Myanmar Citizens Bank Ltd. (MCB)

Transcription

1 Myanmar Citizens Bank Ltd. (MCB) Company Report Non rated (16/17E Target Price Kyat 6,400) Close Kyat 6,000 (OTC) Banking August 26, 2016 Strong growth down the road Among top gainers positioned to capitalize growth Given that the financial sector in Myanmar remains in the early expansion stage, Myanmar Citizens Bank Ltd. (MCB), seventh ranked by assets among private banks and a semi governmental bank with a close relationship with the Ministry of Commerce, its major shareholder, should be one of the prime beneficiaries of these impetuses. In addition, the bank s tight relationship with the Myanmar Payment Union (MPU) coupled with its solid balance sheet should put MCB in a better position to capture growth target price of Kyat 6,400 based on 2016/17E P/BV of 1.0x We derive a 2017E target price for MCB at Kyat 6,400/share, for implied target P/BV of 1.0x based on the Gordon growth model (GGM). This is quite comparable to Indochina banks average P/BV of ~1.0x. Share data OTC Closing Price (Kyat, USD) 6,000/ 4.65 Paid up Shares (mn) Par (Kyat, USD) 5,000/ 3.88 Market cap (Kyat bn/ USDmn) 62 / 48 Listing date 26 August 2016 URL Major Shareholders (31 July 2016 ) % Holding Capital Diamond Star Group Ltd. 41% Good Brothers Machinery Co., Ltd. 11% Ministry of Commerce 10% Shwe Me Co., Ltd. 8% Others 31% Expect a sound 21% net profit CAGR in FY E The robust earnings should be driven mainly by the solid loan growth of 27% and 24% for non interest income in E. This should primarily be backed by Myanmar s sound economic growth and the supportive industry outlook as well as the bank s strong positioning in the field. Promising growth outlook; the challenge is stability We see the growth of Myanmar s banking sector continuing to outpace CLMV and regional peers. This should also be thanks to 1) the Myanmar banking sector s low penetration rate; 2) favorable economic growth; and 3) the ongoing progress of economic and financial reforms. However, the key challenge is the banking system s stability over the longer term given that Myanmar banks will still take several years to be compliant with international practices. Upside/downside risks The main potential downside risks to its profitability could come from 1) regulatory risk as Myanmar banks still have to comply with international standards over the long term; and 2) asset quality risk; and 3) the likelihood of more intense competition in Myanmar s banking system. Meanwhile, the main catalyst could come from Myanmar s favorable macro growth, which should boost banking system growth. Financials and Valuation Prapharas Nonthapiboon Analyst, no Prapharasn@ktzmico.com 66 (0) FY Ended 31 Mar E 20187E 2019E Net profit (Kyat mn) 3,771 5,308 6,557 7,875 9,396 EPS (Kyat) EPS growth (%) 26% 5% 3% 11% 11% BVPS (Kyat) 6,049 6,163 6,356 6,562 6,782 DPS (Kyat) FY Ended 31 Mar E 20187E 2019E PER (X) PBV (X) Dividend yield (%) ROE (%) 11% 10% 10% 10% 10% REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 22

2 Investment Highlights Given that the financial sector in Myanmar remains in the early expansion stage backed especially by the country s favorable GDP growth, Myanmar Citizens Bank Ltd. (MCB), as the seventh ranked bank by assets among private banks and a semi governmental bank with strong government support, should be one of the prime beneficiaries of these impetuses. Note that the IMF expects Myanmar s economy to grow at a robust pace of 8.5% in 2015 and 8.4% in 2016 and projects the system s lending to the private sector to show continuing favorable growth of around 45% in 2015E and CAGR of 32% in E (see figure 1). In addition, MCB is a semi governmental bank that has a close relationship with the Ministry of Commerce, which holds a 10% stake. On top of that, the bank s tight relationship with the Myanmar Payment Union (MPU) coupled with its solid balance sheet (especially in regard to its strong capital and liquidity positions) should put MCB in a better position to capitalize on the favorable growth outlook of the banking system and the macro front as well as to continue outperforming vs. peers in terms of earnings growth. We expect MCB to post favorable earnings growth with a projected net profit compound annual growth rate (CARG) of 21% and EPS CAGR of 8% (due to the share dilution effect on the bank s planned capital raising plan, see Figure 15) over the next three fiscal years, i.e., E, Figure 17 18). The main drivers for net profit growth should come from 1) anticipated average loan growth of 27% in E; and 2) solid average non interest income growth of 24%. This should be thanks to sound GDP growth projected by the IMF at around % and the supportive industry outlook, which should benefit from the strong credit growth on ongoing economic and financial reforms as well as a better political environment. Figure 1: Real GDP growth vs. credit growth Figure 2: Credit and deposits to GDP Real GDP growth (%) Domestic credit growth (%) Credit to private sector growth (%) E 2016E % Credit to private sector (% to GDP) Deposits (% to GDP) Credit to deposits (Loans to deposits) % E 2016E Source: IMF, Central Bank of Myanmar (CBM) Source: IMF, Central Bank of Myanmar (CBM) REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 22

