The share is undervalued compared to its; peers, banking sector and the overall market

Transcription

1 Seylan Bank PLC Earnings Review: BUY V Rs NV Rs July 2014 Company Snapshot Seylan Bank PLC () was incorporated in 1987 as a public listed company. is engaged in commercial banking and provides a gamut of financial products. operates through a network of 151 banking centres and 158 ATM spread across all 9 provinces in the country. 15 new branches will be opened during 2014 increasing the total network to 166 branches and 173 ATMs. It is the fourth largest domestic commercial bank in terms of its asset base which amounted to Rs.223bn on 31 st March reported it s highest ever profit of Rs.2.3bn during FY2013. Case for Investment PBT is forecasted to grow 22.6% YoY during FY2014 to Rs.2.9bn (excluding any reversal of NPL) o o o o o No provision on pawning advances to be made this year (provided gold prices remain stable) compared to 2013 where Rs.400mn was charged to the Income Statement. Increase in lending volume through branch expansion Rise in credit demand in the backdrop of falling interest rates and removal of the credit ceiling. Fee based income sources such as loans, credit cards, and trade remittances would drive non-interest based income. Increase in capital gains from government securities trading, in the backdrop of downward trend in interest rates Rs.4bn worth NPL belonging to the Ceylinco era; namely on Celestial Tower, Kandy City Center and Golden Key Hospital is expected to be settled during period. Table 01: Statistics Sector CSE Code Banking & Fin..N0000 Voting Share (V) Price (Rs.) YTD Range (Rs.) YTD Volume (Mn) Issued Qty. (Mn) Nonvoting Share (NV) Price (Rs.) YTD Range (Rs.) YTD Volume (Mn) Issued Qty. (Mn) Market Cap (Rs. Mn) 19,347 Market Cap (USD Mn) 149 USD:Rs = Top 5 Voting Shareholders 31 st Mar 2014 Name % Sri Lanka Insurance Corp Brown & Company PLC Employees Provident Fund 9.96 Dr. T. Senthilverl 9.70 LOLC Investments Ltd 9.55 Share Price Movement Anticipated growth in GDP (7.8% in FY14, CBSL), will drive the demand for credit and other banking services Rs. 80 Voting Nonvoting The bank is well capitalized to manage future credit growth and branch expansion without burdening equity holders The share is undervalued compared to its; peers, banking sector and the overall market With the management change in 2009, the bank has considerably improved its stability and corporate governance and is now entering its growth phase. Thus future profit growth will be much higher Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Page 1

2 Table 02: Earnings Highlights & Ratios Year ended 31st December F 2015 F Net Interest Income (Rs. Mn) 7,407 8,043 8,605 9,034 9,861 10,713 12,076 Growth +/- 1.7% 8.6% 7.0% 5.0% 9.2% 8.6% 12.7% EBITDA 3,979 4,350 2,951 5,091 6,183 6,326 7,018 Growth +/- 39.5% 9.3% -32.2% 72.5% 21.5% 2.3% 10.9% Operating Profit (Rs. Mn) 906 1,954 1,564 3,911 4,245 5,218 6,535 Growth +/ % 115.7% -20.0% 150.1% 8.5% 22.9% 25.3% Profit Attributable to Equityholders (Rs. Mn) 553 1, ,075 2,326 2,851 3,601 Growth +/ % 118.2% -44.0% 206.9% 12.1% 22.6% 26.3% Recurrent Profit (Rs. Mn) 553 1,207 1,375 2,075 2,326 2,851 3,601 Growth +/ % 118.2% 13.9% 50.9% 12.1% 22.6% 26.3% EPS - Adjusted (Rs.) PE (x) - Voting Nonvoting DPS (Rs.) Dividend Yield (%) - Voting 1.4% 1.0% 1.5% 3.6% 3.5% 3.6% 4.4% Nonvoting 3.1% 2.0% 3.2% 5.7% 7.3% 6.0% 7.4% NAV - Adjusted (Rs.) PBV (x) - Voting Non Voting Interest Rate Spread (Bank) 5.18% 6.01% 5.00% 4.56% 4.27% 5.04% 4.81% Net Interest Margin (Bank) 5.89% 6.66% 5.88% 5.16% 4.89% 5.29% 5.42% Return on Avg. Shareholders' Funds 6.29% 10.13% 4.32% 11.09% 11.06% 12.05% 13.90% Return on Avg. Assets 0.38% 0.87% 0.42% 1.18% 1.16% 1.24% 1.38% Cost to Income 68% 69% 82% 67% 63% 62% 61% Number of Shares (Mn) Share Price - (Rs.) - Voting Share Price - (Rs.) - Non Voting Source: Annual Reports, Capital TRUST Research Page 2

