x 1.2x 0.9x 0.7x 0.9x 0.8x 0.9x 0.9x 0.6x 8.3 8.3 10.4 10.4 15.5 14.8 2.4 3.5 3.5 Dividend Total Yield Return 2016E 6% 14% 7% 15% 5% 9% 6% 10% 7% 30% 9% 4% 3% 25% 4% 16% 6% 16% 5% 15% FC Research expects the banking sector to have a slow phase during 2016E-18E with slow GDP growth, tax attacks, sluggish credit growth and rising non-performing loans. Hence we expect our banking sector universe to provide 15% average return over 1-Year period slightly slower than the expected market return. Slow GDP growth and Tax Attack: The current tight monetary policy and tax increase are unlikely to help the GDP growth numbers to improve. We expect 2Q & 3Q2016 GDP also to remain weak while growth is likely to pick up towards 4Q2016 amidst the rise in the construction led by Government starting off most of the stalled projects. VAT has been increased to 15% resulting in an incremental impact for the banking sector. SAMP -6% 15 June 2016 Apr-16 Disclaimer on Shareholding: Relating to the Banking Sector, First Capital Limited holds 475,000 shares in NTB, 466,401 in SEYB.N and affiliated Unit Trusts hold 15,000 shares in SAMP, 40,000 shares in NTB, 65,000 shares in SEYB.X. Neither First Capital Equities (Pvt) Ltd nor related entities have traded in the shares of the Banking Sector in the three trading days prior to this document, and will not trade in the shares of the Banking Sector for seven trading days following the issue of this document. Credit growth to slow down to 16%: We expect private sector credit growth to slow down to 16% during 2016E gradually 5% slowing down while 1H2016 continuing to remain on the high side. CBSL is comfortable with credit growth of 12%-15% in the sector. However, private sector credit growth shot up to 25% for 2015 amidst lose monetary stance. NPLs to be on the rise in 2H2016 onwards: We expect Banking sector non-performing loans to increase with increase in the interest rate and weak economic condition: Non-performing loans and GDP always have a negative relationship. Downturn in the economy growth, real exchange rate appreciation and the rise in real interest rate contributes to increase in the Non-Performing loans. Banking Sector on a HOLD with 15% avg. return over 1-Year Period: With Average sector return at 15%, current interest rates make valuations unattractive on expected return (Refer 5.1) despite comparatively cheap frontier market valuations. Banking Sector HOLD. We recommend a STRONG BUY on SAMP and NTB, BUY on COMB.X, HOLD on COMB.N, HNB.X, SEYB.N and SEYB.X. HNB.N and NDB are recommended as a SELL. FC Research “Multiple Shocks Dampen Beat” Banking Sector Report – 2016 Table of Contents 1.0 Commercial banking sector struggle in 2013-14 before taking off in 2015 ........................ 3 1.1 State Banks continued with their a dominant presence with higher market share .................. 3 1.2 Tough conditions in 2013, somewhat improving in 2014 .......................................................... 3 1.3 Credit Boom in 2015 drives profitability ................................................................................... 4 2.0 Weak economic indicators to slowdown credit demand .................................................. 6 2.1 Weak GDP growth ..................................................................................................................... 7 2.2 Sri Lanka’s widened trade gap has forced CBSL to keep monetary policy tight in the medium term ........................................................................................................................................... 7 2.3 Alarming fiscal position has led to higher Government Borrowing Requirement: ................... 8 2.4 Tight monetary policy may continue during 2016: ................................................................... 9 2.5 VAT hike to impact bottom line: .... ………………………………………………………………………………………9 3.0 NPLs to jump from current low levels ………………………………………………………………………….10 4.0 Selected Banks to have lowest adverse impact through cost management, higher core income and better asset quality. …………………………………………………………………....………….12 4.1 Effective cost-income management to thrive profitability …………………………………………..……..12 5.0 FC Research Commercial Banking Sector on a HOLD with a 15% Return over 1Year ….14 5.1 Sri Lanka Banks are still cheaper compared to other banks in frontier markets but increased interest rates dampen returns ………………………………………………………………………………..………….14 5.2 FC Research Top Banking Sector Buys: SAMP, NTB – Strong Buy, COMB.X - Buy………………….15 5.3 FC Research Banking Sector HOLD List: COMB.N, HNB.X, SEYB, SEYB.X……………………………….17 5.4 FC Research Banking Sector SELL List: HNB.N, NDB.N………………………………….………………………19 5.5 SAMP Corporate Update…………………………………………………………………………….………………………21 5.6 NTB Corporate Update……………………………………………………………………………….……………….……..24 5.7 COMB Corporate Update…………………………………………………………………………….………………………27 5.8 HNB, NDB, SEYB Income Statements and Statement of Financial Position………………..…………30 2 “Multiple Shocks Dampen Beat” FC Research Figure 3: Commercial Bank Assets (LKR Bn) 6,974 5,022 Banking Sector Report – 2016 1.0 Commercial banking sector struggle in 2013-14 before taking off in 2015 1.1 State Banks continued with their dominant presence and higher market share Sri Lanka’s Commercial Banking sector consists of 13 local banks and 12 foreign banks which account for LKR 6,900Bn (USD 48Bn) asset base. From the overall banking sector, private sector domestic commercial banks hold 46% of the market share and two of the giant state banks hold 44%. Figure 4: Banking Asset Segmentation 2013 2015 Foreign Commercial Banks 10% (Source: CBSL) SAMP 8% NDB 4% HNB, 10% State Owned Banks , 42% Private Sector Commercial Banks 46% SEYB 4% COMB 13% NTB 3% PABC 2% UBC 1% DFCC 4% (Source: CBSL, Company annual & quarterly reports) 1.2 Tough conditions in 2013, somewhat improving in 2014 1.2.1 The Struggle in 2013 Sector profitability declines: Banking sector profits dipped 10%YoY to LKR 75Bn compared to LKR 83Bn in 2012. The profitability was recorded amidst the banking sector recording substantial gains from investments in government securities held for trading illustrating the significant slowdown of the core banking operations of the banking sector in 2013. Slow credit growth and depleting margins led the struggle for banks in 2013: The lagged effects of tightened monetary policy stance in 2012, saw a sharp deterioration in credit growth flowing into 2013 with credit to the private sector slowing to 7.5%. With the downward trend in interest rates accelerating towards the end of the year, net interest margins also started to deplete biting into the profitability of the sector. The Net Interest Margins (NIMs) declined from 4.1% in 2012 to 3.5% in 2013, due to deposit base being repriced with relatively earlier than the lending portfolio, the moderation in credit growth and the increase in low yielding assets. 3 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Pawning led NPLs adds further woes in 2013: The quality of assets in the banking sector deteriorated as indicated by the increase in the Non-Performing Loans (NPL) ratio from 3.7% as at end 2012 to 5.6% by end 2013. This was largely the result of weaker loan quality in the pawning portfolio. NPLs increased by LKR 74Bn during 2013, of which LKR 56Bn relates to pawning advances. In comparison, the increase in NPLs amounted to LKR 17bn in 2012. 1.2.2 Some improvement in 2014 Core banking slowdown off-set by NPL dip and further trading gains: Despite thin NIMs, the banking sector reported earnings of LKR 88Bn for 2014, a growth of 17%YoY compared to LKR 75Bn reported in the previous year. Profitability, which decreased marginally during the first nine months improved towards the latter part of the year. Credit growth remains slow while NIMs remain thin: Continued downward adjustment of interest rates during 2014 resulted in NIMs remaining thin at 3.5%. However, LCB’s (excluding LSBs) NIMs further declined to 3.6% in 2014 from the previous 3.7% in 2013. Towards the latter part of the year, the growth in credit to the private sector by commercial banks strongly rebounded, but still closed the year 2014 only with 8.8%YoY growth. The slowdown in private sector credit growth was mainly due to the decline in pawning advances of commercial banks since 2013 in response to low international gold prices. NPLs ease while trading gains remained strong: Asset quality improved during the year with the gross NPLs declining from 5.6% in 2013 to 4.2% in 2014. The banking sector experienced a declining level of NPLs mainly with the recovery of pawning NPLs particularly during the latter part of the year. Banking sector registered strong capital gains via sale of treasury bills and bonds. Accelerating decline in interest rate during 2014 resulted in a spike in bills and bonds prices signifying healthy capital gains. Relaxation of monetary policy and excess liquidity were the main drivers for this reduction in interest rates. 