3 Valuation 2017 target price of Kyat 6,400 based on 2016/17E P/BV of 1.0x Our valuation for MCB is based on the Gordon growth model (GGM) where we assume long term sustainable ROE of 12%. Accordingly, we derive a 2016/17E target price for MCB at Kyat 6,400/share, for an implied target P/BV of 1.0x. This is relatively comparable to Indochina banks average of around 1.0x; see Figure 3. Note that our target P/BV for MCB of 1.0x, which is higher than BCEL LS (the only listed Lao bank, which currently faces higher NPL risks and limited capital due to the ongoing delay in its recapitalization plan), is backed by MCB s stronger financial positions and earnings growth. However, the main risk to the target price and earnings of MCB could come from the potential negative impacts arising from compliance with international standards over the longer term. In terms of the price performance for the two listed firms (FMI and MTSH), we see a price rally for these firms in the early weeks of trading and price weakening afterward; see Figure 4 7. Figure 3: Financial and valuation summary vs. regional peers Regional NP growth (%) PER (X) P/BV (X) Dividend yield (%) ROE (%) Banks 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Thailand Vietnam BCEL LS Regional Avg Indochina Avg.* Myanmar NP growth (%) PER (X) P/BV (X) Dividend yield (%) ROE (%) Banks FY16/17 FY17/18 FY16/17 FY17/18 FY16/17 FY17/18 FY16/17 FY17/18 FY16/17 FY17/18 MCB** Source: KTZMICO Research, Bloomberg * Fiscal year ended March/ ** Regional average excluding BCEL LS (Lao bank) Figure 4: FMI and MTSH price performance relative to YSX Figure 5: YSX Index and market capitalization Mar Apr May Jun Jul Aug 16 MYANPIX INDEX FMI MTSH Source: YSX, KT ZMICO Research Index First Myanmar Investment 25 Mar 16 1 Apr 16 8 Apr Apr Apr Apr 16 6 May May May May 16 3 Jun Jun Jun Jun 16 1 Jul 16 8 Jul Jul Jul Jul 16 5 Aug Aug Aug 16 Mkt. Cap. (m. MMK) Source: YSX, KT ZMICO Research Myanmar Market cap Myanmar Thilawa SEZ Holdings MYANPIX INDEX MarketCap. 1,200,000 1,000, , , , ,000 REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 22

4 Figure 6: FMI Price Chart Figure 7: MTSH Price Chart Source: YSX, KT ZMICO Research FMI 25 Mar 16 9 Apr Apr 16 9 May May 16 8 Jun Jun 16 8 Jul Jul 16 7 Aug Aug May May 16 4 Jun Jun Jun Jun 16 6 Jul Jul Jul 16 Source: YSX, KT ZMICO Research MTSH 30 Jul 16 7 Aug Aug Aug 16 Company Background Myanmar Citizens Bank Ltd. (MCB) is a public bank established in 1991 and starting operations on 2 June The bank is a semi governmental bank, with the government s shareholding administered through the Ministry of Commerce holding 10% as of July 16; see shareholding structure in Figure It is considered a medium sized bank ranked seventh in terms of assets and deposits among private banks as per the bank s indication. The bank is also listed on the OTC (over thecounter) market, MSEC (Myanmar Securities Exchange Centre) and it will be listed on the Yangon Stock Exchange (YSX) on 26 August To date, the bank had 21 branches across the country and it plans to open 50 branches over the next five years. MCB s current principal activities are retail and corporate banking, in which the bank has a competitive edge over peers. As it is one of the government s banking arms with the Ministry of Commerce being one of the bank s major shareholders, this greatly enhances the bank s business opportunities and profitability. In particular, MCB has been appointed to facilitate the ministry s push toward increasing export/import activities in Myanmar and has, in partnership with the Ministry of Commerce, established an e payment system to facilitate the payment of export/import license fees to the Ministry of Commerce. The bank started its international banking systems/services in It aims to be a leading bank in international banking and trade finance activities and has managed currently to link up with 27 offshore correspondent banks. Currently, this department accounts for 15% of the banks profits. MCB was also the initial member of the MPU (Myanmar Payment Union) and it possesses a founder s share. It also received approval for a mobile payment license in May REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 22

5 Figure 8: Loans by Business Type FY16 (as of Mar 16) Figure 9: Deposit Structure FY16 (as of Mar 16) Construction 11% Others 4% Industrial 23% Current account 23% Savings 45% Service 27% Trading 36% Time deposits 32% Source: MCB, KTZMICO Research Source: MCB, KTZMICO Research Figure 10: Income Structure for financial year 2016 Figure 11: Non interest Income Structure FY16 (as of Mar 16) 100% 80% 35% 37% 51% 60% 19% 18% 40% 22% 19% 24% 20% 24% 27% 25% 0% Source: MCB, KTZMICO Research Others Foreign Exchange Transaction Service income Commission on payment orders & remittances 100% % % 89 40% % % E 20187E 2019E Net Interest Income Non Interest Income Source: MCB, KTZMICO Research Figure 12: Shareholding structure (31 Mar 16) Figure 13: Pre listing shareholding structure (31 Jul 16) Others 33% Capital Diamond Star Group Ltd. 17% Others 31% Capital Diamond Star Group Ltd. 41% Ministry of Commerce 15% Good Brothers Machinery Co., Ltd. Good 6% Brothers Co., Ltd. 7% Shwe Me Co., Ltd. 9% Diamond Star Co., Ltd. 14% Good Brothers Machinery Co., Ltd. 11% Shwe Me Co., Ltd. 8% Ministry of Commerce 10% Source: YSX, MCB, KT ZMICO Research Note: Capital Diamond Star Group, is one of the largest conglomerates in Myanmar and we can find its retailing businesses everywhere in downtown areas. It also operates food, real estate, healthcare and portfolio management businesses; see more details in the website Good Brother s main business is agricultural plants & machinery and Shwe Me s is logistics business. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 22

