Candor Research Expert Analysis & Insight. 29 th of April 2015

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1 29 th of April 215 Candor Equities Limited

2 SECTOR OVERVIEW Sector to grow despite economic swings FY 215- Economic front The external sector forecasted to be moderat The local An currency increase expected in the policy to be depreciated rates of 5bps further can in be 215 expected amidst prevailing during BOP defic 2H215 amidst continuous pressure on the local currency. Market interest rates can be expected to increase by 2bps to 25bps amidst the forecast policy rate hike coupled with the likely increase of government borrowings in the domestic market. The GDP growth forecast may be subdued at 6.5% to 7% due to the slowdown in infrastructure development activities (subdued government expenditure) The external sector growth is forecast to be moderate due to the contraction in export earnings mainly as a result of the curtailed tea sector. Further, rising imports fuelled by a relaxed monitory stance may be detrimental to the trade balance. The local currency is likely to depreciate against the US Dollar to an average level of LKR 136-LKR 137 in the 2H215 due to stunted foreign inflows. FY 215- Banking sector - An exciting year ahead Analyst Pasindu Perera pasindu.perera@candorh.com Net Interest Income (NII) to improve in 2H215 amidst forecasted upward pressure in interest rates. Banks with negative re-pricing gaps though will be vulnerable to interest rate reversions. The quality of assets in the banking sector is likely be moderate in 2H215 due to the slowdown in economic growth coupled with the interest rate hike. This is despite the increase in disposable income resulting from the Government s interim budget proposals. We expect the lending growth to be stagnant in 2H215 with the expected rise in market interest rates and the possible slowdown in economic activities due to subdued government capital expenditure. Deposits growth is expected to accelerate in 2H215 due to the forecasted uptrend in interest rates, but CASA deposits are forecast to slow down due to shifts from low to high yielding deposits. Banking sector fee & commission income is expected to be at a healthy level in 215 due to the pickup in remittances and credit related fees. We expect the foreign exchange income to rise in 215 amidst weaker local currency. Further, the banking sector foreign currency reserves are likely to be revalued higher in line with the depreciating Rupee. Analyst Dushan Virantha dushan.virantha@candorh.com Technical Analyst Shadhir Jannath shadhir.jannath@candorh.com Investment Actions We are positive on the potential for the sector players to improve Net Interest Margins (NIMs) in the medium term. We expect loan growth to continue in 2H215 but at a more moderate pace compared to 2H214 due to the mixed economic sentiments. Further, the Banks with positive re-pricing gaps & a high CASA mix would be the prime focus for 2H215 in the backdrop of an increasing trend in interest rate cycle. 1

3 BANKING SECTOR - KEY DRIVER OF THE SRI LANKAN FINANCIAL SYSTEM Banking: The dominant sector of the financial system The banking sector, comprising of 25 Lincesed Commercial Banks (LCBs) including 12 foreign banks, 9 Licensed Speicalized Banks (LSBs) and the Central Bank dominates the Sri Lankan financial system with a 7% share of the total financial sector assets. The Commercial Banking sector is the prime component of the Banking sector which accounts for 7% of the total Banking sector assets & registers a 48.9% of the total financial sector assets. The sector assets grew at a CAGR of 17% over the last 5 years to record LKR 8.4tn in assets. Banking density has also seen an improvement from 16.8 per 1, persons to 17 during 214. The listed banking space contributes nearly 16% of the total market captialization of the Colombo Stock Exchange(CSE). Banking sector dominance in the Financial System LCBs dominates the Banking sector 4% 7% 19% 7% Banking Sector Other Deposit Taking Financial Institutions Specialised Financial Institutions Contractual Savings Institutions 13% 7% 17% Central Bank Licensed Commercial Banks Licensed Specialised Banks LCBs assets grew at a 4Y CAGR of 19% LKR.Mn 7,, 6,, 5,, 4,, 3,, 2,, 1,, - LCBs assets to GDP continues to rise 62% 6% 58% 56% 54% 52% 5% 48% Commercial Banks hold 66% MKT CAP in Bank & Finance sector LCBs MKT CAP to real GDP surged to 13% in % 12% 34% 66% Listed Banks MKT CAP Other FI MKT CAP 1% 8% 6% 4% 2% Source: Bloomberg, Candor research % 29 Source: Bloomberg, Candor research The Commercial Banking industry in Sri Lanka is considered to be highly concentrated with top 5 Commercial Banks sharing 74% of total LCB assets. Two state banks, Peoples Bank and Bank of Ceylon collectively hold 42% of sector assets. LCBs - Highly Concentrated Industry 8% 4% 1% 3% 5% 1% 1% 12% 14% 23% 19% Source: CBSL, Company, Candor research Bank of Ceylon Peoples Bank Commercial Bank Hatton National Bank National Development Bank Nations Trust Bank Pan Asia Bank Seylan Bank Sampath Bank Union Bank Others 2

4 BANKING SECTOR PERFORMANCES IN 214 During 214, the banking sector remained strong and steady amidst a strong regulatory framework with adequate liquidity buffers. Assets grew by 17% in 214 compared to the 16% growth in 213. Notably, the lending book grew at 13.6% due to the easing of the monetary policy since 212 December which was also complemented by the low inflationary regime. The contraction of pawning exposures due to the steady decline in global gold prices reduced the impairment charges while boosting the bank s bottom line. Continuous branch network expansion % Inflation remained at mid single digit in 214 The banking network expanded with 67 new banking outlets while installing 91 new Automated Teller Machines (ATM s) during 214. Notably of these, 43 banking outlets and 43 ATM s were established outside the western province. At the end of 214 the banking system was operating with 6, 554 banking outlets and 2, 635 ATM s. Further, during 214 the branch & banking outlets opened outside the western province for LCBs and LSBs amounted to 37 and 6 respectively.. January February March April May June July August September October Year-on-Year Change Key interet rates adjusted downward in 214 November December Industry Loan Book grew at 14% % 16. The total assets of the banking sector grew by 17% during 214 compared to the 16.5% growth in 213 with a total asset base of LKR 6.9tn (Excluding Central Bank). The cash and dues from banks was the primary contributor for the healthy growth in assets with a Year on Year growth of 59%. Consequently, the excess funds were invested in low or zero yielding sources. Notably, the credit picked up from 8.8% to 14% in 214 with a 56% share of the banking sector total assets. This was mainly attributed due to the healthy GDP growth of 7.4% in 214 backed by a low interest rate regime and relatively strong external sector performance. Further, the gross non-performing advances dipped by 14% compared to 63.8% growth in 213 amidst the contraction in pawning portfolio coupled with a relaxed inflationary stance However, the specific and general loan provisions increased by 5% and 2% respectively, reflecting a conservative approach despite the contraction in non-performing advances. The deposit growth slowed down but CASA improves Deposits stood as the prime contributor for banking sector funding with 67% share of total liabilities (including equity). However, the deposits growth momentum slowed down to 12% compared to 15% growth in 213 amidst the low interest rate regime. The banking sector CASA ratio stood at 39% in 214, improved from 34% seen in 213. However, the remaining funding gap was covered predominantly through borrowings, led by foreign currency borrowings which recorded a 32% growth Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AWLR AWDR SLFR SDFR Industry Asset Composition 12% 1% 4% 3% 8% 56% 55% 6% 4% 2% 29% 28% % 1% 13% Cash and Due From Banks Investments Net Loans and Advances Investment Properties Fixed Assets (net) Other Assets Industry liability Composition 12% 1% 8% 8% 4% 8% 4% 17% 21% 6% 4% 2% % 7% 67% Deposits Borrowings Other Liabilities Equity Capital & Reserves 3

5 Banking sector risks at lower levels in 214 Improved Credit risk with reduced NPL s During 214, the banking sector implemented prudential initaiatives to mitigate credit risk. The regulatory capital and the core capital surged by 4.89% and 4.15% respectively despite a 14% dip in gross non-performing advances. Compared to 213 the assets quality improved amidst the contraction in pawning portfolios and the pick up in lending. However, as a prudent stategy the banking institutions have increased specific and general provisions significantly despite the reduced non-performing advances. Stable Liquidity position The liquidity position of the banking sector remained steady during 214 with a 39.5% Statutory Liquid Asset Ratio (SLAR) compared to 37.7% in 213. This was predominetly driven by the 59% increase in cash and dues from banks. Further, the liquid assets to total assets and the liquid assets to deposits ratios improved during 214 despite a slight increase of credit to total deposits ratio to 83.1% from 82.2% in 213. Interest rate risk In 214, the market interest rates were further adjusted downward amidst the easing monetory policy stance. Thus, the banking sector withstood against the re-pricing risk as the substantial holdings of investments were held for trading. As a reuslt, the banking sector non- interest income surged by 14% in 214 compared to 9% gain in 213. Exchange rate risk Only 12% of the assets were denominated in foreign currency in 214. The marginal depreciation of LKR against USD by.7% in 214 had a neutral impact on banks profitability through revaluation of foreign currency assets and liabilities as the foreign currency liabilities marginally exceeded foreign currency assets. In 214 the foreign currency loans amounted to LKR 817bn whereas foreign currency borrowings stood at LKR 865bn. As a result some of the banking institutions experienced negative positions from foreign exchange trading in 214. Banking sector assets quality improved in 214 LKR.Mn % 8, 6. 6, 4. 4, 2. 2, -. Specific provisions General provisions Gross NPL ratio Net NPL ratio Liquidity buffers remained strong % Liquid assets to total assets Statutory liquid asset ratio Local currency remained stable LKR 132 Liquid assets to deposits Credit to total deposits NPL ratios Exchange rate Source: CBSL, Bloomberg, Candor research Banking sector withstand against the re-pricing risk LKR.Mn 6,. LKR.Mn 4,. 45,. 2,. 3,. - 15,. (2,.) - (4,.) Non-interest Income Investments - Held for Trading Provision for Decline in Value in Investments 4

6 18% surge in sector PAT The banking sector profit after tax surged by 18% to LKR 88bn during 214. Notably the net interest income increased by 13% (negative.4% in 213), as the significant growth in current deposits (28%) and the slight increase in time deposits (3%) coupled with healthy lending growth. However, the net interest margin (NIM) remained flat at 3.5% in 214 despite a continuous decline since 21. Further, the cost to income ratio dipped to 51.4% in 214 compared to 53.4% in 213. Provisions for bad & doubtful debts and loan write-offs declined by 27% to LKR 13bn amidst the contraction in pawning portfolio. As a result key profitability indicators of ROE and ROA surged to 16.5% and 1.4% respectively in 214. Stabilizing foreign exchange income in 214 Banking sector profitability remained moderate in 214 % % ROE Cost to income ratio ROA 1.6 ROA The banking sector net gain from foreign exchange trading amounted to LKR 26.74bn in 212 due to the notable depreciation of LKR against the USD (in 212 LKR depreciated against the USD by 12.6%). However, the foreign exchange income has stabilized in 214 with an increase of 15% due to the stable local currency. NIMs remained flat in 214 % Net interest margin Foreign exchage income grew at a 4Y CAGR of 12% LKR Mn Foreign Exchange Income (Net) 5

7 LCB s net fee & comission income surged by 13% LCB s net fee & comission income surged by 13% in 214 to LKR 21bn. This was mainly driven by the healthy GDP growth coupled with relatively sound external sector performances. Banking penetration levels remain low in Sri Lanka Even though Sri Lanka is a bank based economy it exhibited a low banking penetration compared to regional counter parts. The penetration of the banking sector which is measured by M2 (broad money) to GDP ratio stands at 4% which is well below to the regional peers such as India (85%), Singapore (137%), Thailand (141%), Malaysia (157%). Sri Lanka is also ranked relatively low in the degree of sophistication in the banking sector which is measured by near money (M) to narrow money (M1) ratio in comparison to the regional peers, apart from India and Thailand. Higher the ratio, lower the level of sophistication in the country s financial system. In addition, Sri Lanka is ranked low for country s intensity for formal finance, which is measured through the ratio of private sector credit to GDP. Given the low financial penetration, limited sophistication in the sector and lower dependency on formal finance, we feel the Sri Lankan banking sector has room to develop compared to regional standards. Therefore, we believe the country s Banking Sector is poised for growth in time to come. LCBs net fee & comission income surged by 13% in 214 LKR.Mn 25, 2, 15, 1, 5, - Net fee and commission income Source: Company, Candor research Sri Lankan economy grew by 7.4% in % Agriculture Industry Services GDP Growth Rate Below average banking penetration in Sri Lanka 25% 2% 15% 1% 5% % M2/GDP Source: International Financial Statistics IMF, Bloomberg and Candor research Sri Lanka has a low degree of sophestication in banking sector 1% 8% 6% 4% 2% % M/M1 Source: International Financial Statistics IMF, Bloomberg and Candor research Sri Lanka has a low intensity for formal finance 18% 15% 12% 9% 6% 3% % Private sector credit/gdp Source: International Financial Statistics IMF, Bloomberg and Candor research 6