1.3 Credit Boom in 2015 drives profitability Banking sector records highest ever profits: Banking sector registered 10%YoY growth to reach LKR 97.0Bn in 2015, from LKR 88.0Bn on the back of heavy credit despite continued thin NIMs in the sector. Private Sector Credit leaps to 25%: The YoY growth of private sector credit accelerated to reach 25.1% by end 2015 from 8.8% at end 2014. Increased domestic demand, a part of which was transformed into high demand for imports, amidst continued low interest rates drove the demand for credit by the private sector. Broad money increased by 17.8%YoY, by end 2015 compared to a growth of 13.4% recorded at end 2014. The average broad money growth in 4 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 2015 was at 15.2% compared to 13.3% recorded in the previous year. NIMs further deteriorate but offset by further trading gains: Sector NIMs remained flat at 3.5% amidst the low interest rate regime, however, NIMs for LCBs further dropped to 3.5% in 2015 from 3.6% in 2014. Some major fluctuations in the treasury bills and bonds market were observed during the year assisting the banking sector make trading gains in 2015 as well. Figure 5: Loan Book Diversification – 2015 100% 90% 1% 7% 80% 70% 60% 10% 12% 12% 13% 2% 11% 11% 16% 11% 0% 8% 8% 10% 11% 8% 4% 20% 7% 8% 14% 23% 16% 1% 16% 4% 0% 5% 2% 8% 2% 14% 12% 0% 50% 22% 17% 26% 17% 20% 40% 30% 52% 49% 20% 49% (Source: Quarterly reports) 39% 34% 54% 48% 43% 10% 0% COMB HNB SAMP NTB NDB SEYB PABC Term loans Overdrafts Trade Finance Pawning Lease rentals receivable Staff loans Credit Cards Others UBC (Source: Bank’s Annual reports) Figure 6: Deposit growth as of 2015 Figure 7: Loan growth as of 2015 60% 40% 35% 50% 30% 25% 20% 15% 10% 55.6% 26.0% 19.9% 21.6% 20.8% 17.9% 39.5% 40% 19.7% 16.3% 19.2% 30% 24.8% 26.4% 16.3% 12.5% Average 18.1% 20% 24.6% 19.6% 15.2% 20.5% 18.5% 11.5% 5% 10% 0% 0% (Source: Banks’s Quarterly Statements) 23.2% Average 19.5% (Source: Banks’s Quarterly Statements) 5 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 2.0 Weak economic indicators to slowdown credit demand Figure 8: Loan growth as of 2015 Total Credit to Private Sector 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000 MoM Growth 6.0% 3,4933,547 3,4063,450 3,315 5.0% 3,156 5.0% 4.0% 3,0043,069 2,9082,963 2,860 2,845 2,804 3.0% 2.9% 2.8% 2.2% 2.0% 1.7% 1.9% 1.5% 1.5% 1.4% 1.3% 1.3% 1.0% 0.9% 0.5% 0.0% Source: CBSL Credit growth to slow down to 15%: We expect private sector credit growth to slow down to 15% during 2016E gradually slowing down while 1H2016 continuing to remain on the high side. CBSL is comfortable with credit growth of 12%-15% in the sector. However, private sector credit growth shot up to 25% for 2015 amidst loose monetary stance. Figure 9: Private Sector Credit as a % of GDP 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Vietnam Ukraine Morocco Vanuatu Mongolia Cabo Verde Honduras India Bolivia Samoa Armenia Paraguay Bhutan Guyana El Salvador Moldova Georgia Indonesia Philippines Kosovo Papua New Guinea Solomon Islands Guatemala Senegal Sao Tome and Principe Djibouti Sri Lanka Nicaragua Egypt, Arab Rep. Swaziland Lesotho Micronesia, Fed. Sts. Cote d'Ivoire Ghana Pakistan Cameroon Zambia Congo, Rep. Timor-Leste Sudan Yemen, Rep. 0% (Source: World Bank) 6 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 2.1 Weak GDP growth and Tax Attack Figure 11: Struggling Quarterly GDP growth (Real) 40% 10% 35% 8% 30% 25% 6% 20% 4% 15% 10% 2% 5% 0% 9.90% 10.00% 8.00% 6.01% 6.00% 4.70% 4.86% 4.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0% -5% GDP Growth - YoY PSC Growth - YoY Figure 10: Private sector credit as a % of GDP -10% -2% -4% Private Sector Credit Growth 2.50% 1.90% 2.00% 4.82% 0.70% 0.00% 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 GDP Growth (Source: Department of Statistics and Consensus) (Source: CBSL) GDP growth may remain slow in 2Q and 3Q 2016: The current tight monetary policy is unlikely to help the GDP growth numbers to improve. We expect 2Q & 3Q2016 GDP growth to remain weak while the same is likely to pick up towards 4Q2016 amidst the rise in the construction, led by Government starting off most of the stalled projects. GDP growth for 2014 was recorded a modest 4.8% while weak GDP growth of 2.5% was recorded in 4Q2015. 2.2 Sri Lanka’s widened trade gap has forced CBSL to keep monetary policy tight in the medium term Figure 12: Struggling Quarterly GDP growth (Real) USD mn -7,000 -7,200 -7,400 -7,600 -7,800 -7,609 -8,000 -8,200 -8,400 -8,600 -8,299 +9% YoY -8,430 +2% YoY Source: CBSL High imports and low exports affecting official reserves: With the trade gap bloating towards 3Q2015 CBSL took measures to contain excessive imports which negatively affected the gross official reserves. Relatively lower dip in import bill compared to export bill, contributed to the expansion in the trade deficit in 2015. Accordingly, the trade deficit expanded marginally by 1.7% to USD 8.4Bn in 2015, from the USD 8.3Bn recorded in 2014. 7 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 However, as a per cent of GDP, the deficit in the trade balance decreased to 10.2% in 2015, from 10.4% in 2014 but continued to remain on the high side. Figure 13: Gross Official Reserves 5,621 6,069 6,573 6,294 7,281 6,784 6,809 6,481 6,225 5,500 6,458 6,000 6,846 6,500 7,455 7,000 7,525 7,500 7,304 USD 'Mn 8,000 5,000 (Source: CBSL) 2.3 Alarming fiscal position has led to higher Government borrowing requirement: High Budget deficits: Sri Lanka registered a high budget deficit of 7.4% of GDP for 2015 raising eyebrows of the international investor. Budget deficit for 2016E was estimated to be c.5.9% of GDP which is again high compared to international standards. For 2016 the Government’s budget proposals targeted a very optimistic revenue growth of 38% while significantly increasing public investments. Low tax to GDP: Sri Lanka’s lagging performance in tax collection is another recent problem faced by the Government. In 2014, Tax to GDP ratio hit a new low of 10.4% down almost 3% since 2006. At the same time, Sri Lanka’s per capita GDP has increased by over 2.75 times (2006 – USD 1,423 and 2015 USD 3,924). These trends suggest an inverse relationship between the two variables. Sri Lanka’s tax revenue to GDP ratio is an anomaly, both in comparison to other middle-income countries and its trend over time. In 2015 the Government revenue performance improved thanks to several one off taxes and the significant expansion in revenue from excise duties on substantially increased motor vehicle imports. IMF deal may bring about some amount of fiscal consolidation: With the Government reaching a staff level agreement with the IMF have been taken to bring about fiscal consolidation. On the 2nd May Government raised the VAT to 15%, targeted to cut cost and restructure state owned enterprises thereby reducing the budget deficit to 5.4%. Finally on the 3rd June 2016 IMF Board level approval was received the IMF program in Sri Lanka. 8 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Government Borrowings remain high: With the Government’s current borrowing requirement, Moody’s expect Sri Lanka’s debt to GDP to jump back up to c.78% by 2016E compared 71% in 2014. Government’s debt to GDP climbed to 76% during 2015. In 2015 net credit to the Government climbed by 22.5%YoY and credit to public corporations increased by 17.2%YoY, while in 2016 up to March net credit to the Government increased by 21.1%YoY and credit to public corporations climbed by 6.2%YoY. With liquidity drying up in the system CBSL holdings shot up to cover the maturities in Treasury Bills and Bonds and also to cater to the capital and interest payment of foreign borrowings. 