6 Figure 14: Company Profile (Myanmar Citizens Bank Ltd.) Company Name Myanmar Citizens Bank Ltd. (MCB) Code ISIN code MM Date Formed 30th October 1991 Management U Myint Win Managing Director Date Listed 26th August 2016 Fiscal year 1st April to 31st March Outstanding Shares 10,400,986 shares (as of 31st July 2016) Paid up Capital MMK million (as of 31st July 2016) Phone admin@mcb.com.mm Address Business Building No. 383, Mahabandoola Road, Kyauktada Township, Yangon, Myanmar MCB is a public bank established in 1991, under Special Company Act. MCB started its business on at No. 383, Mahabandoola Road, Kyauktada Township, Yangon. Authorized capital of MCB is 75 billion kyat and its paid up capital is 52 billion kyat. MCB offers the following domestic banking services: (1) Savings Deposits (2) Current Deposits (3) Time Deposits (4) Call Deposits (5) E payment service for Import License fee payments (6) Internal Remittance and (7) Payment Orders Loan Services of MCB are as follows: (1) Commercial Loans (2) Pledge Loans (3) Trade Guarantees (4) Bank Guarantees / Performance Guarantees International Banking Services are as follows: (1) Export & Import Services (L/C, TT) (2) International Remittance and International Money Transfer Services (Money Gram, IME, Transfast, Merchantrade) (3) Guarantee Issuing Service (4) International Card Business (Visa / MasterCard Acquiring, MasterCard Issuing) (5) Money Changer Service (6) Foreign Exchange Market (7) Payment Orders Hire Purchase Services are as follows: (1) HP for agricultural equipment (2) HP for motor vehicles (3) HP for various rice mill equipment (4) HP for various construction machinery and equipment MCB also offers the following services: (1) 663 Mobile payment services (2) MPU Card Issuing & JCB, CUP Acquiring Service (3) Meter Bill Service REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 6 of 22

7 Board of Directors (1) U Toe Aung Myint ( Chairman) (2) U Myint Win (Managing Director) (3) U Soe U Ko Ko Gyi (Director) (4) U Hla Oo (Director) (5) U Tun Lwin (Director) (6) U Own Saing (Director) (7) U Aung Aung (Director) (8) U Mg Mg Tin (Director) (9) U Zeya Thura Mon (Director) (10) U Yan Naing Tun (Director) (11) U Zaw Lin Htut (Independent Director) (12) U Maung Aung (Independent Director) Website Lead Securities Company Myanmar Securities Exchange Centre Co., Ltd Auditor U HlaTun & Associates Limited Company History MCB is a public bank established in 1991, with company registration No. (274/ ) granted on , under the Special Company Act. With Banking License no. Ma Ba Ba/ J (i) 1(5)1992 granted by the Central Bank of Myanmar on the 25 May 1992, MCB started its business on June 1992 at No. 383, Maharbandoola Road, Kyauktada Township, Yangon. Authorized capital of MCB at the time of establishment, in June 1992, was 1 billion kyat. Now, authorized capital is 75 billion kyat and paid up capital is 52 billion kyat. Of 52 billion kyat in paid up capital, the Ministry of Commerce has paid up capital of 5.12 billion kyat with public paid up capital of billion kyat. Its branches and mini branches were opened as follows: Bank Opening date 1. Kyauktada Branch Mandalay Branch Bayint Naung Branch Nay Pyi Taw Branch Myin Chan Branch Monywa Branch Muse Branch Yasakgyo Branch Taze Branch Mandalay Mini Branch Monywa Mini Branch Dawbon Mini Branch Lasho Branch Aung Lan Branch Bayint Naung Mini Branch Pabedan Mini Branch Puzundaung Branch North Okkalarpa Branch Pyay Branch Latha Branch Sittwe Branch REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 7 of 22

8 MCB was granted a Foreign Exchange Authorized Dealer License by the CBM on 17 August 2012 and became a member of the Society for Worldwide Inter Bank Financial Telecommunication (SWIFT) on 5 January MCB has established correspondent bank relationships and maintained NOSTRO accounts with UOB, OCBC, DBS, Commerz Bank, ICBC, May Bank, Kasikorn Bank, Siam Commercial Bank and Krung Thai Bank and has RMA relationships with 47 banks. By connecting with correspondent banks, MCB is currently providing Foreign Currency Current Account opening, Export/Import Settlements, Cash disbursement, Bank Guarantees, Account Transfers and Foreign Exchange Market activities to customers. MCB was granted a money changer license on 24 October 2011 and it has opened money changer counters at Kyauktada Branch, Muse Branch, Mandalay Branch and Dawpon Mini Branch. MCB has offered Acquiring services for Visa, MasterCard since 2014 and issues "Citizen Card", branded by MasterCard. MCB has partnered with Money Gram, IME, Transfast, Merchantrade to offer inbound money transfer services. MCB started its Mobile Payment Services (663), to offer service to unbanked and rural areas, in July, MCB listed on Yangon Stock Exchange in August Source: YSX, MCB, KT ZMICO Research Figure 15: MCB s share capital history and capital raising plan Financial Year ended March Paid up capital (Kyat mn) , ,870 July , , , , , ,000 Source: MCB, KTZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 8 of 22