8 OUTLOOK FOR 215 Interest rates are under pressure despite policy relaxation CBSL s surprise move The CBSL made a surprise move by pushing policy rates down by 5bps during last monetary policy meeting in April 215 with the view of fuelling economic growth while maintaining the low interest rate regime. This move came into play in a situation where the local currency was continuously under pressure (LKR depreciated 1.5% YTD) coinciding with depleting foreign reserves (currently stands at 6.8bn USD) Summary of external sector performance US$ mn Jan-14 Jan-15 Exports Imports 1, ,681.6 Trade Balance Earnings from Tourism Workers Remittances Inflows to the CSE (Net) Inflows to the Government 1, Official foreign reserves are gradually dimiinishing USD.m 1,. 8,. 6,. 4,. 2,.. Official reserve assets Local currency under pressure during 215 LKR Local Currency Depreciated 1.5% YTD Exchange rate 7

9 Additionally, the CBSL s move to lift the restriction placed on the access to the standing deposit facility for a maximum three times per calendar month at 6.5% and at 5% in excess was considered to be contradictory to the policy rate cut. This restriction was revoked on 3 rd March 215 while signaling a reversion in market interest rates. The T-bill rates for all maturities witnessed a reversion following the removal in the limitation of access to the standing deposit facility. Following the proposed initiative the weekly AWPR appreciated by 81bps before the policy rate cut on 15 th April 215. The CBSL's policy rates adjustments % Private Sector Credit to Grow 1H215 SDFR SLFR Private sector credit growth has continuously accelerated for the past 7 months reaching 12.6% y-o-y for February 215. Therefore, we forecast the private sector credit to pick up at a healthy rate in 1H215 in the backdrop of eased interest rates despite the rising pressure of Government s domestic sector borrowing requirements. Yield curve shifted upward in 215 Market interest rates continously declined in 2H214 % % AWPR AWDR SLFR SDFR % T-bill rates continously adjusted downward 5. 3 month T.bill 6 month T.bill 12 month T.bill 5 Year T.bond 1 Year T.bond Days 182-Days 364-Days 4% Private sector credit accelerated towards 2H214 3% 2% 1% % Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14-1% Private Sector Credit Growth Relaxed Rising AWPLR Interest - 1H215 Rates % Feb-15 1-Mar-15 3-Mar-15 5-Mar-15 7-Mar-15 9-Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar-15 2-Apr-15 4-Apr-15 6-Apr-15 8-Apr-15 1-Apr-15 Weekly AWPR 8

10 LKR to depreciate further against the Dollar The possible interest rate hike in the US towards the end of 215 may intensify the pressure on the local currency since Sri Lanka has already experienced a fall in foreign holdings in government securities in 215 (YTD). Foreign holdings in government securities witnessed a continuous drop from 11.44% to 1.79% over the first 4 months of the year. Further, we have observed a reduction in CBSL s foreign reserves during the first 4 months of the year, indicating an effort to sell USD by the CBSL to stabilize the LKR on top of the existing pressure on the local currency. The foreign reserve reduction is partly attributed to the government s foreign debt servicing commitments, amounting to USD 93mn as of January 215. At the same time, the accelerated credit growth has caused a 7.9% y-o-y increase in imports despite the prevailing lower global crude oil prices. At the same time, the oil price has also seen an uptrend since last month, adding a pressure on import bill. Moreover, the export earnings are also under pressure with the subdued tea export earnings and rubber related products. Given the possible slowdown in FDI s for the short to medium term amidst the changing political climate of the country, we believe the incremental foreign exchange inflows are likely to slow down. Further, the possible US rate hike in 2H215 will make USD borrowings more challenging for Sri Lanka. Therefore, we believe the currency is likely to depreciate in early 2H215 to the tune of approximately LKR 137/-, irrespective of the currency SWAP arrangements between CBSL and Reserve Bank of India. Government biased towards the domestic borrowing mediums The newly elected Government s fiscal policy appears to be biased towards local borrowing sources putting pressure on money market liquidity. Money market liquidity has seen a contraction in the first few months, requiring the CBSL to inject liquidity through the purchase of Government securities, resulting in a considerable increase in the CBSL s Treasury bills holding as at end of March 215. Hence, we believe the CBSL may look to tighten the interest rates in order to stabilize the currency with a view to maintain price stability across the economy. Therefore, a rise in market interest rates from nearly 2bps to 25bps is imperative in our view within 2H215 despite the recently relaxed policy rates. Summary - Thinking behind a possible interest rate hike The declining trend in the CBSL s official foreign reserves. The continuous depreciation in Sri Lankan rupee. Significant foreign debt servicing commitments (by January 215 the foreign debt servicing commitment amounted to USD 93mn). The forecasted interest rate hike in the US economy. The prevailing BOP deficit (by January 215 the BOP deficit amounted to USD 696.5mn). Regression analysis-dependent Variable: AWPR Variable Coefficient SLFR 4.41 R-squared =.87 Prob(F-statistic) =. Correlation analysis AWPR SLFR Exchange rate AWPR 1 SLFR.93 1 Exchange rate The above regression and correlation analysis illustrates the significant relationship between policy rates and market lending rates. It is evident that in the event policy rates increase by 1% it will lead the market interest rates to increase by 4.41%. Therefore, a 5bps increase in policy rates may result in approximately a 2.2% increase in market interest rate (AWPR) % Foreign attraction for treasuaries declines continously % of government securities held by foreigners Rising GOSL's Domestic Borrowings LKR.Bn LKR.Bn Net Credit to Government The CBSL's Government Securitiy holding to rise CBSL holdings of governemnt securities Excess liqudity continously dry up LKR.Bn Jan-12 2-Mar-12 2-May-12 2-Jul-12 2-Sep-12 2-Nov-12 2-Jan-13 2-Mar-13 2-May-13 2-Jul-13 2-Sep-13 2-Nov-13 2-Jan-14 2-Mar-14 2-May-14 2-Jul-14 2-Sep-14 2-Nov-14 2-Jan-15 2-Mar-15 Excess liquidity Link between interest and exchage rates % LKR AWPR SLFR Exchange rate (USD) Exchange rate 9

11 Lending growth to pick up in 1H215 but may be stagnant in 2H215 Banking sector credit grew at a 4Y CAGR of 18% The banking sector gross loans & advances have grown at a 4 year CAGR of 18%. However, we expect the private sector credit growth to slow down to 9% to 1% in 2H215 compared to the current 12.6% during last February. This is attributed to factors including the rising GOSL s domestic borrowings, forecasted interest rate reversion etc. Banking sector NIMs to improve in 215 Following the decision to remove the restriction for access to the standing deposit facility, we witnessed a noteworthy upward adjustment in the yield curve. Subsequently, the weekly AWPR adjusted upward with an increase of 62 bps from March to date. Thus, we expect a boost in the banking sector net interest income in 215, since the AWDR yet remained unchanged which translates into a wider spread. Notably, the banks with positive re-pricing gaps and high CASA mix such as COMB, SAMP, HNB will be able to capitalize on the forecasted interest rate hike and it s NIMs to improve accordingly. Assets quality likely to be moderate in 215 % Gross loans & advances % of total assets Gross loans & advances growth Credit to private sector continously growing LKR.Bn 5,. 4,. 3,. % Gross loans & advances growth The NPL ratio which seen an improvement in 214 is likely to be moderate in 215 due to the possible slowdown in economic growth outlook (projected to grow at 6.5%-7% for 215) coupled with forecasted interest rate hike (2bps to 25bps) 2,. 1,.. Deposits to be boosted in 2H215 with a contraction in CASA deposits The AWDR has not picked up yet subsequent to the monetary board decision to remove the restriction to access for the SDF and the policy rate cut in mid April. However, we expect the AWDR to rise by about 1bps. Thus we expect a moderate growth in deposits in 2H215 mainly owing to the rising trend in interest rates. Further an increase in time deposits compared to the CASA deposits can be expected under the projected outlook coupled with special interest scheme for senior citizens. Fee & commission income forecast to be healthy in 215 The fee & commission income predominately comprises of fees from loans & advances related services, trade & remittances related services and deposits related services. Thus, we are optimistic on fee & commission income in 215 mainly owing to the forecasted expansion in banking sector deposits coupled with moderate lending growth. Foreign exchange earnings to increase in 215 The majority of LCB s in the banking sector witnessed negative positions from foreign exchange activities in 214 amidst the strong local currency. However, we expect a significant gain from foreign exchange activities in 215 due to expected local currency depreciation. GDP to grow at a 6.5% to 7% in 215 We expect GDP growth to be muted at 6.5% to 7% in 215 due to the challenges arising from exports and FDIs along with subdued government expenditure on infrastructure developments in 215. Net Credit to Government Credit to Corporations Credit to the Private Sector Deposit growth slowed down in 214 % % CASA ratio Deposits growth Deposits % of total liabilitie NPL ratio Vs GDP & Inflation % % NPL ratio GDP growth Inflation Deposits % of total assets GDP growth & inflation 1

12 LCBs KEY PERFORMANCE INDICATORS Lending growth 3.% 25.% 2.% 15.% 1.% 5.% 4.% 3.% 2.% 35.% 3.% 25.% 2.% 15.% 1.% 4.% 3.% 2.% 5.% 1.% 5.% 1.% PABC recorded the most aggressive lending growth for FY214.% 4.% 3.% 2.% 1.%.% COMB SAMP.% 9.% 75.% 6.% 45.% 3.% 15.%.% NDB PABC.% 25.% 2.% 15.% 1.% 5.%.% HNB SEYB.% 15.% 9.% 75.% 6.% 45.% 3.% 15.%.% NTB UBC 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research 214 Provisions to net loans ratio 1.%.8%.6%.4%.2%.% -.2% HNB 1.%.8%.6%.4%.2%.% -.2% -.4% -.6% NDB 1.2% 1.%.8%.6%.4%.2%.% COMB 1.6% 1.2%.8%.4%.% -.4% -.8% NTB 1.5% 2.% 2.% 2.% UBC reported the highest credit risk provision for FY214 1.%.5%.% -.5% -1.% SAMP 1.6% 1.2%.8%.4%.% -.4% PABC 1.6% 1.2%.8%.4%.% SEYB 1.5% 1.%.5%.% -.5% UBC 2.1% 1.8% 1.5% 1.2%.9%.6%.3%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research

13 LCBs KEY PERFORMANCE INDICATORS Loans to deposits ratio 1.% 95.% 125.% 1.% 12.% 1.% 96.% 92.% 9.% 75.% 8.% 88.% 85.% 6.% 8.% 5.% 4.% 84.% 75.% 25.% 2.% 8.% 7.%.%.% 76.% NDB accounted the most aggressive lending compared to total deposits in % 88.% 84.% HNB 96.% 92.% 88.% 84.% NDB 86.% 84.% 82.% 8.% 78.% COMB 12.% 1.% 8.% 6.% 4.% NTB 8.% 8.% 76.% 2.% 76.% SAMP 76.% PABC 74.% SEYB.% UBC 14.% 12.% 1.% 8.% 6.% 4.% 2.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research 214 Leverage ratio 12.% 1.% 8.% 16.% 14.% 12.% 1.% 1.5% 1.% 9.5% 8.8% 8.6% 8.4% 6.% 8.% 4.% 2.% 6.% 4.% 2.% 9.% 8.5% 8.2% 8.%.%.% 8.% 7.8% UBC registered the highest leverage ratio in a back drop of TPG Asia s equity infusion 9.2% 8.8% 8.4% 8.% HNB 1.% 8.% 6.% 4.% NDB 12.% 1.% 8.% 6.% 4.% COMB 35.% 3.% 25.% 2.% 15.% 1.% NTB 7.6% 2.% 2.% 5.% 7.2% SAMP.% PABC.% SEYB.% UBC 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research

14 LCBs KEY PERFORMANCE INDICATORS Deposits growth 25.% 2.% 4.% 3.% 25.% 2.% 4.% 3.% 15.% 15.% 2.% 2.% 1.% 1.% 5.% 1.% 5.% 1.%.%.%.%.% PABC boosted their deposit base to fuel the aggressive lending 3.% 25.% 2.% HNB 8.% 6.% NDB 25.% 2.% 15.% COMB 6.% 5.% 4.% 3.% NTB 15.% 4.% 1.% 2.% 1.% 2.% 5.% 1.% 5.%.% SAMP.% PABC.% SEYB.% UBC 25.% 2.% 15.% 1.% 5.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research 214 CASA ratio 6.% 5.% 4.% 3.% 2.% 1.% 35.% 3.% 25.% 2.% 15.% 1.% 5.% 6.% 5.% 4.% 3.% 2.% 1.% 4.% 3.% 2.% 1.%.%.%.%.% COMB, SAMP & HNB attracted low cost funds 6.% 5.% 4.% 3.% 2.% 1.% HNB 35.% 3.% 25.% 2.% 15.% 1.% 5.% NDB 5.% 4.% 3.% 2.% 1.% COMB 4.% 3.% 2.% 1.% NTB.% SAMP.% PABC.% SEYB.% UBC 6.% 5.% 4.% 3.% 2.% 1.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research