2.4 Tight monetary policy may continue during 2016 Figure 14: SL GDP Growth Forecasts SL GDP Growth Forecasts CBSL World Bank IMF ADB Average 2015 4.8% 2016E 5.5% 5.6% 5.0% 5.3% 5.4% 2017E 6.3% 6.0% 5.0% 5.8% 5.8% Gradual slowdown in spending: Consumer credit segment is likely to remain throughout 2016. With the heavy depreciation of the rupee, increased VAT, SRR hike, policy rate hike and Bank Loan to Value ratio being reduced to 70% it is likely to put the brakes on the consumer spending on a gradual note leading to a gradual reduction in the trade gap. However, the results of measures taken may affect only towards the 2H2016. Low Liquidity: Current Market liquidity levels are significantly low which will result in considerable slowdown in private sector credit growth. Government’s borrowing requirement is currently mopping out whatever liquidity that is left in the system. Once IMF facility and other international borrowing come in place borrowing pressure from the Government side may ease off. 2.5 VAT hike to impact bottom line VAT increased to 15%: Value Added Tax (VAT) on financial services from 12% to 12.5% and raise Nation Building Tax by additional 2%. “Our estimations suggest an incremental impact of approximately LKR 7bn from the proposed change in taxes for the banking sector”. 9 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 3.0 NPLs to jump from current low levels NPLs to be on the rise in 2H2016 onwards: We expect Banking sector non-performing loans to increase with increase in the interest rate and weak economic conditions. Non-performing loans and GDP always have negative relationship. Downturn in the economy growth, rupee depreciation and the rise in interest rate contributes to increase in the Non-Performing loans. Figure 15: Gross NPLs vs. GDP Growth 10.0% 8.0% Figure 3: CBSL Holdings of Government Securiti 6.0% 4.0% 2.0% 0.0% -2.0% 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -4.0% Gross Non-performing Advances Ratio GDP Growth (Source: CBSL, Company annual & quarterly report Economic growth related asset quality may depreciate: With the current slowdown in economic conditions and tight monetary policy, we expect NPLs to increase marginally in 2016E and 2017E due to deprived growth momentum negatively affecting sector profitability. Non-performing advances of Commercial banking sector has been lying low over the past few years due to favorable macro-economic environment. Figure 16: Gross NPLs as at 2015 has fallen significantly compared to 2015 S 8% 6% 4.7% 4.8% 4.3% 3.6% 4% 2.4% 2% 2.7% 2.8% 3.7% 2.4% 2.4% 1.6% 0% SAMP HNB COMB NTB NDB SEYB PABC UBC DFCC BOC PB 2014 2015 (Source: Quarterly reports) 10 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Rise in interest rates to further affect NPLs: Interest rates and NPL always has inverse relationship. NPL always increase during rising in interest period. However, in 2015 there was notable absorption risk in the credit portfolio with credit being primarily distributed among the construction (17%), trading (15%), manufacturing (11%), and agriculture & fishing (9%) sectors, which accounted for more than 52% of the total credit portfolio. Figure 17: Gross NPLs as at 2015 6% 250 5% 191 4% 200 165 153 3% 150 117 2% 99 100 1% 0% 50 2011 2012 2013 Gross NPL Volume (LKR. Bn) 2014 2015 Gross NPL Ratio (%) (Source: CBSL) 11 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 4.0 Selected Banks to have lowest adverse impact through cost management, higher core income and better asset quality. 4.1 Effective profitability cost-income management to thrive We expect selected banking counters to perform exceptionally well through improved cost management strategies and continuous progress towards achieving greater core income through developed marketing abilities and diversity in income generation. Figure 18: Cost to Income ratio 100% 90% 80% 70% 60% 50% 40% 30% SAMP HNB COMB NTB NDB SEYB PABC UBC DFCC BOC 2014 PB 2015 (Source: Annual reports) Effective cost management: Selected banking counters have managed to enhance their profitability by enhancing the efficiency of operations by reducing the cost. Further, implementation of lean management philosophy has also enabled them to lower cost through enhancing automation of activities and efficiency of the routine work. Figure 19: Revenue Per Employee 10.00 8.00 6.00 4.00 2.00 0.00 SAMP HNB COMB NTB NDB SEYB PABC UBC DFCC BOC 2014 PB 2015 (Source: Annual reports) 12 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Diversity in Income generation: Banks with diversified income sources where income generation is done through different sources have greater ability of maintaining stable profitability. Despite the lowering margins these counters have been able to improve profitability through income sources. Figure 20: NII+Fee Based Income as a % of Total Income 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% SAMP HNB COMB NTB NDB SEYB PABC UBC DFCC BOC 2014 2015 Figure 21: Fee Based Income as a % of Total Income Figure 22: Net Interest Income as a % of Total Income 25% 80% 20% 75% 15% 70% 10% 65% 5% 60% 0% 55% 2014 2015 2014 2015 13 PB “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 5.0 FC Research Commercial Banking Sector on a HOLD with a 15% Return over 1Year 5.1 Sri Lanka Banks are still cheaper compared to other banks in frontier markets but increased interest rates dampen returns MSCI Frontier Market Index: Sri Lanka’s banks are still behind most of the peers in MSCI Frontier Market Index reflecting a potential for further price upside. This may attract foreign investors providing greater returns compared to other banks in frontier markets. Figure 23: PER Comparison with Banks in MSCI Frontier Markets Index Figure 24: PBV Comparison with Banks in MSCI Frontier Markets Index 17.02 2.23 Figure 3: Gross NPLs as of 9M20 Figure15.79 3: Gross 15 NPLs as of 9M20 1.81 12.56 1.8 1.67 10.44 1.14 0.83 0.76 0.64 United Bank for Africa PLC Al-Salam Bank Zenith Bank PLC Burgan Bank SAK 0.45 (Source: Bloomberg and MSCI) (Source: Bloomberg and MSCI) Figure 25: Forward PER of FC Research Coverage Halyk Savings Bank of Kazakhstan JSC Sri Lankan Banks National Bank of Kuwait SAKP MCB Bank Ltd Attiarwafa Bank 2.41 Bank Muscat SAOG 4.05 Equity Bank Ltd Zenith Bank PLC Sri Lankan Banks 1.1 0.85 4.52 Bank Muscat SAOG 5.78 Halyk Savings Bank of Kazakhstan JSC United Bank for Africa PLC 6.9 Equity Bank Ltd MCB Bank Ltd National Bank of Kuwait SAKP Al-Salam Bank Attiarwafa Bank Burgan Bank SAK 8.3 Figure 26: Forward PBV of FC Research Coverage 1.5x 8.4x 7.3x 1.3x 7.7x 7.3x 5.9x 6.1x 5.3x 1.0x 6.3x 0.8x 4.4x 0.9x 9% 6% 1.0x (Source: (Source:FCFCResearch ResearchEstimates) Estimates) Figure 28: CASA Improvement Figure 27: Dividend Yield 2016E 7% 1.0x 0.7x (Source: FC Research Estimates) 6% 0.9x 60% 7% 5% 5% 3% 4% 50% 40% 30% 20% 2014 50% 47% 2015 46% 46% 41% 36% 32% 25% 28% 18% 19% 10% 0% (Source: FC Research Estimates (Source: Quarterly reports) 14 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Recomme ndation Stock Commercial Bank - Voting Commercial Bank - Non-Voting Hatton National Bank - Voting Hatton National Bank - Non Voting Sampath Bank National Development Bank Nations Trust Bank Seylan Bank - Voting Seylan Bank - Non-Voting Banking Sector Universe COMB.N COMB.X HNB.N HNB.X SAMP.N NDB.N NTB.N SEYB.N SEYB.X HOLD BUY SELL HOLD S.BUY SELL S.BUY HOLD HOLD HOLD Mkt. Cap (LKR mn) 107,922 107,922 71,273 71,273 41,591 28,359 17,918 15,856 15,856 Price 129.6 111.7 216.0 175.0 235.0 171.7 77.7 90.1 63.1 Target Upside Price (%) 139.0 120.0 225.0 182.0 291.0 163.0 95.0 101.0 70.0 PER (x) PBV (x) 2016E 2017E 2016E 2017E DPS 2016E 8.4x 7.3x 7.3x 5.9x 5.3x 7.7x 6.1x 6.3x 4.4x 7.6x 6.6x 6.3x 5.1x 4.5x 5.8x 5.3x 5.4x 3.8x 1.5x 1.3x 1.0x 0.8x 0.9x 0.9x 1.0x 1.0x 0.7x 1.3x 1.2x 0.9x 0.7x 0.9x 0.8x 0.9x 0.9x 0.6x 8.3 8.3 10.4 10.4 15.5 14.8 2.4 3.5 3.5 7% 7% 4% 4% 24% -5% 22% 12% 11% 10% Dividend Total Yield Return 2016E 6% 14% 7% 15% 5% 9% 6% 10% 7% 30% 9% 4% 3% 25% 4% 16% 6% 16% 5% 15% Banking Sector Average Return to be 15% over 1 Year period falls below expected market return: Sri Lanka’s Banking Sector capital gain may provide a return of 9.5% while the dividend yield is c.5.5%. In comparison to the 1 Year T-Bill which provides a return of 10.5% we believe the expected return in the equity market to be estimated 18.5% (with an 8% risk premium). Therefore the Banking Sector is recommended a HOLD. *[However, individual stock expected return differs on categorization] Categorization Company Category Strong Buy Buy Hold Sell Grade A S&P SL20 Companies T.Bill + 10% & Above T.Bill + 5% & Above T.Bill + 1% & Above Below T.Bill + 1% Grade B Rest of the Companies T.Bill + 13% & Above T.Bill + 8% & Above T.Bill + 3% & Above Below T.Bill + 3% Grade C Companies less than LKR 1Bn Market Cap T.Bill + 16% & Above T.Bill + 11% & Above T.Bill + 6% & Above Below T.Bill + 6% 5.2 FC Research Top Banking Sector Buys: SAMP, NTB – Strong Buy, COMB.X - Buy Sampath Bank (Target Price: 291, Total Return: +30 %): NTB’s high