9 Earnings prospects Impressive earnings growth with 43% net profit CAGR in the past three years MCB recorded an impressive earnings growth over the past three years with 43% net profit CAGR during its financial year (Figure 17 18). The strong net profit growth was backed mainly by the robust loan CAGR of 38% and 56% (excluding some extraordinarily high income related to foreign exchange transactions in 2016) for non interest income for the same period. This should be thanks especially to Myanmar s sound GDP growth of around 8.5% in the past three years (Figure 1). Note that the robust non interest growth in recent years, especially for 2016, was largely boosted by the strong growth in fees related to foreign exchange transactions, international banking and trade finance activities (currently, this department accounts for 15% of the bank s profits) as well as remittances and transactional banking. We still expect this growth momentum to continue going forward (Figure 17 18). Expect a solid 21% net profit CAGR in the next three years We expect MCB to post a favorable earnings growth with projected net profit CARG of 21% and EPS CAGR of 8% (due to the share dilution effect on the bank s planned capital raising plan, Figure 15) over the next three years during fiscal year ended E, Figure 17 18). The main drivers for net profit growth should likely come from 1) an anticipated average loan growth of 27% in E; and 2) a solid non interest income average growth of 24%. This should be thanks to the projected sound GDP growth by IMF of around % and the supportive industry outlook which should benefit from the strong credit growth on ongoing economic and financial reforms as well as better political environment. Moreover, the main loan growth drivers should come from corporate and retail hire purchase lending. Meanwhile, we expect the bank s net interest margin (NIM) to decline slightly on a more competitive environment, especially on the deposit side. The bank s main strategic intents The bank s main strategic intents for 2017E and in the long term mainly include: 1) Opening 50 branches over five years 2) Expanding the bank s network, especially online banking services, and strengthening its position in the domestic banking sphere, particularly in retail and corporate banking. 3) Focusing on loans in the trading, industrial and services sectors where risk is lower vs. the agricultural and livestock segments. 4) Due to the involvement of the Ministry of Commerce as shareholders and directors in the company, the bank has the competitive advantage of being well versed in the foreign trade sector as well as the international banking sector. 5) Expanding hire purchase lending into multiple products after its proven success in providing hire purchase financing services with respect to the sale of agricultural equipment to farmers, particularly in the Mandalay, Sagaing, Yangon and Ayeyarwaddy regions. In light of such success, the bank intends to expand such services throughout the entire country. In addition, the bank also plans to expand to other hire purchase products with good potential (i.e., various machinery and equipment for business use, residential apartments, motor vehicles and telephone handsets). Note that its hire purchase loans accounted for around 24% of total loans as of Mar 16. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 9 of 22

10 Potential downside risks to earnings As stated in the earlier report, Myanmar s accounting and transparency standards still lag regional peers including the banking sector. We expect that it will take Myanmar banks several years to be compliant with international practices. The potential main risks to our earnings forecasts for MCB could come from: 1) The potential of booking provision expenses in the profit and loss statement: Note that Myanmar banks, including MCB, still set aside and book provision expenses for loan loss through the retained earnings item in shareholders equity vs. the booking of such expenses through the profit and loss statement based on the international standard. Note also that the provision expenses that the bank booked in the past three years accounted for around 8 10% of its net profit for the period. In the event that the CMB changes the provision accounting standard to be in line with the international standard (there has been no indication from CBM as of yet), we could see potential downside risk to MCB s net profit for E of around 7 8% based on the assumption of the bank s current loan loss reserve policy of 2% of gross loans. Note that the impact could increase to 11 14% of net profit for E, respectively, if we assume the bank to set a general provision at the levels of 2.2%, 2.5% and 2.75% of loans for E respectively; see Figure 16. Figure 16: Provision expenses booked through retained earnings during Fiscal year ended March E* E** General provision expenses for loans (Kyat mn) ,756 % Provision expenses/net profit 9.9% 10.5% 8.0% 7 8% 11 14% Source: KTZMICO Research, Bloomberg * Assume the bank s current reserve policy of 2% of gross loans ** Assume the bank s reserve policy of 2.2%, 2.5% and 2.7% of gross loans for E respectively 2) Change in reserve/provisioning policy required by CBM: As noted earlier, the current reserve policy for loan loss required by the CBM is at 2% of gross loans with no requirement for any specific provision yet. For a longer term perspective, we expect the CBM s provisioning policy to include a specific provision requirement to be more in line with the international standard. This could post additional downside earnings risk to Myanmar banks and MCB. Note that there is still no exact indication from the CBM in relation to the new requirement as well as the timeframe yet. Figure 17: Net profit vs. growth and ROE Figure 18: Loans, NII and Non NII growth vs. NIM 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Net profit Growth ROE 9,396 69% 7,875 57% 50% 6,557 37% 39% 5,308 3,771 41% 24% 2,513 20% 18% 20% 19% 1, ,066 13% 12% 11% 10% 10% 10% 10% E 20187E 2019E 80% 70% 60% 50% 40% 30% 20% 10% 0% 140% 6.0% 120% 5.0% 100% 80% 4.0% 60% 3.0% 40% 2.0% 20% 0% 1.0% 20% E 20187E 2019E 0.0% Net Interest Income Growth Non Interest Income Growth Loan Growth Net interest margin (NIM) RHS Source: MCB, KTZMICO Research Source: MCB, KTZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 10 of 22

11 Financial Position Asset quality and provisioning standards for Myanmar banks still lag regional banks It should be noted that the NPL definition and the provisioning policy for Myanmar banks still lag regional bank peers. MCB (likely the same as other Myanmar banks) classifies loans as NPLs when loans with interest payments and principal are overdue for more than 6 months, which lags behind other regional banks that use criteria of > 3 months overdue interest payments. Moreover, in terms of the provisioning policy, the Central Bank of Myanmar (CBM) requires Myanmar banks to set a provision of only 2% of gross loans for all loan classes with no specific or additional provision required for NPL classes. This standard is relatively more relaxed when compared with Thai and regional banks, which require higher provisioning for NPL classes (see Figure 19 20). Moreover, provisions are normally made at the end of the budget year as per CBM instructions. In a longer term perspective, the CBM should gradually raise the key accounting standards and regulations (i.e., financial reporting, provisioning, NPLs and capital standards as well as income/expenses recognition) for Myanmar banks to be more in line with international standards. These could post potential downside risk to MCB s earnings outlook (see more details in the Earnings Prospects section). Figure 19: Myanmar s NPL definitions and provisioning policy vs. regional banks Loan classification by age Criteria Provisioning Policy (months past due) Thailand Vietnam Laos Myanmar 1 Current no 1%** 0.75%* 1%** 2%* 2 Special mention loans (<3 months) 2%** 5%** 3%** 2%* 3 Sub standard loans (>3 6 months) 100%** 20%** 20%** 2%* 4 Doubtful loans (>6 12 months) 100%** 50%** 50%** 2%* 5 Bad loans (>12 months) 100%** 100%** 100%** 2%* *% of gross loans **% of loans net of collateral (% shortfall in security value) NPLs Source: Central Banks and KT ZMICO Research Note that Myanmar data are based on MCB, CBM and other related sources. Figure 20: CBM s revised criteria on loan classification and NPL definition Loan classification NPL definitions MCB previous Criteria CBM's new revised criteria Past due Past due Standard loans No days No days Watch loans days Sub standard loans 6 12 months days Doubtful loans >12 24months days Bad loans >24 months >180 days Source: CBM and KT ZMICO Research NPLs REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 11 of 22