15 LCBs KEY PERFORMANCE INDICATORS Total CAR 18.% 15.% 25.% 2.% 18.% 15.% 25.% 2.% 12.% 9.% 6.% 15.% 1.% 12.% 9.% 6.% 15.% 1.% 3.% 5.% 3.% 5.% Sector is adequately capitalized.% 14.7% 14.% HNB.% 18.% 15.% NDB.% 18.% 15.% COMB.% 49.% 42.% NTB 13.3% 12.6% 11.9% 11.2% 12.% 9.% 6.% 3.% 12.% 9.% 6.% 3.% 35.% 28.% 21.% 14.% 7.% 1.5%.%.%.% SAMP PABC SEYB UBC 49.% 42.% 35.% 28.% 21.% 14.% 7.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research 214 Core CAR 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.% 21.% 18.% 15.% 12.% 9.% 6.% 3.% 14.% 12.% 1.% 8.% 6.% 4.% 2.% 15.% 14.5% 14.% 13.5% 13.% Sector is adequately capitalized.% 12.% 1.% 8.% 6.% 4.% HNB.% 18.% 15.% 12.% 9.% 6.% NDB.% 18.% 15.% 12.% 9.% 6.% COMB 12.5% 49.% 42.% 35.% 28.% 21.% 14.% NTB 2.% 3.% 3.% 7.%.%.%.%.% SAMP PABC SEYB UBC 49.% 42.% 35.% 28.% 21.% 14.% 7.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research

16 LCBs KEY PERFORMANCE INDICATORS Cost to income ratio 8.% 6.% 6.% 5.% 4.% 6.% 5.% 4.% 7.% 6.% 5.% 4.% 2.% 3.% 2.% 1.% 3.% 2.% 1.% 4.% 3.% 2.% 1.% COMB & NDB lead the operating efficiency in Banking Sector.% 7.% 6.% 5.% 4.% HNB.% 72.% 69.% 66.% 63.% NDB.% 1.% 8.% 6.% COMB.% 1.% 8.% 6.% NTB 3.% 2.% 1.% 6.% 57.% 54.% 4.% 2.% 4.% 2.%.% 51.%.%.% SAMP PABC SEYB UBC 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research 214 Net interest margin NTB reported the healthiest NIMs for FY % 5.2% 5.% 4.8% 4.6% 4.4% 4.2% 6.% 5.% 4.% 3.% 2.% 1.% HNB 4.9% 4.2% 3.5% 2.8% 2.1% 1.4%.7%.% 7.% 6.% 5.% 4.% 3.% 2.% 1.% NDB 5.6% 4.9% 4.2% 3.5% 2.8% 2.1% 1.4%.7%.% 5.7% 5.4% 5.1% 4.8% 4.5% COMB 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% 6.% 5.% 4.% 3.% 2.% 1.% NTB.%.% 4.2%.% SAMP PABC SEYB UBC 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research

17 LCBs KEY PERFORMANCE INDICATORS Return on equity (ROE) 21.% 18.% 15.% 12.% 9.% 6.% 3.% 49.% 42.% 35.% 28.% 21.% 14.% 7.% 25.% 2.% 15.% 1.% 5.% 21.7% 21.% 2.3% 19.6% 18.9% 18.2%.%.%.% 17.5% NTB accounted the highest ROE 25.% 2.% 15.% 1.% HNB 3.% 25.% 2.% 15.% 1.% NDB 14.% 12.% 1.% 8.% 6.% 4.% COMB 12.% 1.% 8.% 6.% 4.% NTB 5.% 5.% 2.% 2.%.%.%.%.% SAMP PABC SEYB UBC 25.% 2.% 15.% 1.% 5.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC 214 Source: Company, Candor research Return on assets (ROA) 2.5% 2.% 6.% 5.% 2.5% 2.% 2.1% 1.8% 1.5% 1.%.5% 4.% 3.% 2.% 1.% 1.5% 1.%.5% 1.5% 1.2%.9%.6%.3%.%.%.%.% HNB, NDB, NTB registered the highest ROA levels in industry 2.5% 2.% 1.5% 1.% HNB 2.5% 2.% 1.5% 1.% NDB 1.5% 1.2%.9%.6% COMB 1.8% 1.5% 1.2%.9%.6% NTB.5%.5%.3%.3%.% SAMP.% PABC.% SEYB.% UBC 2.1% 1.8% 1.5% 1.2%.9%.6%.3%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research

18 LCBs KEY PERFORMANCE INDICATORS Gross non-performing loans 4.8% 4.2% 3.6% 3.% 2.4% 1.8% 1.2%.6% 3.% 2.5% 2.% 1.5% 1.%.5% 4.9% 4.2% 3.5% 2.8% 2.1% 1.4%.7% 6.% 5.% 4.% 3.% 2.% 1.%.%.%.%.% 4.2% HNB 1.% NDB 25.% COMB 1.% NTB 3.6% 8.% 2.% 8.% SAMP recorded an impressive asset quality 3.% 2.4% 1.8% 1.2%.6% 6.% 4.% 2.% 15.% 1.% 5.% 6.% 4.% 2.%.%.%.%.% SAMP PABC SEYB UBC 1.% 8.% 6.% 4.% 2.%.% COMB HNB NDB NTB PABC SAMP SEYB UBC Source: Company, Candor research

19 Candor Equities Limited

20 SRI LANKA BANKING INTERIM UPDATE Commercial Bank of Ceylon PLC (COMB) Bloomberg: COMB SL EQUITY, COMBX SL EQUITY Target Price LKR 195/- voting BUY LKR 154/- non-voting BUY Commercial Bank of Ceylon PLC posted a net profit growth of 2.2% y-o-y (+8.24% Q-o-Q) amounting to LKR 3.3bn for 4Q214 resulting in the highest ever profit of LKR 11.2bn for the full financial year ended 214 (growth of 6.4% y-o-y). This is the highest ever annual profit reported by a private sector commercial Bank in Sri Lankan Banking industry. Traction in retail business continued resulting in strong credit growth of +2.8% y-o-y, NIM stood at 4.2% and fee & commission income grew by +14.1% (y-o-y). Key Highlights Net Interest Income (NII) grew by 1% y-o-y to LKR 7.3bn despite a slump in NIM s from 4.9% to 4.1% y-o-y. The growth mainly stemmed from the loan book growth of 3% q-o-q and the favorable proposition of rate sensitive assets & liabilities, resulting in a negative re-pricing gap amidst a declining interest rate scenario. Further, COMB ended FY214 with an increase of 5% in NII to record at LKR 27.3bn. NIMs declined 8bps y-o-y to 4.1%, led by the reduction in interest yield on interest earning assets of nearly 28bps as opposed to a 21bps reduction in average interest expense on interest earning liabilities. (5bps reduction in interest spread). Interest spread was under pressure despite the improved CASA mix from 44% to 48%. Further, NIMs may be stagnant in 1H215 with the surprise policy rate cut in April, nevertheless going forward NIM s may go up slightly in 2H215 owing to the upward pressure in the market interest rates approximately by 2bps to 25bps. Therefore, we expect the interest spread to rise at approximately 3.5% leading the NIM s to improve at 4.4% in FY215E. Total Advances grew by 2.8% y-o-y for FY214, primarily driven by the healthy lending growth in sectors such as Financial & Business services (+75% y-o-y), Construction (+2% y-o-y) and Agriculture & Fishing (+18% y-o-y). Loans to the Government have also seen an exponential growth of 36% for FY214. We expect the private sector credit growth to further accelerate in 1H215 within a low inflationary environment while moderating towards 2H215 along with the upward pressure in interest rates. Hence, we expect the lending book to grow by an average of 12% in FY215E. As at 31 st December 214, COMB has reported a positive re-pricing gap for 1 year time bucket, indicating an upside in NII towards 2H215 along with the rising interest rates. Therefore, we expect the NII to accelerate at a healthy rate of 23% in FY215E backed by improved NIM s and healthy lending book growth. Key data Price at Evaluation - Voting (LKR) 172. Price at Evaluation - Non Voting (LKR) 138. Market Capitalization (LKR m) 148, Market Capitalization (USD m) 1,116.7 Company as a % of Total Market Cap (%) week High - Voting (LKR) week Low - Voting (LKR) week High - Non Voting (LKR) week Low - Non Voting (LKR) Average Daily Volume - Voting (6 Months) 557,916.2 Average Daily Volume - Non Voting (6 Months) 41, Number of Shares in Issue (m) - Voting Number of Shares in Issue (m) - Non Voting 56.3 Free Float (%) 74.5 Foreign Holding (%) - Voting 38. Foreign Holding (%) - Non Voting 21.5 Source: Bloomberg, Return analysis (%) 3M 6M 12M COMB SL Equity COMBX SL Equity ASPI Source: Bloomberg, Price Chart Source: Bloomberg COMB SL Equity COMBX SL Equity CSEALL Index Return against ASPI Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 COMB SL Equity CSEALL Index COMBX SL Equity Source: Bloomberg 19

21 COMMERCIAL BANK OF CEYLON PLC INTERIM UPDATE Deposits grew 17.3% y-o-y for FY214 led by a strong growth in savings balances & demand deposits amounting to 32% and 22% respectively. CASA improved by 4bps y-o-y to 48%. Non Interest Income grew by 13.9% y-o-y to LKR 11.7bn mainly on account of buoyancy in net fee & commission income by 14.1%. Net trading losses declined by nearly 81% with reduced foreign exchange losses. Going forward we expect the Non Interest Income to grow by approximately 4% in FY215E with gains projected to be materialized through revaluation of foreign currency reserves as a result of the possible depreciation in the currency towards the 2H215. Total banking income witnessed a growth of 7.9% in FY214 and is expected to grow at 17.3% in FY215E backed by a healthy growth in NII. COMB s branch network increased to 239 branches with the addition of 4 new branches in 214. This is the highest branch network for a private commercial bank in Sri Lanka. COMB possess a market share of 14% in the island s banking sector with a asset base of LKR 797bn Cost to Income ratio stood at 4% in FY214 and we expect the same to improve to 38.2%. Non Performing Loans (NPL s) decreased during FY214 from 3.9% to 3.5%. However, the Provision Cover ratio further strengthened from 45% to 46% reflecting reduced volatility on earnings due to bad credit quality. We expect the NPL s to edge up marginally to 3.9% in FY215E while maintaining the provision cover ratio at 46%. The bank received a license to open a representative office in Myanmar which will enable COMB to access Asian markets. Liquidity position was reasonably sound with Loans to Deposit ratio at 94% for FY214. We believe the ratio will further strengthen to 9% in FY215E. COMB is the bank with the least exposure to pawning at.45% of lending book. Bangladesh operations are continuing with a stable outlook having recorded an improved ROA of 5.9% for FY214 compared to 4.99% in FY213. Super Gains Tax which was imposed by the recent interim budget 215 will result in one off tax cash outflow amounting to approximately LKR 3.8bn based on the FY213 profit before tax values. COMB is the largest private sector Commercial Bank in terms of the total assets base amounting to LKR 797bn. We expect the dividend payout ratio to remain static at 5% for FY215E due to the unexpected one-off super gain tax, resulting in a LKR 6/- dividend per share for FY215E. We estimate the dividend yield to be 3.3% for voting share and 4.1% for non-voting share. 2

22 COMMERCIAL BANK OF CEYLON PLC INTERIM UPDATE Outlook & Valuation The bank has been reaping benefits of developing a sound low cost liability franchise which is reflected in its stable funding cost and improved interest margin. The recent cut in the policy rate leads us to derive that the credit growth would gain prominence over margin. Nevertheless we expect the interest spread will stem the growth towards 2H215 along with the rising interest rate environment amidst a positive re-pricing gap in the 1 year time bucket. We expect the sound credit growth & improved NIM s to drive operating profit at 27% & recurring after tax profit at 23% for FY215E. The counter currently trades at 1.9x on FY215E recurring earnings at market price of LKR 172/- whilst PBV stands at 1.91x on FY215E book value. Given the continued consolidation of its market position as the largest private sector Commercial Bank in Sri Lanka and its strong medium to long term prospects in the region, it is our view that COMB.N should be trading at a significant premium to the market. Hence, we recommend BUY with a target price of LKR 195/- for a 12 month horizon, allowing for a total return of approximately 17% including dividends. Further, we believe the COMB.X will grab interest due to relatively attractive dividend yield of 4.1% while assigning a target price of LKR 154/- with a discount of 21% to the voting target price, hence a BUY recommendation. Top 5 Shareholders Name of shareholders No. of Voting Shares Stake % DFCC Bank 119,86, Employees Provident Fund 78,86, HSBC Intl. Nominees Ltd. - JPMLU- Franklin Templeton Investment Funds 52,349, Mr.Y. S. H. I. Silva 44,692, Sri Lanka Insurance Corporation Ltd. - Life Fund 4,851, Name of shareholders No. of Non-voting Shares Stake % HSBC Intl. Nominees Ltd. 3,215, CITY Bank 1,834, GF Capital Global Limited 1,545, HINL - JPMCB - Butterfield Trust (Bermuda) Ltd. 1,379, Northern Trust Company S/A The Ashmoreemm Umbrella Fund Trust 1,328, Source: Company 21