3 Operational Overview The Group s performance is analysed under five units, namely Branch Banking, Corporate Banking, Retail Banking, Treasury and International operations. Branch Banking Branch Banking has been the main source of business of the bank that covers more than 80% of its operations. has been expanding its delivery channels; between 2009 and 2013 has expanded its network with 34 new branches to reach 158. However during the same period employees were reduce by approximately 900 due to improved operational efficiencies. 15 new branches will be opened during 2014 increasing the island wide presence to provide more convenient banking to its customers building the image of. Branch Banking achieved considerable improvement during FY13, such as: Deposit Mobilisation increased by 16% YoY Loan disbursement increased by 14% YoY Net Interest Income earned for the year however decreased by 7% YoY and Profit Before Tax decreased by 28% YoY. Future strategy of Branch Banking is to to enhance Bank s exposure in emerging sectors in the economy such as; renewable energy, tourism, commercial cultivation, construction, transportation and health. Corporate Banking Corporate Banking is made up of the Bank s Off-shore Banking Unit, Corporate Banking Unit and the Millennium Branch located in Head office. Among the clientele are medium sized and large corporate entities including blue-chip companies. The strength of the corporate relationship has enabled to capitalize on opportunities within emerging sectors. Corporate Banking segment also reported considerable improvement in FY13; Net Interest Income grew 29% YoY, however Profit Before Tax decreased by 1.2% YoY to Rs.746mn. Retail Banking Retail Banking consist of three main divisions; Credit Cards, Housing Loans and Pawning. The key strategy in this segment was to enhance customer experience through value addition. During FY13 Net Interest Income earned through: Credit cards grew 16% Pawning Advances, reduced by 18% due to decline in international gold prices and this led to a reduction in the portfolio. Housing Loans portfolio reduced by 4% Page 3

4 Treasury Operations The treasury division experienced constant pressure from the increase in interest rates and the depreciation and volatility of exchange rates during Thus the Profit Before Tax from this segment during 2012 reported a steep decline of 80% YoY. In the backdrop of a more stable exchange rate environment and low interest rates Treasury Operation reported a significant growth in FY13 with increase capital gains from government security trading. Profit Before Tax grew from Rs. 126mn to Rs. 1.5bn. International and Trade Operations International division handles the operational aspect of the trade and remittance business. The expansion of the branch network would enable the trade marketing team to target new clients that would generate new business. Financial Performance FY13 Net Interest Income During FY13, Interest earning assets of grew 21.6% YOY to reach Rs.191.7bn. Increase in market interest rates during the same period enabled the bank to report a 18% YoY growth in Interest Income. The average rate of Interest Income reached to 13.0% compared 13.4% in FY12. Interest bearing liabilities in FY13 increased by 19.8% YoY to Rs.175bn meanwhile interest expense grew 25% YoY as the bank penetrated the market with slightly higher rates to attract more term deposits. The average rate of interest expense increased to 8.6% compared to 8.3% in FY12. The resultant net interest income grew 9.2% YoY to Rs.9.8bn, while the Net Interest Margin (NIM) declined from 5.65% to 5.38%. Much of the scope in enhancing margins would depend on the extent to which can grow its retail loan book while concurrently improving its CASA ratio. During FY13 the CASA ratio declined to 32.9% compared to 34.5% in FY12. The 2013 Budget has permitted licensed commercial banks to borrow up to US$ 50 million each year for three years without the approval from Exchange Control Department. This would facilitate banks to raise low cost funds, thus net interest margins are expected to increase. Page 4