12 Solid balance sheet should put MCB in a better position to capture growth MCB s financial positions are relatively solid especially in regard to the bank s high capital and liquidity positions. The bank s capital adequacy ratio (CAR) and the liquidity ratio for financial year 2016 ended Mar 16 stood at 77% and 50%, respectively, much higher than the CBM s minimum requirement of 10% and 20%, respectively. Meanwhile, the loan to deposit ratio has been at a quite comfortable level of 80% in 2016, relatively comparable to 85% for Thai banks but much higher vs. ~55% for Myanmar s banking system and just 51% for BECL (only listed bank in the Lao Stock Exchange). This reflects MCB s higher credit growth and its better balance sheet leverage vs. the system. Note that MCB still aims to keep its LDR at around 80%. The bank s solid balance sheet will enable it to capture the favorable growth in the banking system and macro front. The bank s NPL ratio has been quite stable at around 1.5 2% during (see Figure 22), which was still in line with the bank s effort to control its NPL ratio at no more than 2%. However, as mentioned earlier, the NPL definition and provisioning policy for Myanmar banks still lags behind regional peers. Figure 21: LDR, Loans to Assets vs. Liquidity ratio 90% 84% 80% 78% 79% 79% 80% 80% 70% 64% 61% 58% 60% 54% 53% 50% 50% 42% 50% 40% 33% 28% 30% 30% 20% Loans to Deposits (LDR) Loans to Assets Liquidity ratio Source: MCB, KTZMICO Research Figure 22: NPLs/Loans vs. Capital Adequacy Ratio 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 45% 1.3% 82% 1.6% 1.4% 2.2% 54% 70% 74% 2.1% 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% NPLs/Loans (RHS) Capital Adequacy Ratio (LHS) Source: MCB, KTZMICO Research Figure 23: Basel standard Country BIS Standard Cambodia Basel I Lao PDR Basel I Myanmar Basel I Vietnam Basel I Brunei Basel I Indonesia Basel II India Basel III Thailand Basel III Philippines Basel III Malaysia Basel III Singapore Basel III Hong Kong Basel III Australia Basel III Japan Basel III Taiwan Basel III Source: BIS, Central banks Figure 24: Capital Adequacy of Private Banks Source: CBM, IMF REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 12 of 22

13 Figure 25: CBM's current key regulations for Myanmar banks CBM's current key requirements for Myanmar banks Cash ratio 5% Liquidity ratio 20% Capital adequacy ratio 10% Single lending limit 20% General provision 2% of gross loans Specific provision No specific requirement NPL definition >6 month overdue payment Minimum reserve requirement 10% of deposits at least 5% cash deposit with CBM CMB policy rate 10% Lending rate 13% (Max) Deposit rate 8% (Min) Call % Saving % Time 8 10% Key Lending regulations/restrictions * All loans must be collateralized. * Loan duration cannot be longer than one year. * Lending rates capped at 13% and deposits required to pay at least 8%. * Banks are only allowed to lend 70 80% of total deposits. Source: CBM, KT ZMICO Research and other related sources REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 13 of 22

14 Industry Outlook Banking sector has grown rapidly over recent years Myanmar s financial system is at the early stage of development. The country is mainly a cashbased economy as less than 20% of the population has access to formal financial services, with rural areas in particular having limited access to banking services. Despite fast growth in recent years (private credit grew 50% over the past four years, especially private banks, which continue to gain shares over SOBs), the banking system remains small relative to regional countries with credit to the private sector as of Feb 15 amounting to only 16% of the country s GDP (private banks contribute 14% of GDP). Meanwhile, total banking assets accounted for 58% of the country s GDP as of Feb 15 (more than half from private banks), up from ~48% of GDP over the past two years. Meanwhile, the current range of banking products and services remains quite limited and the transparency and risk management standards for Myanmar banks still lag CLMV and regional banks, especially in terms of accounting. In addition, given the fact that there is still no credit bureau in Myanmar, questions about the reliability of financial data, especially data on asset quality, NPLs, and provisioning, may lead to difficulties in regard to proper analysis. Growth outlook not in doubt; the challenge is stability Given that the financial sector in Myanmar remains in the expansion stage, especially when compared with regional bank peers, we see the growth of the Myanmar banking sector continuing to outpace CLMV and regional peers. This should be underpinned by 1) the low base and low penetration rate of Myanmar s banking sector; 2) favorable economic growth; 3) the ongoing progress of economic and financial reforms; and especially 4) the likelihood of better stability in the political climate after the election. However, the key challenge is the banking system s stability and quality over the longer term. Although we see ongoing progress with Myanmar s major economic and financial reforms, it will still take several years for the country to be compliant with international practices. (For more details, see the Myanmar Banking Sector report dated 9 Dec 2015). Looking ahead, Myanmar s economic prospects remain attractive on the back of the benefit from reform implementation, including moving towards greater social and economic liberalization under the administration of the new government, as well as high levels of investment. The IMF expects the economy to grow 8.4% in 2016F from 2015E s estimated 8.5% reading (for more details on the economic outlook see our Myanmar report: "Progress toward liberalization driving economic growth from 23 Nov 2015). Figure 26: Real GDP growth vs. credit growth Figure 27: Credit and deposits to GDP Real GDP growth (%) Domestic credit growth (%) Credit to private sector growth (%) E 2016E Source: IMF, Central Bank of Myanmar (CBM) Source: IMF, Central Bank of Myanmar (CBM) REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 14 of 22 % Credit to private sector (% to GDP) Deposits (% to GDP) Credit to deposits (Loans to deposits) % E 2016E