23 COMMERCIAL BANK OF CEYLON PLC INTERIM UPDATE COMB opened 4 domestic branches in FY214 Potential Recovery for NIMs in the medium term LKR million 4, 35, 3, 25, 2, 15, 1, 5, - 211A 212A 213A 214A 215F 6.% 5.% 4.% 3.% 2.% 1.%.% % Number of Branches - Sri Lanka Number of Branches - Bangladesh No of ATMs Net interest income (LKR m) Net interest margin (NIM) (%) Recurring EPS expected to be boosted in FY215 Total Assets to grow 16, 18. 1,,.35 LKR million 14, 12, 1, 8, 6, 4, LKR 9, 8, 7, 6, 5, 4, 3, 2, 1, , A 212A 213A 214A 215F 211A 212A 213A 214A 215F Total Gross Loans and Advances (LKR m) Total other Assets (LKR m) Net profit attributable to equity holders (LKR m) Basic Recurring EPS (LKR) Growth of Total Assets % Sound liquidity position Lending book segregation Other, 16% Pawning,.45% Overdrafts, 14% Trade finance, 8% Term loans, 41% Leasing, 5% Housing & Personal, 6% COMB has the least pawning exposure in the industry Deposits grew at a 3Y CAGR of 18% 4.% 7, % 3.% 6, 5,.2 2.5% 2.% 1.5% LKR million 4, 3, 2,.15.1 % 1.%.5% 1,.5.% 211A 212A 213A 214A - 211A 212A 213A 214A 215F Pawning Composition to Loan % Deposit (LKR million) Growth of Deposit % 22

24 COMMERCIAL BANK OF CEYLON PLC INTERIM UPDATE Deposits segregation Sound low cost liability franchise Certificates of deposits,.18% Current, 8.53% 54% 52% 5% 48% 46% 52% 48% 47% 44% 45% 44% Time deposits, 51.44% Savings, 39.85% 42% 4% 38% 211A 212A 213A 214A 215F CASA ratio Segmental profit Operating income- segmental analysis 12% 4% Retail Banking 7% 1% 6% Retail Banking 2% Corporate Banking Corporate Banking 28% 54% Investment Banking International Operations Dealing/Treasury 17% 69% Investment Banking International Operations Dealing/Treasury Consistent Assets quality Improved Operating Efficiency % % 3. 42% % % 38% 36%. 211A 212A 213A 214A 215F 34% 211A 212A 213A 214A 215F Gross NPL Net NPL Cost to income All charts were sourced by: Company & 23

25 COMMERCIAL BANK OF CEYLON PLC INTERIM UPDATE KEY FINANCIAL DATA Profit & loss (LKR m) Year ended December 211A 212A 213A 214A 215F Net interest income 18,678 22,852 25,899 27,323 33,645 Net Fees & Commission Income 3,325 3,598 4,253 4,852 5,483 Net Trading Gain/Loss 462 2,494 1, , Other Operating income 4,222 4,7 7,67 7,178 7,68 Total banking income 25,764 33,14 36,196 39,47 45,88 Total operating expenses 11,525 13,568 14,364 15,67 17,48 Provisions 1,723 3,153 4,51 4,871 4,848 Operating profit 12,492 16,288 17,231 18,543 23,517 Earnings from associates VAT 1,523 1,987 1,969 2,689 3,763 Tax expense 3,48 4,232 4,119 4,617 5,928 NPAT Recurring 7,932 1,81 11,149 11,244 13,832 NPAT including non recurring 7,932 1,81 11,149 11,244 1,15 Net profit attributable to equity holders 7,932 1,8 1,562 11,24 1,12 Diluted EPS Recurring Book value per share DPS Balance sheet (LKR m) Year ended December 211A 212A 213A 214A 215F ASSETS Cash and cash equivalents 12,935 19,752 14,264 2,622 21,57 Trading capital 61,415 57, , , ,367 Loans, advances & leases 314, ,857 41, , ,195 Other assets 52,921 61,648 5,236 64,246 74,564 TOTAL ASSETS 441, , , , ,695 LIABILITIES Deposits 323,698 39, ,99 529, ,282 TOTAL LIABILITIES 397, ,22 545,77 726,4 788,954 EQUITY SHAREHOLDERS' FUNDS 44,139 52,968 61,446 71,26 78,69 Minorities TOTAL EQUITY 44,169 53,1 61,485 71,253 78,741 Source: Company Data, HBSL Key perfomance indicators Year ended December 211A 212A 213A 214A 215F Earnings and profitability Net interest margin (NIM) (%) Non interest income margin (%) Cost to income ratio (%) Norm'd NPAT growth (%) Norm'd EPS growth (%) Operating profit margin (%) Tax rate (%) Total assets yield (%) ROE (%) ROA (%) Capital adequacy Tier 1 ratio (%) Tier 2 ratio (%) Total capital Ratio (%) Leverage ratio (x) Asset quality Gross NPL ratio (%) Net NPL ratio (%) Provision cover ratio (%) Individual impairment to gross loans (%) Collective impairment to gross loans (%) Total impairment to gross loans (%) Loan growth (%) Liquidity Deposit growth (%) Loans to deposit ratio (%) Valuation multiples P/E (voting) (x) P/E (non voting) (x) P/BV (voting) (x) P/BV (non voting) (x) Mcap/risk weighted assets (x) Mcap/deposits (x) Dividend yield (voting) (%) Dividend yield (non voting) (%) Source: Company Data, Candor Historical data is based on interim financial statements. Therefore data may slightly vary from annual report figures. 24

26 COMMERCIAL BANK OF CEYLON PLC TECHNICAL ANALYSIS COMB has been trading within a triangle pattern since early 215 based on weekly candle chart pattern. This indicates the stock has been cornered with a strong downward trend resistant and upward support. Breakout either above or below the triangle pattern can create major volatility based on the candle volume & turnover. If the stock breaks above its upper level this will create the sentiment to reach its all time high resistant again which is LKR 19. However, if breakout triggers below the lower level of the triangle strong support is expected within the region of LKR 15 to LKR 14. Finally, based on daily candle pattern, the stock has moderate resistant at LKR 18 and reasonable support at LKR 159 levels. Both weekly and daily RSI levels are at neutral levels. Support/Resistance LKR Resistant Resistant Resistant Current Price 172. Support Support Support Source: Candor TA 25

27 COMMERCIAL BANK OF CEYLON PLC (NON VOTING) TECHNICAL ANALYSIS COMBX has been moving above a strong trend support pattern since May 214. However the stock is getting closer to a strong resistant level which is LKR The stock has indicated multiple resistances at LKR 139 levels since early 215. If the stock is able to breach above its resistant LKR 139 together with its strong trend support, a resistant breakout at this major resistant can create major bullish candles and reach resistant levels of LKR 143 and LKR 149 in the short to medium term. However, if the stock breaks below its trend support pattern it is expected find support at LKR 126 levels. Further if it fails to maintain above its initial support, then it is expected find strong support at LKR 115 levels. Both weekly and daily RSI levels are within neutral territory. Support/Resistance LKR Resistant Resistant Resistant Current Price 138. Support Support Support Source: Candor TA 26

28 SRI LANKA BANKING INTERIM UPDATE Hatton National Bank PLC (HNB) Bloomberg: HNB SL EQUITY, HNBNV SL EQUITY Target Price LKR 26/- voting BUY LKR 23/- non-voting BUY HNB s 4Q214 performances continued to remain healthy with a 45% growth in net profit on a q-o-q basis. This resulted for a noteworthy year end net profit of LKR 9.8bn with a 28% y-o-y growth. This was predominantly contributed through a 15% (q-o-q) growth in net interest income coupled with 14% (q-o-q) growth in net fee & commission income. Key Highlights Net interest income (NII) growth continued to be the prime contributor for strong bottom line with a 19% (y-o-y) growth to LKR 7.9bn. Further the NIM s improved by 3bps to 6.1%. A credit growth of 8.9% (q-o-q) coupled with favorable proposition due to short term negative re-pricing gaps amidst the low interest rate environment were the main drivers for healthy NII growth. Further, NII grew by 4% to LKR 25.9bn in FY214. However, FY214 NIM s dipped by 5bps to 5.8% amidst the contraction in interest yield on interest earnings assets by 24bps as opposed to the contraction in interest expenses on interest bearing liabilities by 2bps. Non-interest income grew by 65.9% (y-o-y) to LKR 3bn. A noteworthy recovery in foreign trading income (LKR 13mn) coupled with 2% (y-o-y) growth in net fee & commission income predominately contributed for healthy non-interest income growth. Further in FY214 non-interest income grew by 5.4% to LKR 11.3bn. The gross loans and advances grew by 13.5% to LKR 412.6bn in FY214. This was led by a 26% growth in Term loans amidst the low interest rate environment. However, the bank s pawning exposure has reduced by 43% to LKR 23bn. We expect further expansion in Term loans in 1H215 amidst the easing monetary policy stance whilst moderating during 2H215 following the forecasted interest rate reversion. Deposits accounted for 8.2% of total on-sheet liabilities in FY214, being the primary source of funding. Further, the total deposits grew by 5% (qo-q) to LKR 425.6bn. The total deposits are expected to grow by 12% in FY215E amidst forecasted interest rate reversion. Thus, the bank cost of funding will increase with an increase in borrowings to fund loan growth as well as a shift in the bank s deposit mix, with more demand and savings deposits being shifted to high yield time deposits. Key data Price at Evaluation - Voting (LKR) 23.2 Price at Evaluation - Non Voting (LKR) 177. Market Capitalization (LKR m) 88, Market Capitalization (USD m) Company as a % of Total Market Cap (%) week High - Voting (LKR) week Low - Voting (LKR) week High - Non Voting (LKR) week Low - Non Voting (LKR) Average Daily Volume - Voting (6 Months) 157,672.5 Average Daily Volume - Non Voting (6 Months) 77, Number of Shares in Issue (m) - Voting Number of Shares in Issue (m) - Non Voting 79.7 Free Float (%) Foreign Holding (%) - Voting 27.8 Foreign Holding (%) - Non Voting 39.6 Source: Bloomberg, Return analysis (%) 3M 6M 12M HNB SL Equity HNBNV SL Equity ASPI Source: Bloomberg, Price Chart Source: Bloomberg HNB SL Equity HNBNV SL Equity CSEALL Index Return against ASPI Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr HNB SL Equity CSEALL Index HNBNV SL Equity Source: Bloomberg 27

29 HATTON NATIONAL BANK PLC INTERIM UPDATE Asset quality further improved with a gross NPL of 3.16% and a net NPL of 1.43%. A healthy credit growth of 13.5% coupled with low interest environment largely contributed to the improved asset quality. Furthermore, provision cover ratio improved from 4.4% to 44.2% in FY214 while managing the credit risk. However, we expect a marginal deterioration of assets quality with a gross NPL ratio of 3.5% and a net NPL ratio of 1.55% amidst the mix outlook from economic front. The regulatory capital position has moderated in FY214 with a core CAR of 12.7% and a total CAR of 15.34%. But the bank managed to stand well above the regulatory requirement. With the optimistic outlook on the bank s core business operation we expect an improvement in the regulatory capital position with a core CAR of 13.32% and a total CAR of 15.88% in FY215E. The liquidity position was healthy in FY214 with a statutory liquid assets ratio of 22.81% compared to the minimum requirement of 2%. The Advance to Deposit Ratio (ADR) stood at 94% with adequate liquidity to meet customer deposits. We expect further improvement in the liquidity position complementing the ADR to 92.36% in FY215E with the 12% growth in deposits compared to 1% expansion in total loans and advances. The bank s cost to income ratio improved marginally from 51.66% to 51.54% in FY214 in line with the industry standards. We expect further improvement in the cost to income ratio to 5.95% in FY215E amidst the optimistic outlook on core business operations. The bank s CASA ratio notably improved to 45% compared to 38% in 213. But we expect a dip in CASA ratio to 39% in FY215E amidst the forecast interest rate reversion. HNB won Gold award for the Emerging Islamic Finance Entity of the year by the Islamic Banking Unit for 213/214 at the Sri Lanka Islamic Banking and Finance Institute (SLBFI) Awards 214 HNB is the pioneer in introducing mobile POS technology in Sri Lanka branded MoMo HNB PLC 4Q214 entered into an agreement with The Export Import Bank of Korea (KEXIM) to establish a revolving credit line of USD 5mn to finance trade between Sri Lanka and Korea. Super gains tax which was imposed by the recent interim budget 215 will result in a one off tax cash outflow of LKR 2.7bn based on 25% of FY213 profit before tax. As a result we estimate the net profit for FY215E will dip by 17.3% to LKR 8.1bn, but the recurring profit will amount to LKR 11.5bn. The bank maintained a stable DPS of LKR 8.5 over last 3 years. However, we expect a dip in DPS for LKR 6.4 in FY215E due to the one off super gain tax. Thus the dividend yield for voting and non-voting will amount to 2.8% and 3.63% respectively in FY215E. HNB Assurance PLC, the insurance arm of HNB has continuously experienced a growth momentum which currently contributes 7.6% of the consolidated income of the group. 28