5 Table 03: Interest Yield & Interest Expense Change Rs. Bn Rs. Bn (%) Interest Earning Assets % Interest Income % Avg. Interest Yield 13.24% 13.68% Interest Bearing Liabilities % Interest Expense % Avg. Interest Expense 8.68% 9.41% Interest Rate Spread 4.56% 4.27% Net Interest Margin 5.64% 5.38% Source: Annual Report, 2013 In spite of fluctuating gold prices, growth in pawning contributed significantly to the bank s advances portfolio. Accordingly the growth which continued from last year, accounted for 13% of the bank s total loan book in Since early 2013 the bank has taken steps to reduce their lending exposure to gold pawning and pawning advances reduced to 10% of the bank s total loan portfolio in FY13. Table 04: Performance of Pawning Loan Book Change Rs. Mn Rs. Mn (%) Pawning Advances 17,477 14,370-18% % of total loans & advances 13.1% 10.0% Interest Income 2,391 2,020-16% % of total interest income 11.3% 8.1% Source: Annual Report, 2013 Non Interest Income Non Interest Income which comprises of Net Fees & Commission Income, Net Trading Income and Other Income grew by 19% YoY during FY13 to reach Rs.3.1bn. Commission & Fee based income was the driving force that increased by 26% to Rs.2.1bn largely driven by bank s lending volume, credit and debit cards, trade related services and fee based activities. Net Trading Income grew by 110% to Rs.696mn. Net gain from derivative financial instruments during the year compared to a loss in the previous year was the driving force behind this growth. Page 5

6 During FY13 noninterest Income accounted to 24% of operating Income compared to 22% in FY12 and the management is thriving towards gradually improving this ratio. Transitioning from interest based to fee based income generation is a prudent strategy adopted by the bank that would not only improve the Bank s profitability but also will mitigate the risk involved with market volatilities. Non-Interest Expense (Operating Expenses) Non Interest Expense increased by 13% YoY in FY13 to Rs.8.69bn. Personal Expense which comprise of salaries & wages, contribution to EPF & ETF, and other staff, is the single largest non-interest expense of. During FY13 personal expenses increased by 13% YoY to Rs. 3.7bn Operating Profit Operating Income in FY13 grew by 11% YoY to Rs.12.9bn while operating expenses during the same period grew at a higher rate by 13%. This resulted in a moderate growth in operating profit of 9% YoY to reach Rs.4.2bn. Net Profit & Profitability Net Profit attributable equity holders grew by 12% in FY13 to reach Rs.2.33bn compared to Rs.2.07bn in FY12. In FY13 Net profit as percentage of operating income reached 18%. Cost to Income ratio improved to 63% in FY13 compared 67% in FY12, despite the renewal of the collective agreement during the year. The bank s target is to bring it below 60% in the medium term. Rs.Bn % Net Profit 17.9% 18.0% 20.4% NP/OI Ratio (%) 25% 20% 15% 10% 5% Operating Income & Expenses and Rs. Bn Cost to Income Ratio CIR (%) 14 85% % 75% 70% 65% 60% 55% F 0% % Page 6

7 Loans & Deposits Loans & Receivables FY13 Deposit Mix FY13 Bills of Exchange Lease Rentals Receivable Overdrafts 1% 6% 63% Demand Deposits Trust Receipt/Revolving import Loans 40% 27% Savings Deposits Staff Loans Time Deposits Housing loans 26% Pawning Receivables 0% 10% 6% 3% 7% 7% 4% Certificate of Deposit Refinance Loans Other loans Deposits Deposit Base Rs.Bn Growth (%) Deposits base of grew by 14.1% during FY13 to reach Rs.167.4bn successfully mobilising over Rs.20.6bn deposits. On a four year time frame the deposits base grew at CAGR of 14.8%. Banks innovative savings products, expansion in the branch network facilitated this growth % 9.8% 18.3% 14.1% 12.9% 20% 15% 10% In FY13, Time Deposits grew by 16.8% and accounted for 63.5% of the total deposit base. Savings Accounts which accounts for 26.0% of the total deposit base grew by 11.6% while Demand Deposits (current accounts) declined marginally by 0.3%. As a result CASA ratio declined marginally from 34.5% in FY12 to 32.9% in FY F Demand Deposits 5% 0% Savings Deposits Loans & Receivables Gross Loans & Receivables grew by 8% in FY13 to reach Rs.144bn successfully disbursing Rs.11.2bn, while on a four year time frame the loan portfolio has grown at a 14.5% CAGR. Rs.Bn Loans & Receivables Bank Overdrafts having the single largest exposure of 27% of total gross loans & receivables grew by 20% YoY to reach Rs.39.4bn. Pawning Advances reported a decline of 18% YoY to reach Rs.14.4bn during FY13. Lease Rental Receivable grew by 5% YoY to Rs.8.7bn Bills of Exchange Other Loans & Advances Lease Rentals Receivable Page 7