yielding market leadership in credit card business and leasing portfolio is expected to maintain its NIM above its peers despite operating in a lower interest rate regime. Further, higher fee based income may also expect to assist bank to thrive its topline. [Refer Figure 18 & 19 for detailed analysis] Expected SAMP price for 2016E PER based target price - Voting Justified PBV based target price - Voting Average Target Price 306.2 275.6 290.9 P/E 31 Dec 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 16,781 18,550 23,667 26,692 30,860 5,264 6,623 7,926 9,681 11,551 EPS (LKR) 31.3 38.4 44.4 52.0 59.1 YoY % Growth 45% 26% 20% 22% 19% PER (x) 7.5x 6.1x 5.3x 4.5x 4.0x PBV (x) 1.1x 1.0x 0.9x 0.9x 0.8x Dividend Yield (%) 4.7% 5.5% 6.6% 7.7% 8.8% Net Profit (LKR mn) Valuations NAVPS 205.5 227.0 248.7 273.3 295.7 Adjusted DPS (LKR) 11.0 13.0 15.5 18.2 20.7 Dividend Payout 35% 34% 35% 35% 35% 15 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Expected NTB price for 2016E PER based target price - Voting Justified PBV based target price - Voting Average Target Price 110.1 80.0 95.1 Nations Trust Bank (Target Price: 95, Total Return: +25%): NTB’s market leadership in credit card business has led bank to maintain its NIM at appropriate levels despite its large leasing portfolio. With the rise in interest rates we spreads to increase by at least 40bps with deposits re-pricing faster than its loan book. We expect NTB to continuously work on improving its cost-to- income and while fee based income growth is also expecting remain in line with the Bank’s historic growth rates. [Refer Figure 18 & 19 for detailed analysis] P/E 31 Dec 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 8,940 9,105 10,048 11,286 12,567 Net Profit (LKR mn) 2,536 2,614 2,936 3,402 3,982 EPS (LKR) 11.0 11.3 12.7 14.7 17.1 YoY % Growth 19% 3% 12% 16% 17% PER (x) 7.1x 6.9x 6.1x 5.3x 4.5x PBV (x) 1.5x 1.3x 1.2x 1.0x 0.9x Valuations Dividend Yield (%) 2.7% 2.7% 3.1% 3.8% NAVPS 60.3 65.8 76.1 87.5 100.7 2.1 2.1 2.4 2.9 3.6 19% 19% 19% 20% 21% Adjusted DPS (LKR) Dividend Payout 4.6% Commercial Bank Non-Voting (Target Price: 120, Total Return: +15%): Expected COMB price for 2016E PER based fair value- Voting Justified PBV based fair value - Voting Average fair value Voting non-voting Spread Average fair value - Non-voting P/E 31 Dec 169 107 138 13% 120 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 27,320 30,567 37,203 41,914 47,016 Recurring net Profit (LKR mn) 11,239 11,855 13,853 15,699 17,766 7,566 11,855 13,853 15,699 17,766 Net Profit (LKR mn) Recurring EPS (LKR) 12.9 13.4 15.3 17.0 18.8 EPS (LKR) 8.7 13.4 15.3 17.0 18.8 Recurring Profit YoY % Growth 6% 5% 17% 13% 13% Voting - PER (x) 14.8x 9.6x 8.4x 7.5x 6.8x Voting - PBV (x) 1.7x 1.6x 1.5x 1.3x 1.2x Voting - Dividend Yield (%) 5.0% 5.0% 6.5% 7.2% 7.9% Non-Voting - PER (x) 13.0x 8.4x 7.4x 6.6x 6.0x Non-Voting - PBV (x) 1.5x 1.4x 1.3x 1.2x 1.1x Non-Voting - Dividend Yield (%) 5.7% 5.7% 7.3% 8.1% 9.0% NAVPS 77.4 80.3 88.1 96.7 106.1 6.4 6.4 8.3 9.2 10.2 50% 48% 54% 54% 54% Valuations Adjusted DPS (LKR) Dividend Payout 16 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 5.3 FC Research Banking Sector HOLD List: COMB.N, HNB.X, SEYB.N, SEYB.X Commercial Bank Voting (Target Price: 138, Total Return: +14%) Expected COMB price for 2016E P/E 31 Dec PER based fair value- Voting Justified PBV based fair value - Voting Average fair value Voting non-voting Spread Average fair value - Non-voting 169 107 138 13% 120 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 27,320 30,567 37,203 41,914 47,016 Recurring net Profit (LKR mn) 11,239 11,855 13,853 15,699 17,766 7,566 11,855 13,853 15,699 17,766 12.9 13.4 15.3 17.0 18.8 EPS (LKR) 8.7 13.4 15.3 17.0 18.8 Recurring Profit YoY % Growth 6% 5% 17% 13% 13% Voting - PER (x) 14.8x 9.6x 8.4x 7.5x 6.8x Voting - PBV (x) 1.7x 1.6x 1.5x 1.3x 1.2x Voting - Dividend Yield (%) 5.0% 5.0% 6.5% 7.2% 7.9% Non-Voting - PER (x) 13.0x 8.4x 7.4x 6.6x 6.0x Non-Voting - PBV (x) 1.5x 1.4x 1.3x 1.2x 1.1x Non-Voting - Dividend Yield (%) 5.7% 5.7% 7.3% 8.1% 9.0% NAVPS 77.4 80.3 88.1 96.7 106.1 6.4 6.4 8.3 9.2 10.2 50% 48% 54% 54% 54% Net Profit (LKR mn) Recurring EPS (LKR) Valuations Adjusted DPS (LKR) Dividend Payout Hatton National Bank Non-Voting (Target Price: 182, Total Return: +10%): Expected HNB price for 2016E 0 PER based target price Justified PBV based target price Average Target Price - Voting 0 192 259 225 Spread 20% Average Target Price - Non-Voting 182 P/E 31 Dec 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 27,320 30,567 37,203 41,914 47,016 Recurring net Profit (LKR mn) 11,239 11,855 13,853 15,699 17,766 7,566 11,855 13,853 15,699 17,766 12.9 13.4 15.3 17.0 18.8 EPS (LKR) 8.7 13.4 15.3 17.0 18.8 Recurring Profit YoY % Growth 6% 5% 17% 13% 13% 14.8x 9.6x 8.4x 7.5x 6.8x Net Profit (LKR mn) Recurring EPS (LKR) Valuations Voting - PER (x) Voting - PBV (x) 1.7x 1.6x 1.5x 1.3x 1.2x Voting - Dividend Yield (%) 5.0% 5.0% 6.5% 7.2% 7.9% Non-Voting - PER (x) 13.0x 8.4x 7.4x 6.6x 6.0x Non-Voting - PBV (x) 1.5x 1.4x 1.3x 1.2x 1.1x Non-Voting - Dividend Yield (%) 5.7% 5.7% 7.3% 8.1% 9.0% NAVPS 77.4 80.3 88.1 96.7 106.1 6.4 6.4 8.3 9.2 10.2 50% 48% 54% 54% 54% Adjusted DPS (LKR) Dividend Payout 17 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Seylan Bank Voting (Target Price: 101, Total Return: +16%) and Non-Voting (Target Price: 70, Total Return: +16%): P/E 31 Dec Expected SEYB price for 2016E PER based target price Justified PBV based target price Average Target Price Voting non-voting Spread Average Target Price 120 81 101 30% 70 Net Interest Income (LKR mn) Net Profit (LKR mn) EPS (LKR) YoY % Growth 2014 2015E 2016E 2017E 2018E 11,199 11,857 15,693 17,636 20,030 3,178 3,847 4,564 5,496 6,418 9.2 11.3 13.4 16.1 18.8 37% 21% 19% 20% 17% 9.8x 8.0x 6.7x 5.6x 4.8x Valuations Voting - PER (x) Voting - PBV (x) 1.2x 1.2x 1.0x 0.9x 0.8x Voting - Dividend Yield (%) 2.8% 2.8% 3.7% 4.4% 5.2% Non-Voting - PER (x) 7.4x 6.0x 5.1x 4.2x 3.6x Non-Voting - PBV (x) 0.9x 0.9x 0.8x 0.7x 0.6x Non-Voting - Dividend Yield (%) 3.7% 3.7% 4.9% 5.9% NAVPS 73.0 76.2 86.1 98.1 112.0 2.5 2.5 3.3 4.0 4.7 27% 22% 25% 25% 25% Adjusted DPS (LKR) Dividend Payout 6.8% 18 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 5.4 FC Research Banking Sector SELL List: HNB.N, NDB.N Hatton National Bank Voting ((Target Price: 225, Total Return: +9%) : Expected HNB price for 2016E P/E 31 Dec PER based target price Justified PBV based target price Average Target Price - Voting 0 192 259 225 Spread 20% Recurring EPS (LKR) Average Target Price - Non-Voting 182 0 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 27,320 30,567 37,203 41,914 47,016 Recurring net Profit (LKR mn) 11,239 11,855 13,853 15,699 17,766 7,566 11,855 13,853 15,699 17,766 Net Profit (LKR mn) 12.9 13.4 15.3 17.0 18.8 EPS (LKR) 8.7 13.4 15.3 17.0 18.8 Recurring Profit YoY % Growth 6% 5% 17% 13% 13% Voting - PER (x) 14.8x 9.6x 8.4x 7.5x 6.8x Voting - PBV (x) 1.7x 1.6x 1.5x 1.3x 1.2x Voting - Dividend Yield (%) 5.0% 5.0% 6.5% 7.2% 7.9% Non-Voting - PER (x) 13.0x 8.4x 7.4x 6.6x 6.0x Non-Voting - PBV (x) 1.5x 1.4x 1.3x 1.2x 1.1x Non-Voting - Dividend Yield (%) 5.7% 5.7% 7.3% 8.1% 9.0% NAVPS 77.4 80.3 88.1 96.7 106.1 6.4 6.4 8.3 9.2 10.2 50% 48% 54% 54% 54% Valuations Adjusted DPS (LKR) Dividend Payout National Development Bank (Target Price: 163, Total Return: +4%) Expected NDB price for 2016E PER based target price Justified PBV based target price Average Target Price P/E 31 Dec 119.5 207.0 163.2 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 7,913 7,807 10,608 11,791 13,296 Net Profit (LKR mn) 4,134 3,542 3,474 4,488 4,921 EPS (LKR) 25.0 21.4 21.2 27.3 30.0 YoY % Growth 56% -14% -2% 29% 10% 6.9x 8.1x 8.2x 6.3x 5.8x Valuations PER (x) PBV (x) 1.0x 1.0x 0.9x 0.8x 0.7x Dividend Yield (%) 6.4% 8.1% 6.1% 7.9% 8.7% NAVPS 168.8 171.8 188.6 208.8 246.0 Adjusted DPS (LKR) 11.0 14.0 10.6 13.7 15.0 Dividend Payout 44% 65% 50% 50% 50% 19 “Multiple Shocks Dampen Beat” FC Research Banking Sector Report – 2016 Appendices Appendix: 1 Appendix: 2 Capital adequacy ratios are well above the minimum requirements by CBSL Higher branch network may assist banks to improve their profitability by maintaining higher deposit base Figure 29: Tier 1 and Tier 2 as at 2015 Figure 30: Number of Branches 30.00% 25.00% 833 Tier 1 Tier 2 578 20.00% 15.00% 225 10.00% 249 264 159 92 5.00% 0.00% 93 137 79 64 SAMP HNB COMB NTB NDB SEYB PABC UBC DFCC BOC V (Source: Quarterly reports) PB (Source: Quarterly reports) 20 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana SAMPATH BANK PLC SAMP.N0000 Current Price: LKR 235.0 STRONG BUY Fair Values: LKR 291.0 JUNE 2016 “Profitability Driven by Higher Market Share” KEY DATA Share Price (LKR) 235.00 52w High/Low (LKR) P/E 31 Dec 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 16,781 18,550 23,667 26,692 30,860 5,264 6,623 7,926 9,681 11,551 EPS (LKR) 31.3 38.4 44.4 52.0 59.1 41,591 YoY % Growth 45% 26% 20% 22% 19% Valuations 272.5/204.5 Average Daily Volume (Shares) 68,607 Average Daily Turnover (LKR mn) 16.85 Issued Share Capital (Shares mn) Market Capitalisation (LKR mn) Price Performance (%) Net Profit (LKR mn) 1 mth 3 mths 12mths 0.9% 5.8% -7.8% PER (x) 7.5x 6.1x 5.3x 4.5x 4.0x -2.4% 9.0% Major Shareholders as at 31st Mar 2016 -7.5% PBV (x) 1.1x 1.0x 0.9x 0.9x 0.8x Dividend Yield (%) 4.7% 5.5% 6.6% 7.7% 8.8% SAMP ASPI Vallibel One 14.95% Y. S. H. I Silva 9.98% Employees Provident Fund 9.97% Rosewood (Pvt) Ltd 6.79% NAVPS 205.5 227.0 248.7 273.3 295.7 Adjusted DPS (LKR) 11.0 13.0 15.5 18.2 20.7 Dividend Payout 35% 34% 35% 35% 35% HSBC Intl. Nom Ltd- MATTHEWS Asia Growth Fund 4.58% Public Holdings 83.31% Figure 1: SAMP.N Price Volume Graph 900 280 800 270 700 260 600 250 500 240 400 230 300 220 200 210 100 200 0 Volume - ' 000 Price 290 Volume Price Disclaimer on Shareholding: First Capital does not hold positions in SAMP nor does First Capital envisage taking positions in this share for the succeeding 7 trading days to this report. SAMP as the 3rd largest private sector commercial bank in Sri Lanka with an asset base of LKR 386Bn is likely to maintain its aggressive earnings growth trajectory to reach a CAGR of c.21% over 2015-18E. Amidst the tight liquidity levels in the market we expect a more moderate growth in the loan book for 2016E of 16%YoY. We expect SAMP register total returns of 30% with a capital gain of 24% and a dividend yield of 7%. Net profit up 20% to LKR 7.9Bn 2016E: : We forecast 2016E net earnings to increase by 20%YoY to LKR 7.9Bn and 2017E earnings to rise by 22%YoY to LKR 9.6Bn. With market interest rates increasing by c.300 bps during 2016 we expect yields to be rising at a faster pace than its cost of funding leading SAMP NIMs decline to bottom out and improve with higher interest spreads. We believe SAMP Net Interest Spreads are likely to grow by 50bps gradually over the next couple of quarters. ROE of 19% driven by profit growth of 20% in 2016E: We expect SAMP’s cost-to-income ratio to reach 48% in 2016E as opposed to 52% in 2015 largely on account of the growth in higher income base together with effective cost management translating into an average return on equity of 19% in 2016E. FCE recommends a STRONG BUY on SAMP with a total return of 30% on a 1-year time horizon: At LKR 233.5, SAMP trades at 2016E PER of 5.3x. Our target price of LKR 291.0 (24% Capital Gain) and dividend yields of 6% will provide a 1-year total return of 30%. 21 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana Income Statement - (LKR Mn) 2014 2015 Income 45,981 49,443 70,140 76,099 83,317 Interest income 39,696 39,706 59,134 63,292 68,414 Less: Interest expenses 22,915 21,156 35,467 36,600 37,554 Net interest income 16,781 18,550 23,667 26,692 30,860 5,133 6,621 7,415 8,602 9,978 Fee and commission income Less: Fee and commission expenses Net fee and commission income Net interest, fee and commission income Net trading income 2016E 2017E 2018E 873 1,204 1,631 1,720 1,996 4,259 5,417 5,784 6,881 7,983 21,040 23,968 29,451 33,574 38,843 413 (341) (375) (413) (454) Other operating income 1,153 3,116 3,590 4,205 4,925 Total Operating income 22,606 26,742 32,666 37,365 43,313 Less: Impairment charge/(reversal) for loans and other losses (1,581) (2,718) (1,179) (1,288) Net operating income 21,026 25,749 29,947 36,186 42,024 (993) OPERATING EXPENSES Personnel expenses 5,341 6,524 7,576 8,670 9,917 Depreciation of property & equipment - - - - - Amortisation of intangible assets - - - - - 6,839 7,438 8,211 9,061 9,994 12,180 13,962 15,787 17,731 19,911 Operating profit before value added tax (VAT) and nation 8,845 building tax 11,787 (NBT) on financial 14,160 services 18,455 22,113 Other operating expenses Less: VAT & NBT on financial services 1,598 1,998 2,826 4,611 5,445 Operating profit after value added tax (VAT) 7,247 9,790 11,334 13,844 16,668 PROFIT BEFORE INCOME TAX 7,247 9,790 11,334 13,844 16,668 Less: Income tax expense 1,979 3,161 3,400 4,153 5,000 PROFIT FOR THE YEAR 5,268 6,628 7,934 9,691 11,668 Profit attributable to Equity holders of the Bank 5,264 6,623 7,926 9,681 11,551 Profit attributable to Non-controlling interests 4 5 8 10 117 PROFIT FOR THE YEAR 5,268 6,628 7,934 9,691 11,668 EPS 31.35 38.44 44.37 51.96 59.10 22 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana Statement of Financial Position - (LKR Mn) 2014 2015 2016E 2017E 2018E Cash and cash equivalents 11,645 13,713 18,602 15,942 14,331 Balances with Central Bank of Sri Lanka 17,607 21,342 29,835 34,591 40,471 1,792 5,193 5,817 6,515 7,296 31,285 - 40,146 46,971 58,189 ASSETS Placements with Banks Reverse repurchase agreements Derivative financial instruments Financial investments Loans and receivables from banks 177 319 449 526 616 36,615 55,801 32,405 37,950 44,445 935 1,651 1,181 1,658 1,940 309,569 386,278 448,761 525,588 615,566 24,026 33,368 28,339 33,156 38,793 8,389 8,697 9,090 9,534 10,035 Intangible assets 394 368 457 447 523 Deferred tax asset 23 23 28 34 40 4,151 4,575 4,942 5,337 5,764 442,790 538,647 613,673 710,770 829,239 2,509 3,418 3,306 3,868 4,526 12,500 8,663 4,488 5,256 6,156 52 457 2,418 2,418 2,418 339,679 407,164 472,310 552,603 646,545 43,611 65,171 75,570 82,890 96,982 9,835 14,571 11,051 12,697 14,583 408,186 499,444 569,142 659,732 771,209 4,470 5,381 5,549 5,754 5,997 25,666 29,103 29,499 29,983 29,685 Total equity attributable to equity holders of the Bank 34,511 39,109 44,428 50,925 57,801 95 103 112 229 Loans and receivables from other customers Other loans & receivables Property plant and equipment Other assets Total assets LIABILITIES Due to banks Securities sold under re-purchase agreements Derivative financial instruments Due to other customers Debt issued and other borrowed funds Other liabilities Total Liabilities EQUITY Stated capital Researves Non-controlling interests Total Equity Total Liabilities and Equity NAVPS 92 34,604 39,203 44,531 51,038 58,030 442,790 538,647 613,673 710,770 829,239 206 227 249 273 296 23 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana NATIONS TRUST BANK PLC NTB.N0000 Current Price: LKR 77.7 STRONG BUY Fair Value: LKR 95.0 JUNE 2016 “Focus SME Growth” KEY DATA Share Price (LKR) 77.70 52w High/Low (LKR) 107.9/73.0 Average Daily Volume (Shares) 30,358 P/E 31 Dec 2014 2015 2016E 2017E 2018E Net Interest Income (LKR mn) 8,940 9,105 10,048 11,286 12,567 Net Profit (LKR mn) 2,536 2,614 2,936 3,402 3,982 Average Daily Turnover (LKR mn) 2.74 Issued Share Capital (Shares mn) 230.6 EPS (LKR) 11.0 11.3 12.7 14.7 17.1 Market Capitalisation (LKR mn) 17,918 YoY % Growth 19% 3% 12% 16% 17% Price Performance (%) 1 mth 3 mths 12mths Valuations NTB -10.1% 5.0% -17.9% PER (x) 7.1x 6.9x 6.1x 5.3x 4.5x -2.4% 9.0% Major Shareholders as at 31st Mar 2016 -7.5% PBV (x) 1.5x 1.3x 1.2x 1.0x 0.9x 4.6% ASPI Dividend Yield (%) 2.7% 2.7% 3.1% 3.8% John Keells Holdings PLC 20.00% NAVPS 60.3 65.8 76.1 87.5 100.7 HWIC Asia Fund 15.00% Adjusted DPS (LKR) 2.1 2.1 2.4 2.9 3.6 19% 19% 19% 20% 21% Mackinnons Keells Limited 9.90% Dividend Payout Central Finance Company PLC A/C No 03 8.98% Janashakthi General Insurance Limited 8.06% Nations Trust Bank, one of the fastest growing commercial bank, captures a target price of LKR 97.0 with earnings CAGR of 15% 2015-18E. NTB’s loan book is expected to grow by 18% to LKR 143Bn in 2016E. NTB’s market leadership in credit card business has led bank to maintain its NIM at appropriate levels. FCR expects total return of 25% with a capital gain of 22% and a dividend yield of 3%. Public Holdings 34.85% Figure 1: NTB.N Price Volume Graph 400 Price Volume ('000) 110 105 100 300 95 90 200 Spreads to improve in 2016E: NTB’s market leadership in credit card business has led bank to maintain its NIM at appropriate levels despite its large leasing portfolio. With the rise in interest rates we spreads to increase by at least 40bps with deposits repricing faster than its loan book. We expect NTB to continuously work on improving its cost-to- income and while fee based income growth is also expecting remain in line with the Bank’s historic growth rates. 