30 HATTON NATIONAL BANK PLC INTERIM UPDATE Outlook & Valuation With the recent policy rate cut we expect a boost in credit growth in the bank during 1H215 which translates into healthy NIM s amidst wider interest rate spread. Furthermore, with the expected market interest rate hike during 2H215 we expect a further expansion in NIM s amidst the bank s total positive re-pricing gap of LKR 46.9bn despite a slight contraction in volume growth. We expect HNB to record a net profit of LKR 8.1bn and a recurring net profit of 11.5bn (Up by 9.8% y-o-y) driven by a 16% growth in net interest income coupled with 15% y-o-y growth in net fee & commission income in FY215E. We surmise that additional cost efficiencies coupled with moderate branch expansions would further improve the cost to income ratio of the bank to 51% in FY215E while contributing to the bank s bottom line. In terms of PER, HNB.N is valued at 8.58x on FY215E recurring earnings at a market price of LKR 23/- whilst PBV stands at 1.22x on FY215E book value. This is compared to the BFT sector trailing PER of 13.4x and PBV of 1.6x. Thus, given the medium term strong earnings growth potential and being a timely bank in fine-tuning its strategies to meet the market conditions with strong brand loyalty we rate HNB.N share as a BUY with a target price of LKR 26/- for 12 months horizon. Further, we project HNB.N to generate a total return of 15.84% (Including dividends) over the 12 months horizon. On the other hand, we project HNB.X will grab investor interest due to healthy total return of 18.21% (including 3.63% dividend yield) while assigning a target price of LKR 23/-, maintaining a discount of 22% to the voting target price. Hence, we recommend BUY for HNB.X. Top 5 Shareholders Name of shareholders No. of Voting Shares Stake % Sri Lanka Insurance Corporation Ltd. 47,635, Employees Provident Fund 31,836, Milford Exports (Ceylon) Limited 25,828, Mr.Sohli Edelji Captain 23,75, Stassen Exports Ltd 22,387,96 7. Name of shareholders No. of Non-voting Shares Stake % HSBC Intl nominees Ltd-JPMLU-Franklin Templeton Invest 7,625, Mellon-Frontaura Global Frontier Fund LLC 7,334, HSBC Int'l Nom Ltd-UBS AG Zurich 4,437, The Bank of New York Mellon SA/NV-CF Ruffer Total Return Fund 2,557, Employees Trust Fund Board 2,22,

31 HATTON NATIONAL BANK PLC INTERIM UPDATE Branch expansion remained flat in FY214 Net interest income continue to grow 3 35, , 6.4 No of Branches LKR million 25, 2, 15, 1, % 5 5, A 212A 213A 214A 215F Number of Branches Net interest income (LKR m) Net interest margin (NIM) (%) Recurring EPS to be boosted in FY215E Total assets grew at a 4Y CAGR of 15% 12, 3. 7,.2 1, 25. 6, LKR million 8, 6, LKR 5, 4, 3, , 1. 2,.6 2, 5. 1, A 212A 213A 214A 215F A 212A 213A 214A 215F Net profit attributable to equity holders (LKR m) Basic EPS (LKR) Total Gross Loans and Advances (LKR m) Total other Assets ( LKR m) Growth of Total Assets % Sound liquidity position Pawning exposure continuously declined 215F 214A 213A 212A 211A 18.% 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.% ADR %.% Pawning Composition to Loan % Lending book segregation Deposit segregation Other loans, 27.2% Overdrafts, 16.8% Certificates of deposit, 1% Current account deposits, 6% Lease Rentals Receivable, 5.9% Pawning advances, 5.6% Term loans, 44.5% Time deposits, 61% Savings deposits, 33% 3

32 HATTON NATIONAL BANK PLC INTERIM UPDATE Deposit grew at a 3Y CAGR of 14% Insurance sector continuously growing LKR million 6, 5, 4, 3, 2, 1, % 12.% 1.% 8.% 6.% 4.% 2.% 6.15% 6.39% 7.6% 6.68% 5.57% 4.87% 85.69% 86.77% 85.28% 211A 212A 213A 214A 215F.% Deposit (LKR million) Growth of Deposit % Banking Leasing Property Insurance Others CASA ratio Healthy assets quality 48% % 44% 46% 45% % 2.5 4% % 2. 38% 39% 38% 39% %.5 34%. 211A 212A 213A 214A 215F 211A 212A 213A 214A 215F CASA Ratio Gross NPL Net NPL Improved operating efficiency 6% 58% 56% 54% 52% 5% 48% 46% 211A 212A 213A 214A 215F Cost to income ratio All charts were sourced by: Company & 31

33 HATTON NATIONAL BANK PLC INTERIM UPDATE KEY FINANCIAL DATA Profit & loss (LKR m) Year ended December 211A 212A 213A 214A 215F Net interest income 16,92 22,444 25,5 25,985 3,246 Net fee & comission income 2,931 3,769 4,3 4,579 5,266 Net trading gain/loss 426 1,624 1, , Other operating income 3,624 4,897 4,958 5,713 5,664 Total banking income 23,44 29,6 32,59 37,329 41,7 Total operating expenses 13,645 16,514 16,837 19,24 21,247 Provisions 51 1,162 3,35 2,533 2,254 Operating profit 1,296 11,924 12,448 15,556 18,2 Earnings from associates VAT 1,224 1,248 1,66 2,55 2,985 Tax expense 2,156 2,421 3,13 3,8 4,3 NPAT Recurring 6,9 8,271 7,812 1,68 11,58 NPAT including non recurring 6,9 8,271 7,812 1,68 8,329 Net profit attributable to equity holders 6,819 8,111 7,65 9,82 8,123 Diluted EPS Recurring Book value per share DPS Balance sheet (LKR m) Year ended December 211A 212A 213A 214A 215F ASSETS Cash and cash equivalents 7,576 8,849 11,588 13,422 14,31 Trading capital 51,435 58,929 64,27 69,443 7,832 Loans, advances & leases 257,435 33, ,846 41,282 44,293 Other assets 74,85 87,699 96, , ,3 TOTAL ASSETS 391, , ,395 6, ,456 LIABILITIES Deposits 29,912 34, ,1 425,62 476,695 TOTAL LIABILITIES 348,94 46,85 466,729 53,637 58,369 EQUITY SHAREHOLDERS' FUNDS 41,575 51,624 57,562 67,95 76,147 Minorities ,14 1,734 1,94 TOTAL EQUITY 42,357 52,594 58,666 69,639 78,87 Source: Company Data, Candor Key perfomance indicators Year ended December 211A 212A 213A 214A 215F Earnings and profitability Net interest margin (NIM) (%) Non interest income margin (%) Cost to income ratio (%) Norm'd NPAT Growth (%) Norm'd EPS Growth (%) Operating profit margin (%) Tax rate (%) Total assets yield (%) ROE (%) ROA (%) Capital adequacy Tier 1 ratio (%) Tier 2 ratio (%) Total capital Ratio (%) Leverage ratio (x) Asset quality Gross NPL ratio (%) Net NPL ratio (%) Individual impairment to gross loans (%) Collective impairment to gross loans (%) Total impairment to gross loans (%) Loan growth (%) Liquidity Deposit growth (%) Loans to deposit ratio (%) Valuation multiples P/E (voting) (x) P/E (non voting) (x) P/BV (voting) (x) P/BV (non voting) (x) Mcap/risk weighted assets (x) Mcap/deposits (x) Dividend yield (voting) (%) Dividend yield (non voting) (%) Source: Company Data, Candor Historical data is based on interim financial statements. Therefore data may slightly vary from annual report figures. 32

34 HATTON NATIONAL BANK PLC TECHNICAL ANALYSIS HNB has been trading above its trend resistant level since early 215 triggered through a major resistant breakout placing major bullish candles after its breakout point. Currently, the former trend resistant level of HNB acts as strong support level since its breakout. The bullish rally after its breakout was interrupted at the resistant level of LKR 24 levels and the bearish turnaround eventually found support above its trend support discussed earlier. If HNB is able to penetrate its LKR 24 resistant region with the support of its upward trend pattern, then the stock can test its next Fibonacci resistant level LKR within the medium term. However, if HNB fails to maintain its price above the current trend support, it is expected find support between LKR 22 to LKR 21 regions based on weekly Fibonacci levels. Weekly & Daily RSI are within neutral levels. Support/Resistance LKR Resistant Resistant Resistant Current Price 23.2 Support Support Support Source: Candor TA 33

35 HATTON NATIONAL BANK PLC (NON VOTING) TECHNICAL ANALYSIS HNBX initiated to trade above its medium term trend pattern since November 214 after its safe landing on strong support level LKR 142. The stock has indicated strong resistance at LKR 186 levels which eventually resulted in a major price dip together with overbought conditions in March 215. However the stock found strong support above its medium term trend support pattern. If HNBX is able to conservatively maintain itself above its trend support level, it is expected to breach its former resistance level LKR 186 by July 215 and trigger a resistant breakout. The resulting breakout can push the stock to test its new resistant levels of LKR & LKR within the medium term. However if the stock fails to sustain above its trend support level, it is expected to find support at LKR 164 to LKR 157 levels. Currently, both weekly & daily RSI levels are at neutral levels. Support/Resistance LKR Resistant Resistant Resistant Current Price 177. Support Support Support Source: Candor TA 34

36 SRI LANKA BANKING INTERIM UPDATE National Development Bank PLC (NDB) Bloomberg: NDB SL EQUITY Target Price LKR 27/- HOLD National Development Bank 4Q214 results remained strong with a 93% (y-o-y) growth in net profit to LKR 858mn. This resulted in a 12 month accumulated profit of LKR 4.1bn, amounting to a growth of 56.5%. Net interest income grew by 1% (y-o-y) to LKR 1.9bn with a NIM of 3.2%. Asset quality remained stable with a gross NPL ratio of 2.51% amidst the low interest rate environment coupled with 81% (y-o-y) contraction in pawning exposure. However, the CASA ratio continues to remain low at 24%, well below to the industry standards. Key Highlights Net interest income continued to remain strong at -5% (q-o-q) growth to LKR 1.9bn (+13% y-o-y) backed by a 28% (y-o-y) lending book growth coupled with 3.6% net interest margin. However, NIM dipped by 4bps (y-o-y) due to the slump in low cost funding of CASA ratio to 24% in FY214 compared to 25% in FY213. Further, we expect NII will remain flat at LKR 7.9bn (-.46% y-o-y) in FY215E mainly owing to the forecasted contraction in CASA ratio to 22%. Key data Price at Evaluation (LKR) 265. Market Capitalization (LKR m) 43, Market Capitalization (USD m) Company as a % of Total Market Cap (%) week High (LKR) week Low (LKR) 187. Average Daily Volume (6 Months) 8,18.27 Number of Shares in Issue (m) Free Float (%) Foreign Holding (%) 42.4 Source: Bloomberg, Return analysis (%) 3M 6M 12M NDB SL Equity ASPI Source: Bloomberg, Non-interest income dipped by 7% (y-o-y) to LKR 1.3bn led by a 67% (y-oy) contraction in foreign exchange income to LKR 211mn. But on a y-o-y basis non-interest income surged by 11% to LKR 5.1bn due to the 512% surge in other income. However, we expect non-interest income will fall to LKR 4.9bn in FY215E amidst the expected contraction in other income. Furthermore, total banking income marginally increased by 2% (y-o-y) to LKR 3.3bn in 4Q214. The bank lending book grew at a 4 year CAGR of 28%, further the lending book grew by 6.5% q-o-q and 28% y-o-y to LKR 18.2bn. This growth was predominately driven by a 57% growth in long-term loans within the low interest rate environment. Pawning exposure also experienced a drop of 81% which resulted to a healthy gross NPL of 2.51%. However, we expect the lending book growth to be at 21% amounting to LKR 218.1bn in FY215E amidst the forecasted interest rate reversion. The bank deposits grew at a 4Y CAGR of 26%, which accounted to 63% of bank total on-balance sheet liabilities. Furthermore, the bank deposits grew by 17% (y-o-y) and.8% (q-o-q) to LKR 151.5bn, this was predominately driven by an 18% growth in time deposits despite a low interest rate regime, as a result the CASA ratio of was at a low of 24%. However, we expect a boost in total deposit growth of 18% to LKR 178.8bn in FY215E which will predominately drive the time deposits amidst forecasted interest rate reversion. This may drag down the bank s CASA ratio to 22% in FY215E. Price Chart Source: Bloomberg NDB SL Equity Return against ASPI Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 NDB SL Equity Source: Bloomberg CSEALL Index Dec 14 Jan 15 Feb 15 CSEALL Index Mar 15 Apr 15 35