8 Loans to Deposit Ratio Despite lower interest rates that prevailed during the year deposit base grew faster than loans and advances mainly due to slower credit growth in the private sector. In FY13 deposits base grew by 14.1% while gross loans and advances grew by only 8%. Thus loans to deposit ratio eased from a high of 91% to 86% during the year. Asset Quality Credit proposals beyond a stipulated threshold are now strictly reviewed by the Risk management Unit (RMU). This has facilitated a health balance between robust loan book expansion and superior asset quality. Rs. Bn (10) 87.1% Loans Vs Deposits Deposits Loans Loans to Deposit Ratio 88.8% 94.0% 90.6% 86.1% Loans to Deposit Ratio (%) 96% 94% 92% 90% 88% 86% 84% 82% Compared to a gross NPL ratio of 33.6%, and a net NPL ratio of 29.3% reported in FY09, the management of has made substantial progress in reducing their Gross NPL ratio to 12.4%, and the net NPL ratio to 10.6% by end of FY13. Decline in NPL ratio was facilitated by the decline in NPLs in absolute terms by Rs.13bn. This remains still high compared to industry averages due to hardcore nonperforming loans amounting to Rs.4bn belonging to the Ceylinco ere. They are; Celestial Tower Rs.2.1bn, Kandy City Center Rs.1.5bn, Golden key Hospital Rs.0.4bn. The total value of these three properties is very much higher than Rs.4bn and agreements have been reached to settle these amounts during period. This would reduce the NPL ratio to be in line with the industry averages. Non Performing Loans Rs. Bn NPL Ratio (%) % 29.29% 25.07% 21.29% NPL (Gross) NPL (Gross) Ratio (%) NPL (Net) Ratio (%) 17.67% 15.25% 12.44% 14.24% 12.99% 10.58% % 35% 30% 25% 20% 15% 10% 5% 0% Capital Adequecy Well Above Statutory Minimum Capital Adequacy Ratio (CAR) determines whether a bank has the required capital to face and absorb any potential risks while expanding their business activities. During FY11 the bank raised Rs.4.7bn by way of a rights issue that strengthened its capital base. In FY13 became one of the best capitalized banks in the country. The Group Tier 1 (core) and Tier I & II (total) capital adequacy ratios stood at 15.01% and 16.01% respectively as at 31st December 2013, well above minimum statutory requirements of 5% and 10% respectively. The sound ratios give an opportunity for the bank to manage future credit growth and branch expansion. During 2011 and 2012 s Tier 1 and Tier 2 capital were more or less equal due to the lack of debt in the capital structure. This has overburdened the equity holders. During early 2013 the bank raised Rs.2bn by way of debentures and this improved total CAR to 16.01%. 17% 16% 15% 14% 13% 12% 11% 10% 9% Capital Adequacy Tier I Tier I & II Page 8