85 80 100 75 70 - Volume ('000) Price Disclaimer on Shareholding: First Capital Limited holds 475,000 shares and affiliated Unit Trusts hold 40,000 shares in NTB. Neither First Capital Equities (Pvt) Ltd nor related entities have traded in the shares in the three trading days prior to this document, and will not trade in the shares for seven trading days following the issue of this document. Capturing lending Market Share: Despite the loan growth we expect NTB’s loan growth to be c.18% to LKR 143Bn. Loan growth is likely to emerge from retail & SME lending segments. NTB’s credit card lending would continue to enhance banks NIMs due to higher interest rate. SME focus: NTB is planning to further strengthen SME in the coming years with emphasis increasing on process efficiencies and relationship-driven marketing. The strategy to growth in SMEs representing all regions and industry sectors. FCE recommends a STRONG BUY on NTB with a total return of 25% on a 1year time horizon: At LKR 77.70, NTB trades at a 2016E PER of 6.1x. Our target price of LKR 95.0(+22% Capital Gain) and dividend yield of 3% will provide a 1-year total return of 25%. 24 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana Income Statement Interest Income Interest Expense Net Interest Income 2014 2015 2016E 2017E 2018E 17,452 (8,513) 8,940 16,628 (7,523) 9,105 22,075 (12,027) 10,048 23,691 (12,405) 11,286 26,562 (13,995) 12,567 3,008 (225) 2,783 3,438 (236) 3,201 4,547 (359) 4,188 5,375 (425) 4,951 6,370 (503) 5,867 111 282 12,116 (94) 307 12,519 188 352 14,775 252 395 16,884 172 503 19,108 1,157 985 1,165 1,124 823 10,959 11,534 13,610 15,760 18,285 Personnel Expenses Depreciation of Property, Plant and Equipment Amortization of Intangible Assets Other Operating Expenses Total Operating Expenses 2,700 324 171 3,192 6,388 2,883 375 242 3,362 6,862 3,302 383 243 3,866 7,794 3,858 437 274 4,446 9,015 4,468 513 305 5,113 10,399 Operating Profit Before Value Added Tax (VAT) 4,571 4,673 5,816 6,745 7,886 Value Added Tax (VAT) on Financial Services Profit Before Income Tax Income Tax Expense Profit for the Year 744 3,827 1,290 2,536 767 3,906 1,291 2,614 1,368 4,448 1,512 2,936 1,590 5,155 1,753 3,402 1,853 6,033 2,051 3,982 11.0 11.3 12.7 14.7 17.1 Fees and Commission Income Fees and Commission Expense Net Fees and Commission Income Net Trading Income Other Operating Income Total Operating Income Impairment Charge / (Reversal ) for Loans and Advances Net Operating Income EPS 25 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana Statement of Financial Position 2014 2015 Assets Cash and Cash Equivalents Balances with Central Bank of Sri Lanka Reverse Repurchase Agreements Derivative Financial Instruments Financial Assets - Held for Trading Financial Assets -Avalable for Sale Financial Assets - Held to Maturity Other Financial Assets Loans and Advances to Customers Other Assets Property, Plant and Equipment Intangible Assets Total Assets 6,900 3,992 11,014 128 15,700 4,329 9,653 3,821 98,347 2,506 2,194 1,284 159,869 6,392 5,284 302 554 2,044 16,533 12,744 6,511 121,143 1,386 2,144 1,224 176,261 7,607 9,259 4,572 287 3,048 15,241 6,096 143,360 5,734 2,264 1,260 198,729 6,763 11,950 5,532 339 5,532 16,597 7,376 169,592 6,784 2,783 1,267 234,517 6,930 14,101 6,528 403 7,616 14,144 8,704 201,697 8,068 3,317 1,244 272,753 Liabilities Due to Banks Repurchase Agreements Derivative Financial Instruments Due to Customers Debt Issued and Other Borrowed Funds Current Tax Liabilities Other Liabilities Deferred Tax Liabilities Total Liabilities 2,923 15,047 166 111,010 10,189 666 5,559 413 145,973 2,276 10,406 53 129,158 12,974 426 5,064 733 161,090 2,458 8,602 61 152,407 10,503 1,113 5,267 769 181,180 2,655 13,567 71 184,412 6,141 1,114 5,477 808 214,244 2,867 12,102 81 217,606 9,020 1,114 5,696 848 249,334 5,101 538 8,151 105 13,896 5,101 661 9,336 73 15,171 5,101 863 10,983 602 17,549 5,102 1,098 12,857 1,214 20,272 5,103 1,373 15,012 1,931 23,419 159,869 176,261 198,729 234,517 272,753 60 66 76 88 101 Equity Attributable to Equity Holders of the Parent Stated Capital Statutory Reserve Fund Retained Earnings Other Reserves Total Equities Total Liabilities and Equity NAVPS 2016E 2017E 2018E 26 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana COMMERCIAL BANK COMB.N0000 COMB.X0000 Current Price: LKR 129.6 Current Price: LKR 111.7 HOLD (V)/ BUY (NV) Fair Value: LKR 139 Fair Value: LKR 120 HOLD BUY JUN 2016 “Higher NIMs & Cost Management is Key” KEY DATA Share Price V/NV (LKR) 129.6/111.7 52w High/Low (LKR) (Voting) 173.0/113.3 136.8/99.9 52w High/Low (LKR) (Non-Voting) 37.7/2.9 Average Daily Turnover (LKR mn) V/NV 832.5 Issued Share Capital (Shares mn) COMB.X 2015 2016E 2017E 2018E 27,320 30,567 37,203 41,914 47,016 11,239 11,855 13,853 15,699 17,766 7,566 11,855 13,853 15,699 17,766 107,922 1 mth 3 mths 12mths Net Profit (LKR mn) 0.7% 6.4% -17.4% -2.2% 0.0% -14.7% 9.0% -7.5% COMB 2014 Net Interest Income (LKR mn) Recurring net Profit (LKR mn) Market Capitalisation (LKR mn) Price Performance (%) P/E 31 Dec 265/22 Average Daily Volume (Shares) V/NV ASPI -2.4% Major Shareholders as at 31st Mar 2016 Voting Recurring EPS (LKR) 12.9 13.4 15.3 17.0 18.8 EPS (LKR) 8.7 13.4 15.3 17.0 18.8 Recurring Profit YoY % Growth 6% 5% 17% 13% 13% Voting - PER (x) 15.0x 9.7x 8.4x 7.6x 6.9x 1.7x 1.6x 1.5x 1.3x 1.2x Valuations DFCC Bank A/C 14.74% Mr.Y.S. H. I. Silva 9.92% Employees Provident Fund 9.70% Sri Lanka Insurance Corporation Ltd. - Life Fund 5.03% Voting - PBV (x) CB NY S/A International Finance Corporation 4.47% Voting - Dividend Yield (%) 5.0% 5.0% 6.4% 7.1% 7.8% 7.28% Non-Voting - PER (x) 12.9x 8.3x 7.3x 6.6x 5.9x Non-Voting Employees Trust Fund Board Non-Voting - PBV (x) 1.4x 1.4x 1.3x 1.2x 1.1x 2.78% Non-Voting - Dividend Yield (%) 5.8% 5.8% 7.4% 8.2% 9.1% 2.48% NAVPS 77.4 80.3 88.1 96.7 106.1 5.78% Funds HSBC Intl. Nominees Ltd. - JPMLU- Franklin Templeton Investment CITY Bank NY S/A Forward International Dividend Fund 3.15% GF Capital Global Limited HINL - JPMCB - Butterfield Trust (Bermuda) Ltd. Public Holdings V/NV 99.6%/99.8% Dividend Payout 4.0 170 3.0 150 2.0 130 1.0 Price 190 Volume - mn Figure 1: COMB.N Price Volume Graph 110 Jun-15 0.0 Oct-15 Volume Feb-16 Jun-16 Price - Voting Volume -mn Figure 2: COMB.X Price Volume Graph Price 0.6 140 130 0.4 120 0.2 110 100 Jun-15 Oct-15 Volume Adjusted DPS (LKR) 0.0 Feb-16 Jun-16 Price - Non-voting Disclaimer on Shareholding: First Capital does not hold positions in COMB nor does First Capital envisage taking positions in this share for the succeeding 7 trading days to this report. 6.4 6.4 8.3 9.2 10.2 50% 48% 54% 54% 54% COMB as the largest private sector commercial bank in Sri Lanka is expected to record c.17%YoY earnings in 2016E. We expect yields to be rising at a faster pace than its cost of funding leading COMB NIMs decline to bottom out and improve with higher interest spreads. We believe COMB Net Interest Spreads are likely to grow gradually over the next couple of quarters. Amidst the tight liquidity levels in the market we expect a more moderate growth in the loan book for 2016 of c.13%YoY. We expect COMB voting and non-voting shares to register total returns of 14% and 15% respectively including dividends over 1 year period. BUY (V), HOLD (NV) NIMs may even out at 4.27% for 2016E: Despite the lower loan growth recorded in 2015, we expect COMB’s loans to grow by 13% to LKR 585Bn in 2016E owing to growing trade related and SME sector borrowing. Being the largest list bank, we expect COMB maintain its high CASA base compared to the industry and rate adjustment to drive net interest income to LKR 37Bn 2016E. ROE of 19% driven by profit growth of 17% in 2016E: We expect COMB’s cost to core income ratio to reach 46% in 2016E as opposed to 48% in 2015 largely on account of the growth in higher income base together with effective cost management translating into an average return on equity of 19% in 2016E. COMB.N & COMB.X to provide likely total returns of 14% & 15%: COMB voting currently trades at 8.4x PER & 1.5x PBV on 2016E earnings while the non-voting counter trades at a 7.3x PER and 1.3x PBV. Our 1-year target price for COMB.N is LKR 139.0 (+7%) and LKR 120.0(+7%) for COMB.X providing a total 1-year return of 14% and 15% respectively including dividend yields of 6% for COMB.N and 7% for COMB.X. HOLD (V), BUY (NV) 27 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana Income Statement P/E 31 December 2014 2015 2016E 2017E 2018E Interest Income 61,933 66,339 86,857 95,931 105,404 Less: Interest Expenses 34,613 35,772 49,654 54,017 58,388 Net Interest Income 27,320 30,567 37,203 41,914 47,016 Fee and Commission Income 5,614 6,330 7,216 8,154 9,214 Fees and Commission Expense 764 