37 NATIONAL DEVELOPMENT BANK PLC INTERIM UPDATE The bank has recorded a resilient continuation in its assets quality over the last 4 years. The bank s gross and net NPL ratios stood at 2.51% and 1.25% respectively in FY214. However, we expect a slight reduction in asset quality with a gross NPL ratio of 2.55% and a net NPL ratio of 1.28% in FY215E amidst the mixed outlook on the Sri Lankan economy in FY215E. The bank liquidity position remained resilient in FY214 with a statutory liquid assets ratio (DBU) of 23.85% and a positive maturity gap of LKR 29bn. Nevertheless, the bank s ADR stood at % in FY214, the highest amongst its peers. This is indicative of the bank s reliance on costly borrowings to finance the lending growth. We expect a further increase in ADR to 118.9% in FY215E amidst the bank s aggressive appetite on lending. The regulatory capital position remained moderate during FY214 with a core CAR of 12.92% and a total CAR of 17.55% compared to core CAR of 15.15% and a total CAR of 21.4% in FY213. The bank though managed to stand well above the regulatory requirement. This demonstrates the bank s ability to meet with liabilities and risks on time. This further exhibits a healthy risk rating of AA-. Given the optimistic outlook on bank s core business operations we expect a further continuation of healthy regulatory capital levels in FY215E with a core CAR of 12.87% and a total CAR of 17.17%. NDB group operations expanded with the launch of the Emerald Sri Lanka fund, the largest private equity fund dedicated to Sri Lanka. The bank branch network expanded by 5 new branches to 83 The operation efficiency which as measured by the cost to income ratio improved from 48.18% to 45.59% in FY214 amidst the low interest rate environment. However, we expect a further increase in cost to income ratio to 5% in FY215E due to the heavy reliance on costly borrowings for lending growth. Super gain tax which was imposed by the recent interim budget 215 will result in a one off tax cash disbursement of LKR 966mn based on 25% of FY213 profit before tax. As a result the net profit for FY215E will dip by 32.4% to LKR 2.8bn, but the recurring profit is projected to reach at LKR 3.8bn with a 9.7% y-o-y dip. The bank declared a DPS of LKR 11. in FY214 with a dividend payout of 43.9%. However, we expect a dip in DPS to LKR 5.1 in FY215E with a dividend payout of 3% amidst the one off super gains tax. As a result dividend yield will dip to 1.92% compared to 4.4% in FY

38 NATIONAL DEVELOPMENT BANK PLC INTERIM UPDATE Outlook & Valuation NDB has exhibited sound fundamentals in recent years with the exception of liquidity risk management and securing low cost of funding. Earnings forecast of LKR 3.8bn (-9.7% y-o-y) excluding non-recurring super gain tax correspond to a PER of 11.76x and a PBV of 1.47x. However, the company in a position to accelerate their profit growth momentum up to 39% over a 3 year horizon amidst the healthy net interest income coupled with resilient non-interest income. Thus, we recommend a HOLD with a target price of LKR 27/- for 12 months horizon. Top 5 Shareholders Name of shareholders No. of Shares Stake % Bank Of Ceylon No. 1 Account 16,371, Employees Provident Fund 16,1, Sri Lanka Insurance Corporation Limited - General Fund 9,388, HSBC Intl Nom Ltd - Snfe-Ntasian Discovery Master Fund 8,973, Dr. S Yaddehige 8,669, 5.25 Source: Company 37

39 NATIONAL DEVELOPMENT BANK PLC INTERIM UPDATE Branch network further expanded in FY214 NII & NIMs LKR million % A 212A 213A 214A 215F Number of Branches No of ATMs Net interest income (LKR m) Net interest margin (NIM) (%) Recurring EPS Total assets to grow at a moderate pace ,.35 LKR million LKR 25, 2, 15, 1, , A 212A 213A 214A 215F 211A 212A 213A 214A 215F Net profit attributable to equity holders (LKR m) Basic EPS (LKR) Total Gross Loans and Advances (LKR m) Total other Assets (LKR m) Growth of Total Assets % NDB will continue the aggressive appetite on lending Pawning exposure decreased continuously 4.% 215F 3.5% 3.% 214A 2.5% 213A 2.% 1.5% 212A 1.%.5% 211A.% 211A 212A 213A 214A Pawning Exposure ADR % Lending book segregation Deposit segregation Consumer, & Other Loans, 21% Pawning,.23% Long-term loans, 22% Other Deposits, % Margin Deposits, % Demand Deposits, 8% Savings Deposits, 16% Trade and Finance Loans, 19% Overdrafts, 13% Medium and short tem loans, 24% Time Deposits, 76% 38

40 NATIONAL DEVELOPMENT BANK PLC INTERIM UPDATE Deposit grew at a 3Y CAGR of 23% Core business operation remained solid % % 1.95% 2.8% LKR million % 8.% 6.% 4.% 22.71% 74.33% 97.25% 96.8% % 211A 212A 213A 214A 215F.% Deposit (LKR million) Growth of Deposit % Banking Capital Markets Property Investment Others High cost of funding Assets quality 25% 3.% 25% 25% 24% 24% 24% 2.5% 24% 23% 2.% 23% 22% 22% 1.5% 22% 21% 22% 1.% 21%.5% 2% 2%.% 211A 212A 213A 214A 215F 211A 212A 213A 214A 215F CASA ratio Gross NPL Net NPL Improved operating efficiency 6% 5% 4% 3% 2% 1% % 211A 212A 213A 214A 215F Cost to income ratio All charts were sourced by: Company & 39

41 NATIONAL DEVELOPMENT BANK PLC INTERIM UPDATE KEY FINANCIAL DATA Profit & loss (LKR m) Year ended December 211A 212A 213A 214A 215F Net interest income 4,99 5,819 7,12 7,913 7,877 Net Fees & Commission Income 1,916 1,72 2,411 2,564 3,77 Net Trading Gain/Loss 448 1,272 1, ,1 Other Operating income , Total banking income 7,922 9,189 11,549 12,966 12,744 Total operating expenses 3,981 4,497 5,564 5,911 6,369 Provisions , Operating profit 4,3 4,641 4,724 6,527 5,829 Earnings from associates VAT , Tax expense 1,93 1,275 1,151 1,349 1,218 NPAT Recurring 2,763 3,182 2,712 4,246 3,834 NPAT including non recurring 2,763 8,932 2,712 4,246 2,869 Net profit attributable to equity holders 2,527 3,14 2,642 4,134 2,793 Diluted EPS Recurring Book value per share DPS * LKR 5.75 b of capital gains from divestment of AVIVA NDB shares during 212 Balance sheet (LKR m) Year ended December 211A 212A 213A 214A 215F ASSETS Cash and cash equivalents 2,519 3,635 2,668 3,274 3,91 Trading capital ,167 18,58 9,289 Loans, advances & leases 93,166 19, , , ,543 Other assets 46,717 6,645 61,1 72,562 52,934 TOTAL ASSETS 142, ,12 26, ,13 278,667 LIABILITIES Deposits 82,94 17, , , ,753 TOTAL LIABILITIES 124,75 148, ,455 24, ,926 EQUITY SHAREHOLDERS' FUNDS 16,925 24,883 24,514 27,876 29,742 Minorities TOTAL EQUITY 17,838 25,79 25,362 28,798 3,74 Key perfomance indicators Year ended December 211A 212A 213A 214A 215F Earnings and profitability Net interest margin (NIM) (%) Non interest income margin (%) Cost to income ratio (%) Norm'd NPAT growth (%) Norm'd EPS growth (%) Operating profit margin (%) Tax rate (%) Total assets yield (%) ROE (%) ROA (%) Capital adequacy Tier 1 ratio (%) Tier 2 ratio (%) Total capital Ratio (%) Leverage ratio (x) Asset quality Gross NPL ratio (%) Net NPL ratio (%) Individual impairment to gross loans (%) Collective impairment to gross loans (%) Total impairment to gross loans (%) Loan growth (%) Liquidity Deposit growth (%) Loans to deposit ratio (%) Valuation multiples P/E (x) P/BV (x) Mcap/risk weighted assets (x) Mcap/deposits (x) Dividend yield (%) Source: Company Data, Candor Historical data is based on interim financial statements. Therefore data may slightly vary from annual report figures. 4

42 NATIONAL DEVELOPMENT BANK PLC TECHNICAL ANALYSIS NDB initiated its strong medium term trend support after its major price breakout at LKR 18. However it is apparent that the stock is experiencing difficulty in breaking above LKR 265. Therefore, LKR 265 levels can be considered as a major resistant region where the stock has tested this level multiple times and failed to break above the level since October 214. If NDB manages to break above its major resistance with the support of the developing bullish flag pattern, than any major breakout above LKR 265 can push the stock test its next key resistant level LKR 286 within short to medium term. Currently, the stock trades within a safe region which is between LKR 265 & LKR 24. However if the stock fails to maintain itself within this region, it is expected to find strong supports at LKR 23 levels & then at LKR 223 levels. Currently, both weekly & daily RSI levels are closer to overbought levels. Purely looking at the absolute RSI values it can be considered as neutral levels. Support/Resistance LKR Resistant Resistant Resistant Current Price 265. Support Support2 25. Support Source: Candor TA 41

43 SRI LANKA BANKING INTERIM UPDATE Nations Trust Bank PLC (NTB) Bloomberg: NTB SL EQUITY Target Price LKR 12/- BUY Nations Trust Bank recorded LKR 549mn as net profits in 4QFY214 which accounts for a y-o-y growth of 1.7%. This led to a total accumulated profit of LKR 2.5bn in FY214 with an 18.7% y-o-y growth. Net interest income was the prime contributor for the bottom line with a -.1% q-o-q growth and a 16% y-o-y growth to LKR 8.9bn in FY214. Further the asset quality remained healthy with a gross NPL and a net NPL of 4.14% and 2.73% respectively amidst a 48% (y-o-y) contraction in the pawning portfolio. Key Highlights NTB recorded a net interest income of LKR 2.3bn in 4QFY214 at a y-o-y growth rate of 9%, which amounted to an accumulated net interest income of LKR 8.9bn (+16%, y-o-y) in FY214. This was mainly driven by the healthy NIM of 6.7% (+3bps y-o-y) coupled with 19% (y-o-y) lending book growth. We expect the bank to report a NII of LKR 9.2bn (+3% y-o-y) in FY215E amidst the total positive re-pricing gap of LKR 22.3bn. Furthermore, we expect the yield on interest earning assets to increase by 12bps in FY215E due to the forecast interest rate reversion in 2H215. NTB s non-interest income dip of 31% (q-o-q) to LKR 739mn was due to the contraction in net trading income to negative LKR 94mn due to the strong local currency. However, on y-o-y basis non-interest income surged by 42% to LKR 3.2bn. This is manly as a result of the 11% increase in net fee & commission income amidst the healthy economic growth coupled with resilient external sector performances. Furthermore, we expect a 42% increase in non-interest income in FY215E backed by healthy net fee & commission income. Key data Price at Evaluation (LKR) 13.7 Market Capitalization (LKR m) 23, Market Capitalization (USD m) Company as a % of Total Market Cap (%) week High (LKR) week Low (LKR) 66.5 Average Daily Volume (6 Months) 367,92.8 Number of Shares in Issue (m) Free Float (%) Foreign Holding (%) 17.5 Source: Bloomberg, Return analysis (%) 3M 6M 12M NTB SL Equity ASPI Source: Bloomberg, Price Chart The bank s lending book grew by 9% q-o-q and 19% y-o-y to LKR 98.5bn. This is mainly attributed due to a 16% q-o-q growth in term loans amidst the low interest rate environment. Notably, the pawning portfolio reduced by 48% (y-o-y) to LKR 1.2bn with a healthy gross NPL ratio of 4.14%. Further, we expect a 2.8% growth in the lending portfolio to LKR 118.9bn in FY215E which translates to a healthy net interest income of LKR 9.2bn in FY215E. The bank deposits grew at a 4 year CAGR of 23% compared to the industry average of 17%. Furthermore, the bank deposits grew by 16% (y-o-y) to LKR 111.1bn. This is mainly due to a 52% (y-o-y) growth in CASA deposits to stand at 33.4% amidst the low interest rate environment. Furthermore, we expect a 16% growth in total deposits in FY215E to LKR 128.8bn, driven by a 16% growth in fixed deposits due to the forecasted interest rate hike. But this will drag down the bank s CASA ratio to 3.7% in FY215E. Source: Bloomberg NTB SL Equity Return against ASPI Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 NTB SL Equity Source: Bloomberg CSEALL Index Dec 14 Jan 15 Feb 15 Mar 15 CSEALL Index Apr 15 42