9 Financial Performance -1QFY14 Interest income for the quarter grew marginally by 0.3% due to low demand for credit while Interest expenses declined by 7.6%. As a result Net Interest Income (NII) for the 1 st quarter grew by 13.8% to Rs.2.5bn. Net Interest Margins contracted to 4.51% from 4.89% maintained during December Deposit base during the 1QFY14 increased marginally by 1.9% YTD (Rs.3.2bn) to Rs.170.6bn, though loans and advances declined by 3.5% YTD (4.7bn) to Rs.131.8bn. The main reason for the decline in loans and advances was the decline of pawning advances that reduced by Rs.3.2bn during the quarter. Loans to deposit ratio declined from 81.6% in December 2013 to 77.3% by March Non-Interest Income reported a significant growth of 127.5% due to net gain from financial investments and other operating income, while Net Operating Income reported a growth of 17.8% to Rs.3.22bn. Operating Expenses grew by 6.0% during the 1Q to reach Rs.1.9bn and PBT grew by 11.5% to Rs.829.6mn. Tax expenses for the period grew by 27% leading to a 4.6% growth in Profit After Tax to Rs mn compared to Rs.513.7mn reported in the previous year corresponding period. Table 05: 1Q Financial Summary 1Q ended 31 st March YoY Net Interest Income 2,463 2,165 14% Non-Interest Income % Loan Loss Impairment 199 (54) -471% Net Income 3,019 2,785 8% Operating Expenses 1,980 1,868 6% PBT % PAT % Divisible Profit % Source: quarterly financial statements, 2014 Banking Sector Outlook Sri Lankan banking sector consists of 24 commercial banks managing Rs.5.02 trillion in assets as of end of 2013, a YoY growth of 15.3%. Amidst tightening of the monetary policy including a credit ceiling imposed by the Central Bank, banking sector reported a 21% loan growth in FY12 compared 32% in FY11. As the growth of credit and monetary aggregates decelerated, the Central Bank was able to signal an early exit from the tight policy stance in December 2012 by easing its policy interest rates by 25 basis points and allowing the credit ceiling to expire at the end of During 2013 Central Bank reduced policy interest rates further by 100 basis points on two occasions. However, low private sector credit demand led to a lower growth in total loans and advances of the banking sector (8.8% YoY growth compared to 21.1% YoY growth). Decline in gold prices coupled with low credit growth led to a decline in asset quality of the entire banking sector. The GoSL s five hub concept is expected to boost infrastructure activities in the country and as a result we expect the banking sector loan growth to be much higher in FY budget has permitted commercial banks to raise USD50mn a year from abroad for the next three years. This has enabled banks to diversify its source of funding and further strengthen their balance sheet. Page 9

10 Table 06: Banking Industry Performances Vs Seylan Bank Banking Industry Seylan Bank Growth Growth Assets (Rs.bn) 5,098 5,942 17% % Deposits (Rs.bn) 3,625 4,170 15% % Gross Loans & Advances (Rs.bn) 3,149 3,427 9% % Net Interest Income (Rs.bn) % % Profit Before Tax (Rs.bn) % % Profit After Tax (Rs.bn) % % Ratios Interest Margin 4.1% 3.5% 5.7% 5.4% Return on Assets 1.7% 1.3% 1.2% 1.2% Return on Equity 20.2% 16.0% 11.1% 11.1% Core Capital Adequacy Ratio 14.5% 13.7% 14.7% 15.0% Total Capital Adequacy Ratio 16.3% 16.3% 14.7% 16.0% Gross NPL Ratio 3.7% 5.6% 15.3% 12.4% Net NPL Ratio 2.2% 3.8% 13.0% 10.6% Source: CBSL Annual Report 2013, Annual Report 2013 Banking Sector Comparison 31 st Mar 2014 Financial Results COMB HNB SAMP NDB NTB PABC UBC Total Assets (Rs. Mn) 648, , , , , ,949 67,607 38,952 Total Deposits (Rs. Mn) 472, , , , ,984 98,139 55,620 30,925 Total Net Advances (Rs. Mn) 418, , , , ,787 83,977 48,329 27,413 Total Shareholders Funds (Rs. Mn) 61,224 56,595 32,928 22,527 24,730 11,804 4,135 4,938 PAT - 4QTrailing (Rs. Mn) 10,607 7,485 3,854 2,343 3,326 2, Interest Margin (%) 4.53% 4.34% 2.98% 4.51% 3.55% 5.70% 4.33% 3.68% ROA (%) 2.13% 1.13% 1.78% 1.47% 2.27% 2.05% 0.53% 0.06% ROE (return on avg. equity) (%) 15.19% 8.01% 16.78% 9.48% 19.35% 18.30% 8.52% 0.56% Gross NPL Ratio (%) 4.40% 4.53% 2.38% 11.75% 2.69% 4.36% 7.80% 9.28% Capital Adequacy Tier I (%) 12.87% 11.94% 9.75% 15.13% 14.63% 13.30% 9.26% 17.66% Capital Adequacy Tier I & II (%) 16.37% 15.23% 13.57% 16.09% 20.31% 17.97% 10.70% 16.65% EPS - 4Q Trailing (Rs.) PE(x) - Voting PE(x) - Non Voting NAV (Rs.) PBV(x) - Voting PBV(x) - Non Voting Share Price - Voting (Rs.) Share Price - Non Voting (Rs.) Page 10