4,849 920 5,410 1,082 6,134 1,223 6,931 1,382 7,832 813 200 694 930 Net Fee and Commission Income Net Gain from Trading Net Gain from Financial Investments Other Operating Income (305) 2,273 (237) 1,006 0 1,128 5,024 4,049 5,580 6,706 7,523 39,160 41,534 50,047 56,320 63,499 4,898 4,100 4,631 4,399 4,398 34,262 37,434 45,417 51,921 59,101 Personnel Expenses 8,956 10,261 11,801 13,463 15,353 Other Operating Expenses 6,764 7,161 8,259 9,705 11,187 Total Operating Expenses 15,720 17,421 20,060 23,168 26,540 Operating Profit before Value Added Tax (VAT) 18,542 20,013 25,356 28,753 32,560 Total Operating Income Less: Impairment Charge/(Reversal) for Loans and other Losses Net Operating Income OPERATING EXPENSES Less: Value Added tax (VAT) on Financial Services Operating profit after value added tax (VAT) Share of Profit/(Loss) of Associates (Net of Income Tax) 2,689 2,890 5,574 6,332 7,187 15,853 17,122 19,783 22,421 25,373 7 14 14 14 15 PROFIT BEFORE INCOME TAX 15,860 17,136 19,797 22,435 25,388 Less: Income Tax Expense 4,617 11,243 5,277 11,859 5,939 13,858 6,730 15,704 7,616 17,772 11,239 4 11,243 11,855 4 11,859 13,853 5 13,858 15,699 5 15,704 17,766 6 17,772 12.9 13.4 15.3 17.0 18.8 PROFIT FOR THE YEAR Profit Attributable to Equity Holders of the Bank Non-Controlling Interest PROFIT FOR THE YEAR EPS 28 FC Research SRI LANKA Corporate Update Analyst: Atchuthan Srirangan Wediwardana Statement of Financial Position P/E 31 December 2014 2015 2016E 2017E 2018E ASSETS Cash and Cash Equivalents 20,622 20,107 25,736 43,977 48,928 Balances with Central Banks 19,634 28,221 42,230 49,994 58,993 Placements with Banks 14,508 17,194 19,257 21,568 24,156 Securities Purchased under Resale Agreements 41,198 8,002 8,162 8,978 9,158 460 4,118 1,604 1,893 2,233 6,327 7,656 11,139 13,144 15,510 Derivative Financial Instruments Other Financial Assets Held-For-Trading Loans and Receivables to Banks 551 601 891 1,052 1,241 Loans and Receivables to Other Customers 406,531 509,923 584,550 677,373 785,753 Financial Investments - Available-for-sale 214,225 204,262 256,192 289,163 341,212 50,436 57,724 58,879 67,711 73,128 106 105 103 101 99 11,135 11,181 11,226 11,154 11,153 Intangible Assets 856 884 1,169 1,475 1,853 Leasehold Property 109 107 106 105 103 Other Assets 10,560 12,097 14,852 17,525 20,680 Total assets 797,258 882,183 1,036,095 1,205,210 1,394,197 25,669 31,789 29,228 33,869 39,288 1,193 1,891 1,754 2,032 2,357 Securities sold under repurchase agreements 124,391 112,250 128,601 149,022 172,866 Due to Other Customers 529,267 624,021 742,585 876,251 1,033,976 11,637 9,986 23,088 19,099 21,266 Current Tax Liabilities 5,711 3,026 2,969 3,365 3,808 Deferred Tax Liabilities 2,876 468 2,969 3,365 3,808 2 2 2 2 2 17,670 15,749 11,691 13,547 15,715 Financial Investments - Loan and Receivables Investments in Associates Property, Plant & Equipment LIABILITIES Due to Banks Derivative Financial Instruments Other Borrowings Other Provisions Other Liabilities Subordinated Term Debts Total liabilities 11,263 11,988 13,636 15,409 931 729,678 811,169 956,523 1,115,961 1,294,017 31,645 EQUITY Stated Capital 21,458 23,255 25,731 28,514 Statutory Reserves 4,327 4,922 5,615 6,400 7,289 Retained Earnings 4,418 4,468 6,314 8,154 10,236 Other Reserves 37,330 38,319 41,857 46,120 50,943 Total Equity to Equity Owners of the Bank 67,533 70,964 79,518 89,189 100,114 Non-Controlling Interest Total Equity NAVPS 48 50 55 60 67 67,580 71,014 79,573 89,249 100,180 797,258 882,183 1,036,095 1,205,210 1,394,197 77.4 80.3 88.1 96.7 106.1 29 “Multiple Shocks Dampen Beat” Banking Sector Report – 2016 FC Research HATTON NATIONAL BANK PLC SELL (V)/ HOLD (NV) JUN 2016 P/E 31 December Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Net loss from trading Net gain from financial investments Other operating income Total Operating income Less: Impairment charge/(reversal) for loans and other losses Net operating income Operating Expenses Personnel expenses Other overhead expenses Current Price - LKR 216.0/175.0 2014 2015 2016E 2017E 2018E 53,063 27,078 25,985 56,894 27,200 29,694 85,823 46,633 39,190 93,523 50,060 43,462 103,679 53,151 50,528 5,196 617 4,579 6,426 182 6,244 7,454 895 6,560 8,647 1,038 7,609 10,030 1,204 8,827 (442) 1,494 5,713 37,329 362 298 6,047 42,644 (971) 313 6,526 51,618 (1,150) 329 7,376 57,625 (1,333) 345 8,348 66,715 (2,533) (1,022) (4,599) (3,597) (3,126) 34,796 41,622 47,018 54,028 63,589 8,108 11,132 19,240 9,155 13,305 22,460 10,610 14,377 24,986 12,333 16,134 28,467 14,331 18,253 32,584 Operating profit before value added tax (VAT) 15,556 19,162 22,032 25,561 31,005 Value Added Tax (VAT) on Financial Services Operating profit after value added tax (VAT) 2,550 13,005 3,062 16,100 3,917 18,115 4,547 21,014 5,440 25,565 Share of profit/(loss) of Associates (net of income tax) Profit before income tax 143 13,148 60 16,160 66 18,181 73 21,086 80 25,645 Income Tax Expense Profit for the Year 3,080 10,068 5,064 11,096 5,454 12,727 6,326 14,761 7,693 17,951 Profit attributable to Equity holders of the Bank Profit attributable to Non-controlling interests Profit for the Year 9,820 248 10,068 10,554 542 11,096 12,090 636 12,727 14,022 738 14,761 17,054 898 17,951 Statement of Financial Position P/E 31 December Assets 2014 2015 2016E 2017E Cash and cash equivalents Balances with central banks Placements with banks Reverse repurchase agreements Derivative financial instruments Other financial assets held for trading Loans and receivables to other customers Financial investments - Available-for-sale Financial investments - Held-to-maturity Financial investments - Loans and receivables Investments in Associates Investment properties Property, plant and equipment Intangible assets Other assets Total assets 13,848 16,908 5,096 19,575 178 1,053 401,282 69,443 955 38,846 725 1,042 18,290 1,132 11,668 600,272 15,508 20,096 1,174 7,782 1,303 1,949 507,244 79,718 1,257 87,087 785 1,042 23,909 1,144 7,328 757,347 17,416 39,785 4,478 586 6,219 585,619 93,287 1,244 87,068 851 1,037 14,393 1,155 19,901 873,039 24,688 30,675 47,285 54,851 5,194 6,025 678 787 14,428 16,737 678,271 786,794 93,785 117,159 1,443 1,674 100,999 117,159 924 1,004 1,032 1,027 4,404 6,151 1,167 1,178 23,085 26,779 997,384 1,155,698 Liabilities Due to banks Derivative financial instruments Due to other customers Dividends payable Other borrowings Debt securities issued Current tax liabilities Subordinated debentures Insurance provision - Life Insurance provision - General Other provisions Other liabilities Total Liabilities 43,505 631 425,620 587 21,329 4,843 3,395 11,674 5,563 1,279 2,123 10,086 530,634 58,284 304 536,133 765 43,626 4,417 4,763 12,086 7,007 1,546 2,746 7,251 679,507 62,257 1,165 621,914 296 46,849 5,518 5,454 16,476 8,689 1,825 5,856 7,976 784,276 73,142 1,380 721,420 344 40,696 5,917 6,326 18,515 10,774 2,153 6,783 8,774 896,223 84,806 1,600 836,848 418 47,208 6,383 7,693 20,902 13,360 2,541 7,868 9,651 1,039,277 Equity Stated capital 13,290 Statutory reserves 3,160 Retained earnings 10,397 Other reserves 41,058 Total equity attributable to equity holders of the Bank 67,905 Non-controlling interests 1,734 Total Equity 69,639 13,827 3,760 7,950 50,028 75,564 2,276 77,841 14,103 4,365 14,173 53,209 85,850 2,913 88,763 14,385 5,066 21,159 56,900 97,510 3,651 101,161 14,673 5,918 29,894 61,387 111,873 4,548 116,422 600,272 757,347 873,039 997,384 1,155,698 169.0 188.1 213.7 242.7 278.5 Total Liabilities and Equity EPS 24.4 26.0 29.8 34.5 42.0 Fair Value – LKR 225.0/182.0 NAVPS 2018E 30 “Multiple Shocks Dampen Beat” Banking Sector Report – 2016 FC Research NATIONAL DEVELOPMENT BANK PLC [ NDB.N0000] JUN 2016 SELL Current Price - LKR 171.7 NATIONAL DEVELOPMENT BANK (LKR MN)- INCOME STATEMENT 2014 2015 2016E 2017E 2018E Fair Value – LKR 163.0 NATIONAL DEVELOPMENT BANK (LKR MN) - BALANCE SHEET 2014 2015 2016E 2017E 2018E Interest income 21,152 21,432 30,732 33,317 35,536 ASSETS Interest expense 13,239 13,625 20,123 21,526 22,240 Cash and cash equivalents 3,274 11,854 11,162 9,846 11,814 Balances with Central Bank 6,741 7,000 10,082 14,332 16,912 7,913 7,807 10,608 11,791 13,296 Placements with banks 2,722 1,154 3,683 4,383 5,172 Derivative financial instruments 1,904 1,904 2,191 2,586 3,051 Other financial assets held for trading 6,029 5,229 7,366 8,766 10,343 Net interest income Net fee and commission income 2,564 3,157 3,433 3,972 4,604 Net trading income/(expense) 2,240 1,582 1,068 1,404 1,830 248 745 400 420 441 12,966 13,291 15,509 17,588 20,171 529 746 1,575 896 998 Other operating income Total operating income Impairment charge/ (reversal) for loans and other losses Net operating income 12,437 12,545 13,934 16,692 19,173 Loans and advances to banks 311 103 1,096 1,293 1,526 175,236 209,666 242,502 284,020 332,645 Other financial assets classified as loans and receivable 38,683 37,369 31,306 39,445 46,546 Financial assets - held to maturity 10,167 5,661 18,415 21,914 25,859 Financial assets - available for sale 18,058 28,965 18,415 19,723 23,273 Investments in associate companies - - - - - 1,876 2,049 2,630 3,103 3,662 Loans and advances to customers Other assets Less: Operating Expenses Intangible assets Personnel expenses 3,172 3,634 4,006 4,497 5,540 Property, plant & equipment Other operating expenses 2,738 3,196 3,602 4,102 4,663 Total assets Total operating expenses 5,911 6,830 7,608 8,598 10,203 Investment properties Derivative financial instruments 6,527 5,715 6,326 8,094 8,970 Value Added Tax (VAT) on financial services (1,029) (910) (1,343) (1,637) (1,886) Operating profit after value added tax 5,497 4,805 4,983 6,457 7,083 97 78 82 86 90 Share of associate companies’ profit Profit before tax 5,595 4,883 5,064 6,543 7,173 Income tax expense (1,349) (1,213) (1,519) (1,963) (2,152) Profit for the year 4,246 3,670 3,545 4,580 5,021 Profit attributable to equity holders of the parent Profit attributable to minority interest 4,134 3,542 3,474 4,488 4,921 112 128 71 92 100 4,246 3,670 3,545 4,580 5,021 Due to customers Debt securities issued and other borrowed funds Tax liabilities Other liabilities Subordinated term debts 21.45 21.16 27.33 152 140 2,402 2,442 1,546 1,672 1,672 1,672 1,672 269,130 315,354 353,070 413,636 485,055 7,029 11,620 9,043 13,163 15,417 663 639 1,455 1,704 1,996 151,485 184,152 219,141 258,587 305,132 61,926 60,498 55,794 64,825 75,718 806 524 395 510 560 6,361 7,936 9,700 9,657 11,310 11,149 19,574 24,582 28,588 31,793 610 713 927 1,205 1,566 Employee benefit liabilities 301 297 - 240,331 285,953 321,037 378,239 443,491 Stated capital 1,145 1,163 1,206 1,248 1,291 Statutory reserve fund 1,011 1,243 1,243 1,243 1,243 Investment Fund 1,474 1,000 1,462 2,036 2,687 24,246 24,976 27,060 29,754 35,167 27,876 28,382 30,971 34,281 40,387 923 1,019 1,061 1,116 1,176 28,798 29,401 32,032 35,397 41,564 269,130 315,354 353,070 413,636 485,055 Total liabilities EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF PARENT Retained Earnings Non-controlling interests Total liabilities and total equity 25.04 184 2,365 Deferred Tax Total Equity EPS 275 2,455 LIABILITIES Due to Banks Operating profit before value added tax 297 2,253 - - 29.97 NAVPS 168.85 171.84 188.62 208.77 31 245.96 “Multiple Shocks Dampen Beat” Banking Sector Report – 2016 FC Research SEYLAN BANK PLC [ SEYB.N/SEYB.X] JUN 2016 Income Statement P/E 31 December HOLD Current Price - LKR 90.1/63.1 2014 2015 2016E 2017E Statement of Financial Position 2018E P/E 31 December Interest Income 23,422 24,167 36,372 37,666 42,683 Interest Expense (12,223) (12,309) (20,679) (20,030) (22,653) 11,199 11,857 15,693 17,636 20,030 Net Interest Income Fees and Commission Income Fees and Commission Expense Net Fees and Commission Income 2,347 2,811 3,658 4,301 5,056 (97) (120) (146) (172) (202) 2,250 2,691 3,512 4,129 4,854 Net Trading Income 1,079 1,254 416 495 498 Net Gain on Financial Investments 1,190 232 349 349 349 591 165 235 529 801 16,308 16,199 20,204 23,138 26,533 Total Operating Income Impairment Charge / (Reversal ) for Loans and Advances 2014 2015 2016E 2017E 2018E Assets Cash and Cash Equivalents 6,673 7,801 9,010 10,723 10,362 Balances with Central Bank of Sri Lanka 7,432 8,564 12,055 13,984 16,043 Placements with Banks and Finance Companies 2,334 757 1,537 1,783 2,068 191 130 466 549 646 2,534 6,025 10,598 9,220 10,695 Derivative Financial Instruments Financial Assets - Held for Trading Reverse Repurchase Agreements 17,763 2,313 5,299 10,757 10,695 154,963 193,104 232,900 274,254 322,949 Financial Investments - Available-for-Sale 23,838 48,076 35,767 36,880 39,215 Financial Assets - Held to Maturity 22,520 18,229 26,494 24,586 24,955 4,576 4,875 6,934 9,406 11,462 609 600 971 1,317 1,605 1,183 1,090 1,081 1,072 1,063 Intangible Assets 280 250 291 335 380 Deferred Taxation Assets - - - - - Loans and Advances to Customers Other Operating Income Fair Value – LKR 101.0/70.0 Property, Plant and Equipment Leasehold Rights Investment Properties 2,135 489 1,961 1,954 2,408 Other Assets 6,660 6,773 9,316 10,970 12,918 14,173 15,710 18,243 21,184 24,125 Total Assets 251,558 298,586 352,717 405,833 465,056 Personnel Expenses 3,957 4,222 4,314 4,861 5,360 11,615 19,784 23,741 28,489 34,187 Depreciation of Property, Plant and Equipment 1,685 1,773 1,918 2,071 2,230 211 50 609 707 820 Other Operating Expenses 2,493 2,636 3,031 3,486 4,009 185,924 224,525 264,940 307,330 356,503 Total Operating Expenses 8,135 8,631 9,264 10,418 11,599 12,420 11,410 6,987 8,228 9,688 15 16 22 26 30 Debentures 7,656 7,180 17,180 17,180 14,583 Current Tax Liabilities 1,323 505 525 547 568 Other Liabilities 6,038 7,376 7,671 7,977 8,297 225,238 271,231 321,675 370,484 424,676 10,530 10,530 10,530 10,530 10,530 996 1,187 1,433 1,719 2,053 9,294 11,376 13,801 16,633 19,941 Net Operating Income Liabilities Operating Expenses Operating Profit Before Value Added Tax (VAT) 6,038 7,079 8,980 10,766 12,526 Value Added Tax (VAT) on Financial Services 1,203 1,256 1,662 1,953 2,236 Profit Before Income Tax 4,835 5,823 7,318 8,813 10,290 Income Tax Expense 1,583 1,937 2,415 3,084 3,601 Profit for the Year 3,253 3,886 4,903 5,728 6,688 Due to Banks Derivative Financial Instruments Due to Customers Repurchase Agreements Other Borrowings Total Liabilities Equity Attributable to Equity Holders of the Parent Stated Capital Statutory Reserve Fund Retained Earnings Other Reserves Profit attributable to: Equity Holders of the Bank Non-Controlling Interests Profit for the Year EPS 3,217 3,847 4,854 5,671 6,622 36 39 49 57 67 3,253 3,886 4,903 5,728 6,688 9.4 11.3 14.2 16.6 19.4 Non-Controlling Interest Total Equity Total Liabilities and Equity NAVPS 4,376 3,194 4,165 5,299 6,624 25,195 26,288 29,928 34,181 39,148 1,124 1,067 1,114 1,168 1,232 26,320 27,355 31,042 35,350 40,379 251,558 298,586 352,717 405,833 465,056 73.0 76.2 86.8 99.1 113.5 32 First Capital Equities (Pvt) Ltd 347 1/1, Dr. Colvin R. De Silva Mawatha, Colombo 2 Sales Desk: +94 11 2145 000 Fax: +94 11 2145 050 http://www.firstcapital.lk/investment_bank_contact/ HEAD OFFICE BRANCHES 347 1/1, Matara Negombo Dr. Colvin R. De Silva Mawatha, No. 24, 1/3, 2nd Floor, No.72A, 2/1, Colombo 2 Lakshman Cooray Building, Old Chilaw Road, Anagarika Dharmapala Mw, Negombo Sales Desk: +94 11 2145 000 Matara Fax: +94 11 2145 050 Tel: SALES CEO +94 41 2237 636 Tel: +94 31 2233 299 BRANCHES http://www.firstcapital.lk/investment-bank-about-us/leadership/ Jaliya Wijeratne +94 70 2910 042 Negombo Colombo Priyanka Anuruddha +94 70 2910 035 Priyantha Wijesiri +94 70 2910 036 Damian Le Grand +94 70 2910 032 Nishantha Mudalige +94 70 2910 041 Matara Isuru Jayawardana +94 70 2910 034 Sumeda Jayawardana +94 70 2910 038 Anushka Buddhika +94 70 2910 030 Kapila Weerasinghe +94 70 2910 033 Gamini Hettiarachchi +94 70 2910 039 Thushara Abeyratne +94 70 2910 037 RESEARCH Dimantha Mathew +94 11 2145 016 Amanda Lokugamage +94 11 2145 015 Atchuthan Srirangan +94 11 2145 017 Michelle Weerasinghe +94 11 2145 018 FIRST CAPITAL GROUP http://www.firstcapital.lk/investment-bank-about-us/leadership/ HEAD OFFICE BRANCHES No. 2, Deal Place, Matara Kurunegala Kandy Colombo 3 No. 24, 1/3, 2nd Floor, No. 6, 1st Floor, No.213-215, Tel: Lakshman Cooray Building, Union Assurance Building, Peradeniya Road, Anagarika Dharmapala Mawatha, Rajapihilla Mawatha, Kandy Matara Kurunegala +94 11 2576 878 Tel: +94 41 2222 988 Tel: +94 37 2222 930 Tel: +94 81 2236 010 Disclaimer: This Review is prepared and issued by First Capital Equities (Pvt) Ltd. and is based on information available in the public domain, internally developed and other sources believed to be correct. Although all reasonable care has been taken to ensure that the contents of this document are accurate, First Capital Equities (Pvt) Ltd and its Directors and employees, are not responsible for its accuracy, usefulness and reliability and disclaim liability for any loss suffered by the use of information contained herein. First Capital Equities (Pvt) Ltd may act as a Broker in the investments which are the subject of this document or any related investments and may have acted on or have used the information contained in this document, or the research or analysis on which it is based, before its publication.