15 Figure 28: Myanmar s key banking statistics Myanmar's key banking statistics E 2016E Real GDP growth (%) Central bank rate (%) Domestic credit (% YoY change) Credit to private sector (% YoY change) Credit to private sector (% to GDP) Deposits (% to GDP) Credit to deposits (Loans to deposits) % Source: IMF s forecasts, IMF World Bank Annual Meetings 2015, KT ZMICO Research Figure 29: Key economic statistics E 2016F Output Gross domestic product, current prices MMK, bn 43,238 47,722 54,699 62,834 76,471 92,641 USD, bn Gross domestic product per capita, current prices USD 1,118 1,100 1,112 1,228 1,269 1,364 Gross domestic product, constant prices % Prices Inflation (avg.) % Inflation (end) % Public Sector Total revenue MMK, bn 5,222 11,156 12,772 16,563 15,919 19,052 % GDP Total expenditure MMK, bn 7,208 11,955 13,732 18,405 19,582 23,379 % GDP government net lending/borrowing MMK, bn 1, ,841 3,664 4,328 % GDP Public debt % GDP External % GDP Domestic % GDP Balance of Payments Volume of exports of goods and services % Volume of exports of goods % Volume of imports of goods and services % Volume of imports of goods % Trade balance USD, bn % GDP Current account balance USD, bn % GDP International reserves USD, bn Months of imports Money and Credit Broad money % Credit to private sector % % GDP Deposits % GDP FX & Rate Exchange rate (end) Official rate Kyat/$ ,027 Market rate Kyat/$ ,070 Interest rate (end) Central bank rate % Other Indicators Foreign direct investment % GDP Population Million Unemployment rate % Source: IMF s forecasts, IMF World Bank Annual Meetings 2015, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 15 of 22

16 Financial institutions in Myanmar As of 22 Aug 16, Myanmar s financial system comprised four state owned banks (SOBs), 24 private banks, 10 foreign bank branches, 48 representative offices of foreign banks, and 11 finance companies; see Figure A new microfinance bank was recently established and authorities are considering license applications for a housing bank and a livestock development bank. The 28 Myanmar banks have accumulated assets amounting to around 55% of GDP. Private banks continue to gain a greater share over state owned banks (SOBs) While state banks previously dominated the market, private banks have continued to gain a greater share and post stronger growth vs. SOBs, especially after the rapid growth in recent years. Assets owned by private banks now account for more than half of total system assets. The SOBs share of total banking sector assets continued to decline to 52% in Mar 15 from 67% two years ago. Meanwhile, private banks share of banking sector assets has surged to 48% of system assets. State Owned Banks (SOBs): Myanma Economic Bank (MEB), Myanma Foreign Trade Bank (MFTB), and Myanmar Agricultural Development Bank (MADB) were all established under the Socialist Union of Burma Bank Law in 1975, see Figure 31. A fourth state bank, the Myanma Investment and Commercial Bank (MICB), was set up in 1990 in order to stimulate the growth of industry and production in the country. MEB is the country s largest bank in terms of outreach, with a domestic banking network of over 310 branches across the country and the second largest deposit base (after Kanbawza Bank, a private bank). MADB is the largest stateowned bank in terms of loans (as of 2012). MFTB specializes in international banking. Semi governmental and private banks: The private banks, many of which were established after 1992, are dominated by five banks, namely Kanbawza Bank (35.4% of total private bank assets), Ayeyarwaddy Bank (11.3%), Co operative Bank (10.7%), Myawaddy Bank (7.3%), and Myanma Apex Bank (6.8%). These five banks collectively account for 72% of the total assets of private banks and 48% of the total deposits in the domestic banking system. In comparison to state owned banks, semi governmental and private banks play a leading role in terms of marketing campaigns and technological innovation (e.g., introduction of debit and credit cards and expansion of ATM networks). REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 16 of 22