44 NATIONS TRUST BANK PLC INTERIM UPDATE The bank s asset quality has slightly deteriorated in FY214 with a 63bps and 6bps reduction in gross NPL and net NPL respectively. The bank recorded a gross NPL and net NPL of 4.14% and 2.73% in FY214 despite a low interest rate environment. We expect a further reduction in asset quality in FY215E with a gross NPL of 4.2% and a net NPL ratio of 2.9% amidst the forecast interest rate reversion. The bank s liquidity position has moderate in FY214 with the statutory liquid assets (DBU) ratio of 23.17% compared to a 25.26% in FY213. Furthermore ADR stood at 88.59% which indicates the bank s ability to meet with liabilities timely. However, we expect an increase in ADR to 92.54% in FY215E, as we expect the bank to intensify their appetite on lending. The regulatory capital position remained healthy in FY214 with a core CAR of 14.16% and a total CAR of 18.28%, well above the regulatory requirement. In addition, the bank maintained a leverage ratio of 9% continuously whilst prudently managing the financial risk. We expect a further enhancement in regulatory capital position with a core CAR of 15.7% and a total CAR of 18.9% in FY215E amidst the optimistic outlook on bank s core business operations. The bank s CASA ratio improved from 25.4% in FY213 to 33.4% in FY214 amidst the low interest rate environment. This led to a strong cost to income ratio of 52.7% in FY214 compared to 58.3% in FY213. Further, we expect the cost to income ratio to improve to 51.6% in FY215E amidst the resilient NIM of 6.5%. Super gains tax which was imposed by the recent interim budget 215 will result in a one off tax cash outflow of LKR 787.8mn based on 25% of FY213 profit before tax. As a result the net profit for FY215E will dip by 5.3% to LKR 2.4bn, but the recurring profit amount to LKR 3.2bn with a 25.7% gain. NTB recognized as the Fastest Growing Retail Bank in Sri Lanka in 214 by International Finance Publications Limited 1,56 customers registered for NTB s e banking in 214 NTB has maintained a stable dividend policy with a constant DPS of LKR 2.1 over last four years. The bank recorded a dividend payout of 19.1% in FY214 with a 2.16% dividend yield. However, we expect the bank s DPS will drop down to LKR 1.56 in FY215E with a dividend payout of 15% amidst the super gain tax cash disbursement. However, we expect the bank will re- adjust their dividend policy with a constant dividend payout of 2% from FY216E onwards. 43

45 NATIONS TRUST BANK PLC INTERIM UPDATE Outlook & Valuation The bank has been continuously benefiting through a healthy lending book growth coupled with strong net interest margins. The recent policy rate cut will further boost the bank s credit growth during 1H215 which translates in to a healthy NII. We expect the bank s NII to further increase in 2H215 amidst the positive re-pricing gaps due to the forecast interest rate hike. Thus the earnings forecast of LKR 3.1bn (+25.7% y-o-y) excluding nonrecurring super gains tax correspond to a PER of 7.48x and a PBV of 1.49x. Hence, with the strong earnings forecast together with the healthy competitive position we recommend a BUY with a target price LKR 12/- for 12 months horizon. Further, we project NTB to generate a total return of 17.45% (including 1.51% dividend yield) over the 12 months horizon. Top 5 Shareholders Top five shareholders of NTB Name of shareholders No. of Shares Stake % John Keells Holdings PLC 46,121, HWIC Asia Fund 34,591, Mackinnons Keells Limited 22,83, Central Finance Company PLC A/C No 3 2,715, CF Growth Fund LTD A/C No 1 14,813, Source: Company data 44

46 NATIONS TRUST BANK PLC INTERIM UPDATE Branch network further expanded in FY214 Net interest income to grow with stable NIMs LKR Million % A 212A 213A 214A 215F. Number of Branches No of ATMs Net interest income (LKR m) Net interest margin (NIM) (%) Recurring EPS will boost in FY215E Credit grew at a 3Y CAGR of 16% , , LKR Million LKR 14, 12, 1, 8, , 5 211A 212A 213A 214A 215F 2.. 4, 2, 211A 212A 213A 214A 215F.5 Net profit attributable to equity holders (LKR m) Basic EPS (LKR) Total Gross Loans and Advances (LKR m) Total other Assets (LKR m) Growth of Total Assets % NTB will intensify the appetite on lending Pawning exposure decreased continuously 3.5% 215F 3.% 2.93% 214A 213A 2.5% 2.% 2.35% 1.5% 212A 1.% 1.28% 1.6% 211A.5% ADR %.% 212A 213A 214A 215F Pawning exposure as a % of Loans Lending book segregation Deposit segregation Corporate Loans, Housing Loans/ 1.53% Net staff loans, 1.31% Other, 2% Demand, 14% Others, 2.4% Leases, 25.62% Staff Loans, 1.8% Overdrafts, 19.18% Pawning advances, 1.26% Savings, 19% Fixed, 65% Term loans, 29.27% 45

47 NATIONS TRUST BANK PLC INTERIM UPDATE Deposit grew at a 3Y CAGR of 18% Treasury function continuously growing % % 4.25% 4.39% 3.1% LKR million % 8.% 6.% 4.% 2.% 9.58% 9.53% 86.16% 86.8% 23.1% 73.98% 211A 212A 213A 214A 215F.% Deposit (LKR million) Growth of Deposit % Banking Treasury Functions Others CASA Mix Assets quality will remain moderate in FY215E 4.% 4.5% 35.% 3.% 33.4% 3.7% 4.% 3.5% 3.% 25.% 2.% 24.% 21.9% 25.4% 2.5% 2.% 15.% 1.% 1.5% 1.%.5% 5.%.%.% 211A 212A 213A 214A 215F 211A 212A 213A 214A 215F Gross NPL Net NPL CASA ratio Improved operating efficiency 64% 62% 6% 58% 56% 54% 52% 5% 48% 46% 211A 212A 213A 214A 215F Cost to income ratio All charts were sourced by: Company & 46

48 NATIONS TRUST BANK PLC INTERIM UPDATE KEY FINANCIAL DATA Profit & loss (LKR m) Year ended December 211A 212A 213A 214A 215F Net interest income 4,44 5,755 7,675 8,94 9,226 Net Fees & Commission Income 1,76 2,45 2,54 2,784 4,1 Net Trading Gain/Loss Other Operating income Total banking income 6,494 8,315 9,91 12,117 13,725 Total operating expenses 4,17 4,697 5,779 6,388 7,77 Provisions ,157 1,125 Operating profit 2,712 3,186 3,681 4,571 5,523 Earnings from associates VAT Tax expense ,15 1,29 1,367 NPAT Recurring 1,67 1,935 2,136 2,537 3,189 NPAT including non recurring 1,67 1,935 2,136 2,537 2,42 Net profit attributable to equity holders 1,67 1,935 2,136 2,537 2,42 Diluted EPS Recurring Book value per share DPS Balance sheet (LKR m) Year ended December 211A 212A 213A 214A 215F ASSETS Cash and cash equivalents 3,694 2,534 3,2 6,9 6,27 Trading capital 6,55 21,88 24,46 15,7 1,78 Loans, advances & leases 61,188 73,424 82,327 98, ,5 Other assets 3,64 25,41 32,478 38,921 35,73 TOTAL ASSETS 12,73 122, , , ,127 LIABILITIES Deposits 67,633 86,274 95,73 111,1 125,42 TOTAL LIABILITIES 93, ,352 13, , ,15 EQUITY SHAREHOLDERS' FUNDS 8,628 1,95 11,738 13,895 15,977 Minorities TOTAL EQUITY 8,628 1,95 11,738 13,895 15,977 Key perfomance indicators Year ended December 211A 212A 213A 214A 215F Earnings and profitability Net interest margin (NIM) (%) Non interest income margin (%) Cost to income ratio (%) Norm'd NPAT growth (%) Norm'd EPS growth (%) Operating profit margin (%) Tax rate (%) Total assets yield (%) ROE (%) ROA (%) Capital adequacy Tier 1 ratio (%) Tier 2 ratio (%) Total capital Ratio (%) Leverage ratio (x) Asset quality Gross NPL ratio (%) Net NPL ratio (%) Individual impairment to gross loans (%) Collective impairment to gross loans (%) Total impairment to gross loans (%) Loan growth (%) Liquidity Deposit growth (%) Loans to deposit ratio (%) Valuation multiples P/E (x) P/BV (x) Mcap/risk weighted assets (x) Mcap/deposits (x) Dividend yield (%) Source: Company Data, Candor Historical data is based on interim financial statements. Therefore data may slightly vary from annual report figures. 47

49 NATIONS TRUST BANK PLC TECHNICAL ANALYSIS NTB has been trading above its trend support pattern since August 214 & has managed to break above multiple key resistant levels. However, currently the stock trades below its former resistant breakout levels amidst neutral RSI levels. If NTB is able breach above its key resistances again considering its current RSI levels and the developing uptrend pattern, then the stock has a high chance to test new technical resistant level after its breakout above LKR 18 & LKR 113. Furthermore, if the stock fails to maintain above its developing uptrend pattern, it is expected to find moderate support at LKR 1 & then strong support at LKR 95 to LKR 9 levels. Support/Resistance LKR Resistant Resistant Resistant Current Price 13.7 Support Support Support Source: Candor TA 48

50 SRI LANKA BANKING INTERIM UPDATE Sampath Bank PLC (SAMP) Bloomberg: SAMP SL EQUITY Target Price LKR 31/- BUY Sampath Bank marked a net profit of LKR1.3bn in 4QFY214 with a 24.9% (y-oy) growth. This led to a total accumulated profit of LKR 5.3bn in FY214 with a 45.3% (y-o-y) growth. This was predominately fueled through an 11% (y-o-y) growth in net interest income followed by a 4% growth in non-interest income. Key Highlights Net interest income stood as the prime contributor for bank s bottom line with a 2% growth q-o-q and 11.2 % growth y-o-y to reach at LKR 16.8bn in FY214. This was primarily due to a healthy NIM of 5.63% backed by 26bps (y-o-y) reduction in interest expense on interest bearing liabilities. In addition, 14.8% lending book growth also contributed for healthy NII growth. Furthermore, we expect an 11.9% (y-o-y) growth in NII to LKR 18.8bn in FY215E. This is as a result of forecast NIM of 5.47% backed by a total positive re-pricing gap of LKR 29.2bn amidst the forecasted upward pressure on interest rate in 2H215. Key data Price at Evaluation (LKR) 257. Market Capitalization (LKR m) 44, Market Capitalization (USD m) Company as a % of Total Market Cap (%) week High (LKR) week Low (LKR) Average Daily Volume (6 Months) 116,744.6 Number of Shares in Issue (m) Free Float (%) 49.4 Foreign Holding (%) 18.8 Source: Bloomberg, Return analysis (%) 3M 6M 12M SAMP SL Equity ASPI Source: Bloomberg, Non-interest income grew by 4% y-o-y to LKR 7.4bn in FY214. This was mainly backed by a 21% (y-o-y) growth in net fee & commission income to LKR 3.2bn. Furthermore, we expect a 17% growth in non-interest income in FY215E to LKR 8.6bn, mainly backed by 3% growth in net fee & commission income. The bank s lending book grew by 12% (q-o-q) and 14.8% (y-o-y) to LKR 318.9bn in FY214. A 35% growth in term Loans due to the low interest rate environment contributed mainly for healthy lending book growth. In addition, the bank reduced its exposure to pawning by 53% in FY214 whilst achieving a healthy net NPL ratio of.53%. We expect the private sector credit growth to accelerate during 1H215 with the recent CBSL policy rate cut while moderating towards 2H215 due to upward pressures on interest rates. Hence, we expect the lending book to grow by average 12% in FY215E. The bank deposits stood at LKR 339.7bn with a 4% q-o-q and a 13.1% y-oy growth. This was predominately contributed by a 57% growth in CASA deposits due to the low interest rate environment. Thus, the bank s CASA ratio significantly improved to 46.2% in FY214 compared to 33.3% in FY213. We expect a 14% growth in total deposits in FY215E growing to LKR 387.2bn. This will mainly fuel through a 14% growth in fixed deposits amidst the forecasted rate hike during 2H215. The rate hike though result in a drag on the bank s CASA ratio to 44.8% in FY215E. Price Chart Source: Bloomberg SAMP SL Equity Return against ASPI Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 SAMP SL Equity Source: Bloomberg CSEALL Index Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 CSEALL Index 49