11 Valuation & Recommendation Net profit for FY13 reported a 12% YoY growth to reach Rs.2.33bn. For FY14 on a conservative basis we forecast profits to grow by 23% to reach Rs.2.85bn. This corresponds to a forward PE of 8.4x for the voting shares and 5.1x for the nonvoting share which are below the respective sector PEs and the overall market PE. Furthermore the voting and the nonvoting shares are trading at low multiples of 1.0x and 0.6x in terms their net asset value. Thus considering future profit growth potential and the low PE and PBV ratios, the share is well poised to generate sizable returns to investors in the medium to long term. Thus we recommend a buy. Table 07: Share Valuation -FY14 F EPS NAV (Rs.) Banking, Fin. & Ins. Sector PE PBV (x) PE Based Valuation PBV Based Valuation Target Share Price (Rs) The information and the opinions contained herein were compiled by Capital TRUST Research (Pvt) Ltd, and are based on information obtained from reliable sources in good faith. However, such information has not been independently verified and no guarantee, representation or warranty expressed or implied is made by Capital TRUST Research (Pvt) Ltd and its related companies as to its accuracy or completeness. This report is not and should not be construed as an offer to sell or a solicitation of an offer to buy any security. Neither Capital TRUST Research (Pvt) Ltd nor its related companies, directors and employees can be held liable whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein Page 11

12 TELEPHONE : (011) HOTLINE : (011) FAX : (011) E MAIL : inquiries@capitaltrust.lk TRADING DIVISION BOARD OF DIRECTORS Tushan Wickramasinghe (011) Moksevi Prelis (Chairman) Dakshana Gooneratne (011) Tushan Wickramasinghe (Managing Director/CEO) Lawrence David (011) Sarath Rajapakse (Director) M J M Husni (011) Sandesh Jayakody (011) Nilantha Perera (011) Kavin Kodytuakku (011) Saliya Gamagedera (011) Asanka Perera (011) Shanmugassharma Rakesh (011) Thilina Yahampatharachchi (011) Sajee Perera (011) Gayan Vithanage (011) Anushan Kandasamy (011) Shehan Mendis (011) Danushka Arambegedra (011) Rukshan Perera (011) Chamila Fernando (011) Laxman Ratnayake (011) Dilshard Hameed (011) Nilosan Kanagaraj (011) KANDY BRANCH Arjuna Wilbawa (081) Suranga Guruge (081) Dasantha Herath (081) Roshan Helage (081) Mohomed Faizan (081) Ananda Wijenayake (081) FAX (081) KURUNEGALA BRANCH Dammika Senarathne (037) Indunil Pradeep (037) FAX (037) NEGOMBO BRANCH Sanjeewa Perera (031) Narada Abeysinghe (031) Srikanth Anton (031) FAX (031) MATARA BRANCH Venura Gamage (041) CUSTOMER SERVICE DIVISION Prasad Jagoda (041) Prashani Perera (011) Prabath Rathnayaka (041) Raveesha Karunaratne (011) Anurada Dahanayaka (041) Jagath Rathnayake (041) Tharanga Wijeweera (041) ACCOUNTS DIVISION FAX (041) Methmal Senivirathne (011) Ranjini Jayawardena (011) Subani Wimalarathne (011) MORATUWA BRANCH Kumari De Alwis (011) Suneth Fernando (011) Anuradha Weerakkody (011) DOCUMENTATION DIVISION Bhanuka De Silva (011) N.M.A Navaratne (011) Asoka Dharmatilaka (011) FAX (011) CAPITAL TRUST RESEARCH (PVT) LTD Charitha Gunasekere (011) Shashitha hith Jayakody (011) Osadi Hettiarachchi (011) CAPITAL TRUST CREDIT (PVT) LIMITED Madusha Gunawardena (011)