17 Figure 30: Financial institutions in Myanmar Private Banks State Owned Banks 1 Myanmar Citizens Bank Ltd 1 Myanma Foreign Trade Bank 2 First Private Bank Ltd 2 Myanma Investment and Commercial Bank 3 Co operative Bank Ltd 3 Myanma Economic Bank 4 Yadanabon Bank Ltd 4 Myanma Agriculture and Development Bank 5 Myawaddy Bank Ltd 6 Yangon City Bank Ltd Representative Offices of Foreign Banks and Finance Company 7 Yoma Bank Ltd 1 DBS Bank Limited 8 Myanmar Oriental Bank Ltd 2 National Bank Limited 9 Asia Yangon Bank Ltd 3 First Overseas Bank Limited 10 Tun Foundation Bank Ltd 4 CIMB Bank Berhad (New Licence for Name of Change) 11 Kanbawza Bank Ltd 5 Arab Bangladesh (AB)Bank Limited 12 Small & Medium Industrial Development Bank Ltd 6 Siam Commercial Bank Public Company Limited 13 Global Treasure Bank Ltd 7 Maruhan Japan Bank PLC 14 Rual Development Bank Ltd 8 Krung Thai Bank Public Company Limited 15 Innwa Bank Ltd 9 United Bank of India 16 Asia Green Development Bank Ltd 10 Kasikornbank Public Company Limited 17 Ayeyarwaddy Bank Ltd 11 Woori Bank 18 United Amara Bank Ltd 12 Vietin Bank 19 Myanma Apex Bank Ltd 13 Korea Development Bank 20 Naypyitaw Sibin Bank Limited 14 Standard Chartered Bank 21 Myanmar Microfinance Bank Limited 15 Shinhan Bank 22 Construction and Housing Development Bank Limited 16 Industrial Bank of Korea 23 Shwe Rural and Urban Development Bank Limited 17 First Commercial Bank (New Licence for Change of Management Office) 24 Ayeyarwaddy Farmers Development Bank Limited (A Bank) 18 E.SUN Commercial Bank, Singapore Branch 19 Bank of India (BOI) Foreign Banks Branches 20 Kookmin Bank 1 The Bank of Tokyo Mitsubishi UFJ, Ltd 21 Export Import Bank of India 2 Oversea Chinese Banking Corporation Ltd 22 The Export Import Bank of Korea 3 Sumitomo Mitsui Banking Corporation 23 Eastern Bank Limited 4 United Overseas Bank Limited 24 Bank of Ayudhya Public Company Limited 5 Bangkok Bank Public Company Limited 25 RHB Bank Berhad 6 Industrial and Commercial Bank of China 26 Commercial Bank of Ceylon PLC 7 Malayan Banking Berhad (Maybank) 27 State Bank of India 8 Mizuho Bank Limited 28 Cathay United Bank 9 Australia and New Zeland Banking Group Limited 29 State Bank of Mauritius 10* The Joint Stock Commercial Bank for Investment and 30 BRED Banque Populaire Development of Vietnam (BIDV) 31 Busan Bank Co., Ltd 11* Taiwan's E.SUN Commercial Bank 32 AEON Credit Service Company 12* South Korea's Shinhan Bank 33 PT. Bank Negara Indonesia (Persero)Tbk 13* The State Bank of India 34 Bank of Taiwan *Note: Licenses granted on March Taishin International Bank Co., Ltd 36 Taiwan Shin Kong Commercial Bank Co., Ltd Finance Companies 37 CTBC Bank Co., Ltd 1 Oriental Leasing Company Ltd 38 Yuanta Commercial Bank Co., Ltd 2 Myat Nan Yone Finance Company Ltd 39 Taiwan Cooperative Bank Limited 3 National Finance Company Ltd 40 Taiwan Business Bank Limited 4 Ryuji Finance Company Ltd 41 Mega International Commercial Bank Co., Ltd 5 Mahar Bawga Finance Company Ltd 42 Ho Chiminh City Development Joint Stock Commercial Bank 6 Jewel Spectrum Company Ltd 43 Qatar National Bank 7 Century Finance Company Ltd 44 Sampath Bank PLC 8 Win Progress Services Company Ltd 45 Bank of China 9 Z Corporation Company Ltd 46 KEB Hana Bank (New Licence for Change of Name) 10 Global Innovations Finance Company Ltd 47 BTMU Leasing (Thailand) Co., Ltd 11 Mother Finance Company Limited 48 ACLEDA Bank Plc. Source: CBM, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 17 of 22

18 Figure 31: Financial institutions in Myanmar (as of 16 Mar 16) Source: YSX, CBM, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 18 of 22

19 Figure 32: Commercial bank lending by sector (% share) Figure 33: Banking sector liquidity (loans/deposits) Source: IMF, Central Bank of Myanmar Source: IMF, Central Bank of Myanmar Figure 34: Interest rates in Myanmar (%) Figure 35: Myanmar s interest spread vs. regional banks Source: CBM, CEIC, IMF/IFS Source: CBM, World Bank, IMF Upside risk/downside risk The main potential downside risks to its profitability outlook could come from 1) regulatory risk and accounting standard changes as Myanmar banks still have to comply with international standards over the long term (see details in Earnings Prospects section); and 2) asset quality risk given the bank s rapid business expansion; and 3) the likelihood of more intense competition in Myanmar s banking system. Meanwhile, the main catalyst could come from Myanmar s favorable economic growth, which should continue to outpace regional peers and help boost banking system growth. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 19 of 22

20 Income Statement (Kyat mn) E 20187E 2019E Fiscal year ended 31 March Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Total Interest Income 7,171 10,072 16,123 21,247 26,451 32,639 Total Interest Expenses 4,127 6,080 8,995 11,938 15,125 19,059 Net Interest Income 3,044 3,992 7,128 9,310 11,326 13,580 Commission on payment orders & remittances 658 1,128 1,474 1,842 2,211 2,543 Service income ,381 1,865 2,331 2,797 Foreign Exchange Transaction ,930 1,500 1,650 1,815 Other Income 966 1, Total Non Interest Income 2,773 4,253 5,803 5,234 6,223 7,190 Operating Income 5,817 8,245 12,931 14,544 17,549 20,770 Personal expenses 1,184 1,543 2,364 3,191 3,989 4,667 Expenditure for international banking , Other Expenses 1,116 1,386 1,643 2,111 2,460 2,855 Total Operating Expenses 2,467 3,138 5,835 5,802 7,049 8,242 Operating Profit 3,351 5,107 7,096 8,742 10,500 12,528 Extraordinary Items (55) Taxation 838 1,282 1,788 2,185 2,625 3,132 Net Profit 2,513 3,771 5,308 6,557 7,875 9,396 EPS (Kyat) Balance Sheet (Kyat mn) E 20187E 2019E Fiscal year ended 31 March Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Assets Cash at bank 5,814 5,496 8,989 9,169 9,352 9,539 Cash with CBM and other banks 11,702 20,101 31,427 34,085 38,003 42,975 Net Investment 18,788 31,621 50,852 62,337 74,805 89,765 Loans 60,848 87, , , , ,154 Net Loans 60,848 87, , , , ,154 Premises and Equipment 3,832 5,311 8,056 11,682 14,018 16,121 Other Assets 4,312 14,558 15,212 17,131 17,788 18,707 Total Assets 105, , , , , ,262 Liabilities & Equity Deposits 76, , , , , ,650 Other Lialilities 5,473 16,126 23,976 27,523 30,399 33,667 Total Liabilities 82, , , , , ,317 Paid up Capital 18,271 37,113 49,870 60,000 65,000 70,000 Premium on Share Capital 113 2,886 4,799 6,319 7,069 7,819 Retained Earning Other Equity Items 3,338 4,814 6,714 9,349 12,709 16,819 Total Shareholders' Equity 21,784 44,899 61,467 76,276 85,312 Source: MCB, KTZMICO Research 94,945 REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 20 of 22

21 Valuation and Financial Ratios E 20187E 2019E Fiscal year ended 31 March Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Per Share Data (Kyat) EPS DPS BVPS 5,962 6,049 6,163 6,356 6,562 6,782 Multiplier P/E (X) P/BV (X) Dividend yield (%) Growth YoY (%) Net Profit 39.2% 50.0% 40.8% 23.5% 20.1% 19.3% EPS 36.1% 26.1% 4.8% 2.7% 10.9% 10.8% Net Interest Income 5.9% 31.2% 78.5% 30.6% 21.7% 19.9% Non Interest Income 177.3% 53.4% 36.4% 9.8% 18.9% 15.5% Operating Income 50.1% 41.7% 56.8% 12.5% 20.7% 18.4% Operating Profit 40.7% 52.4% 38.9% 23.2% 20.1% 19.3% Loans 37.6% 43.2% 32.3% 30.0% 25.0% 25.0% Deposits 38.1% 34.1% 39.9% 25.0% 25.0% 25.3% Key Financial Ratios Gross NPLs (Kyat mn) 852 1,922 2,374 3,427 4,738 6,612 Gross NPLs/Loans 1.4% 2.2% 2.1% 2.2% 2.4% 2.7% Loan Loss Reserve/NPLs 142.9% 90.7% 97.1% 96.2% 98.8% 97.4% Loan Loss Reserve/Loans 2.0% 2.0% 2.0% 2.2% 2.5% 2.8% Provision/Total loans* 0.55% 0.60% 0.49% 0.66% 0.74% 0.75% Capital & Liquidity Ratio Capital Adequacy Ratio 54.4% 70.2% 73.5% NM NM NM Loans to Deposits Ratio 79.1% 84.4% 79.8% 83.0% 83.0% 82.8% Loans to Assets 57.8% 53.1% 50.2% 52.7% 54.9% 56.9% Liquidity ratio 29.8% 32.7% 49.7% NM NM NM Profitability Ratio ROA 2.7% 2.8% 2.7% 2.6% 2.5% 2.5% ROE 11.9% 11.3% 10.0% 9.5% 9.7% 10.4% Cost to Income 42.4% 38.1% 45.1% 39.9% 40.2% 39.7% Non Interest Income/Total Income 47.7% 51.6% 44.9% 36.0% 35.5% 34.6% Net Interest Margin (NIM) 3.73% 3.47% 4.24% 4.20% 4.15% 4.07% Tax rate 25.0% 25.4% 25.2% 25.0% 25.0% 25.0% Key Assumptions E 20187E 2019E Loan Growth Net 37.6% 43.2% 32.3% 30.0% 25.0% 25.0% Cost to Income 42.4% 38.1% 45.1% 39.9% 40.2% 39.7% Net Interest Margin 3.73% 3.47% 4.24% 4.20% 4.15% 4.07% Provision/Total loans* 0.55% 0.60% 0.49% 0.66% 0.74% 0.75% Source: MCB, KTZMICO Research * Provision for loan loss is currently booked through the retained earnings item in shareholders equity REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 21 of 22

22 Note: KT ZMICO has two major shareholders, Krungthai Bank PLC (KTB) and Seamico Securities PLC (ZMICO). Therefore, prior to making investments in the securities of KTB and ZMICO, investors should consider the risk factors carefully. An executive of KT ZMICO Securities is also a board member of BCP, BTC, CI, CPI, KBS, MAJOR, MK, PACE, PSL, SVH, VNG, ZMICO, SAWAD, TFG. A management member of KT ZMICO Securities is also a board member of BTC and NFC. KT ZMICO is a financial advisor for U, LOXLEY, ZMICO, MAKRO, CPALL, SAFARI, PACE, PLE, TPOLY, M CHAI, CI, EARTH. KT ZMICO is a co underwriter of ALT, EKH, RJH, BCPG. Corporate Governance Report (CGR) Source: Sec, Thai Institute of Directors Association (IOD) Excellent (scores: ) Satisfactory (scores: 60 69) Very Good (scores: 80 89) Pass (scores: 50 59) Good (scores: 70 79) No Logo N/A (scores: below 50) Anti corruption Progress Indicator Source: Sec, Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) Level 1 (Committed) : Organization s statement or board's resolution to work against corruption and to be in compliance with all relevant laws. Level 2 (Declared) : Public declaration statement to participate in Thailand's private sector Collective Action Coalition Against Corruption (CAC) or equivalent initiatives Level 3 (Established) : Public out preventive measures, risk assessment, communication and training for all employees, including consistent monitoring and review processes Level 4 (Certified) : Audit engagement by audit committee or auditors approved by the office of SEC, and receiving certification or assurance by independent external assurance providers (CAC etc.) Level 5 (Extended) : Extension of the anti corruption policy to business partners in the supply chain, and disclosure of any current investigations, prosecutions or closed cases Insufficient or not clearly defined policy Data not available / no policy DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. The use of any information contained in this document shall be at the sole discretion and risk of the user. KT ZMICO RESEARCH RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months OUTPERFORM: Expecting total returns between 10% to +15%; returns expected to exceed market returns over a six month period due to specific catalysts UNDERPERFORM: Expecting total returns between 10% to +15%; returns expected to be below market returns over a six month period due to specific catalysts SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months. SELL: Expecting negative total returns of 10% or more over the next 12 months REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 22 of 22