51 SAMPATH BANK PLC INTERIM UPDATE The bank s operating cost grew by 7.79% q-o-q and 16% y-o-y to LKR 12.9bn. This was predominately driven by a 15.2% growth in personnel expenses. However, the cost to income ratio improved slightly in FY214 with 53.2% compared to 54.4% in FY213 due to the bank s low cost of funding coupled with improved net interest income. However, we expect a 17% growth in operating cost in FY215E, largely due to a 15% growth in expansion cost. Thus we expect a drag on the bank s efficiency with a cost to income ratio dropping to 54.7% in FY215E. The bank s asset quality further improved in FY214 with a gross NPL of 1.93% and a net NPL of.53%, the ratio being the best amongst its peers. The low interest rate environment coupled with healthy lending book growth of 14.8% predominately contributed for the improved asset quality. However, we expect a slight deterioration in asset quality in FY215E with a gross NPL of 2.2% and a net NPL of.59% mainly owing to the mixed economic outlook. Sampath Bank won prestigious awards in Best Corporate Citizen Sustainability Awards 214 The bank liquidity position remained strong in FY214 with a statutory liquid assets ratio of 24.54%, compared to the regulatory requirement of 2%. Furthermore, the ADR stood at 91.14% compared to 88.52% in FY213 due to the 14.8% (y-o-y) surge in the lending book. Nevertheless, the bank is in a strong position to meet its liabilities. We expect an improvement in the bank s liquidity position in FY215E with an ADR of 89.45% in the back drop of a deposit growth of nearly 14%. The bank s regulatory capital position remained strong in FY214 with a core CAR of 8.96% and a total CAR of 13.72%. We expect a further improvement in bank s regulatory capital position with a core CAR of 1.48% and a total CAR of 16.68% as a result of the optimistic outlook on the bank s core business operations. Super gains tax which was imposed by the recent interim budget 215 will result in one off tax cash outflow amounting to approximately LKR 1.2bn based on the FY213 profit before tax. The bank has maintained an average dividend payout ratio of 37% as their dividend policy for FY211-FY214. However, we expect the dividend payout to fall at 25% in FY215E due to the super gain tax liability. This will lead to a DPS of LKR 6.63 and a dividend yield of 2.58%. But, we expect the bank will re-establish the constant dividend payout of 37% from FY216E onwards. 5

52 SAMPATH BANK PLC INTERIM UPDATE Outlook & Valuation The bank will continuously benefit through low cost funding (High CASA) and improved assets quality. We expect a 9.5% growth in recurring profits in FY215E to LKR 5.8bn which translate to a PER of 7.68x and a PBV of 1.2x. Thus we recommend a BUY with a target price of LKR 31/- over 12 months horizon, expecting a total return of 23.2% over 12 months horizon. Top 5 Shareholders Name of shareholders No. of Shares Stake % Vallibel One PLC 2 5,17, Mr Y S H I Silva 1 6,75, Employees Provident Fund 1 6,745, Rosewood (Pvt) Limited 1 1,689, HSBC INTL NOM Ltd-BBH-MATTHEWS International Funds 7,5, Source: Company Data 51

53 SAMPATH BANK PLC INTERIM UPDATE SAMP opened 8 domestic branches in FY214 NII to grow , 18, , LKR million 14, 12, 1, 8, 6, 4, % 2, Number of Branches 211A 212A 213A 214A 215F Net interest income (LKR m) Net interest margin (NIM) (%) Recurring EPS is expected to boost in FY215E Total Assets to grow 6, 4. 6,.3 5, 35. 5,.25 LKR million 4, 3, 2, LKR 4, 3, 2, , , A 212A 213A 214A 215F 211A 212A 213A 214A 215F Total Gross Loans and Advances (LKR m) Total other Assets (LKR m) Net profit attributable to equity holders (LKR m) Recurring EPS (LKR) Growth of Total Assets % Liquidity position remains stable Lending book segregation 215F Others, 25.72% Pawning, 7.86% 214A Import export, 16.14% 213A 212A 211A Overdrafts, 16.74% Term loans, 33.55% ADR % Continuous reduction in pawning exposure Deposits grew at a 3Y CAGR of 2% 3.% 45,.3 25.% 24.86% 4, 35,.25 2.% 15.% 19.4% 3, 25, 2, % 5.% 7.86% 15, 1, 5,.1.5.% 212A 213A 214A - 211A 212A 213A 214A 215F Deposit (LKR million) Growth of Deposit % Pawning Composition to Loan % 52

54 SAMPATH BANK PLC INTERIM UPDATE Deposits segregation Sound low cost liability franchise Other Deposits, 4% Demand Deposits, 6% 5.% 45.% 4.% 39.9% 46.2% 44.8% 35.% 3.% 33.8% 33.3% Savings Deposits, 29% 25.% 2.% 15.% Fixed deposits, 61% 1.% 5.%.% 211A 212A 213A 214A 215F CASA ratio Segmental analysis Improved assets quality 12.% 3.% 1.% 2.96% 4.31% 5.27% 2.5% 8.% 2.% 6.% 4.% 94.77% 92.25% 92.45% 1.5% 1.% 2.%.5%.% % Banking Leasing & Factoring Dealing / Investment Other 211A 212A 213A 214A 215F Gross NPL Net NPL Improved operating efficiency 6% 58% 56% 54% 52% 5% 48% 46% 211A 212A 213A 214A 215F Cost to income ratio All charts were sourced by: Company & 53

55 SAMPATH BANK PLC INTERIM UPDATE KEY FINANCIAL DATA Profit & loss (LKR m) Year ended December 211A 212A 213A 214A 215F Net interest income 9,288 12,39 15,95 16,78 18,779 Net Fees & Commission Income 1,934 2,22 2,619 3,159 4,17 Net Trading Gain/Loss Other Operating income 2,467 4,133 2,716 3,791 4,625 Total banking income 14,3 18,38 2,36 24,142 27,41 Total operating expenses 8,247 9,47 11,66 12,854 15,1 Provisions ,862 2,418 2,632 Operating profit 6,293 8,829 5,78 8,845 9,777 Earnings from associates VAT 918 1, ,599 1,77 Tax expense 1,67 2,213 1,151 1,98 2,242 NPAT Recurring 3,75 5,44 3,626 5,267 5,765 NPAT including non recurring 3,75 5,44 3,626 5,267 4,571 Net profit attributable to equity holders 3,683 5,437 3,623 5,263 4,568 Diluted EPS Recurring Book value per share DPS Balance sheet (LKR m) Year ended December 211A 212A 213A 214A 215F ASSETS Cash and cash equivalents 1,747 1,442 8,341 11,645 13,166 Trading capital 2,25 1,924 2,393 1,582 1,83 Loans, advances & leases 171, ,48 265,91 39,57 346,363 Other assets 66,246 89,48 114,66 119, ,916 TOTAL ASSETS 25, , ,34 442, ,247 LIABILITIES Deposits 195,94 243,88 3, , ,234 TOTAL LIABILITIES 228, ,51 359,544 48, ,357 EQUITY SHAREHOLDERS' FUNDS 22,87 27,214 31,671 34,511 36,795 Minorities TOTAL EQUITY 22,867 27,275 31,76 34,64 36,891 Key performance indicators Year ended December 211A 212A 213A 214A 215F Earnings and profitability Net interest margin (NIM) (%) Non interest income margin (%) Cost to income ratio (%) Norm'd NPAT growth (%) Norm'd EPS growth (%) Operating profit margin (%) Tax rate (%) Total assets yield (%) ROE (%) ROA (%) Capital adequacy Tier 1 ratio (%) Tier 2 ratio (%) Total capital Ratio (%) Leverage ratio (x) Asset quality Gross NPL ratio (%) Net NPL ratio (%) Individual impairment to gross loans (%) Collective impairment to gross loans (%) Total impairment to gross loans (%) Loan growth (%) Liquidity Deposit growth (%) Loans to deposit ratio (%) Valuation multiples P/E (x) P/BV (x) Mcap/risk weighted assets (x) Mcap/deposits (x) Dividend yield (%) Source: Company Data, Candor Historical data is based on interim financial statements. Therefore data may slightly vary from annual report figures. 54

56 SAMPATH BANK PLC TECHNICAL ANALYSIS SAMP has initiated to trade within a price channel since mid 214. The stock has been trading conservatively within this upward price channel with multiple supports & resistances. However, based on the daily candle chart it can be identified LKR 263 levels as a key resistance. Therefore, in order to remain and continue within this long term price channel it is important to successfully break above this medium term resistances without any trend reversals. If SAMP is able to continue to trade within the price channel, it can be assumed the stock to reach the level of its Fundamental target value of LKR 31 level by April 216. Further, analyzing the downside, LKR 25 & LKR 24 levels can be considered as key support levels for the stock based on its historical behavior at these price levels. Currently, both the weekly and daily RSI levels are within the neutral territory. Support/Resistance LKR Resistant Resistant Resistant Current Price 257. Support Support Support Source: Candor TA 55

57 SRI LANKA BANKING INTERIM UPDATE Seylan Bank PLC (SEYB) Bloomberg: SEYB SL EQUITY, SEYBX SL EQUITY Target Price LKR 11/- voting HOLD LKR 77/- non-voting BUY SEYB recorded a net profit of LKR 3.2bn in FY214 with a 36.6% (y-o-y) growth. Net interest income was the prime contributor with a 14% (y-o-y) growth to reach at LKR 11.2bn. This was predominantly contributed through a healthy NIM of 5.4% coupled with strong lending book growth of 12%. Furthermore, the non-interest income witnessed a 66% growth, mainly driven by a 55% growth in foreign exchange income. Key Highlights The bank lending book grew by 12% (y-o-y) to LKR 162bn. Notably, the pawning portfolio reduced by 41% (y-o-y) to LKR 8.5bn. The asset quality though continues to be under pressure with a gross NPL of 7.69% and a net NPL of 5.31%, the ration being the highest among its peers. Further, we expect a 14% growth in the lending portfolio to LKR 184.7bn in FY215E which translates to a healthy net interest income growth of 1% in FY215E. NII growth is partly supported by the total positive re-pricing gap of LKR19bn amidst the forecasted interest rate hike during 2H215. The bank deposits grew at a 4 year CAGR of 14% compared to the industry average of 17%. Furthermore, the bank deposits grew by 11% (yo-y) to LKR 185.9bn. This is predominately driven through a 3% (y-o-y) growth in CASA deposits amidst the low interest rate environment. We expect a 16.6% growth in total deposits in FY215E to LKR 216.8bn, mainly due to the 2% growth in fixed deposits amidst the forecasted interest rate hike. But this will hinder the bank s CASA ratio to 37% in FY215E which is currently at 39%. Furthermore, the high cost of funding in FY215E will result an increase in the cost to income ratio to 5.7% compared to 49.9% in FY214. The bank liquidity position has improved in FY214 with statutory liquid assets ratio (DBU) of 27.6% compared to a 26.74% in FY213. ADR stood at 83.35% which indicates the bank s ability to meet with liabilities. However, we expect a further improvement in ADR to 81.13% in FY215E. At the same time, the bank s regulatory capital position remained healthy in FY214 with a core CAR of 14.4% and a total CAR of 14.98%. Super gains tax which was imposed by the recent interim budget 215 will result in a one off tax cash expense of LKR 874mn based on 25% of FY213 profit before tax. As a result the net profit for FY215E to plunge by 11.8% to LKR 2.8bn, but the recurring profit amounts to LKR 3.7bn with a 15.1% growth. Furthermore, we expect this to discourage the bank s dividend payout ratio to 27% in FY215E with a dividend yield of 2.8% (voting) and 3.18% (non-voting) respectively. Key data Price at Evaluation - Voting (LKR) 16.2 Price at Evaluation - Non Voting (LKR) 69. Market Capitalization (LKR m) 3, Market Capitalization (USD m) Company as a % of Total Market Cap (%) week High - Voting (LKR) week Low - Voting (LKR) week High - Non Voting (LKR) week Low - Non Voting (LKR) 36.5 Average Daily Volume - Voting (6 Months) 31,87.1 Average Daily Volume - Non Voting (6 Months) 433,491.5 Number of Shares in Issue (m) - Voting Number of Shares in Issue (m) - Non Voting Free Float (%) Foreign Holding (%) - Voting 6.7 Foreign Holding (%) - Non Voting 5.7 Source: Bloomberg, Return analysis (%) 3M 6M 12M SEYB SL Equity SEYBX SL Equity ASPI Source: Bloomberg, Price Chart Source: Bloomberg SEYB SL Equity SEYBX SL Equity CSEALL Index Return against ASPI Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 Source: Bloomberg SEYB SL Equity CSEALL Index SEYBX SL Equity 56

58 SEYLAN BANK PLC INTERIM UPDATE Outlook & Valuation SEYB consistently performed well despite the poor asset quality management (7.6% NPL ratio) in comparison to the industry. Nevertheless, the bank has experienced a continuous improvement in asset quality over the past 4 years (NPL stood at 14.2% in FY211). We expect a 15.1% growth in recurring profits in FY215E which translates to a PER of 9.94x and a PBV of 1.39x for SEYB.N. Further, we expect the SEYB.N will generate a total return of 6.35%. Thus we signal a HOLD recommendation for SEYB.N amidst the optimistic long-term view. However, we believe the SEYB.X will grab interest due to relatively attractive dividend yield of 3.18% while assigning a target price of LKR 77/- with a discount of 3% to the voting target price hence the BUY recommendation, expecting a total return of 14.78% over 12 months horizon. Top 5 Shareholders Name of shareholders No. of Voting Shares Stake % Sri Lanka Insurance Corporation Ltd 26,396, Brown & Company PLC A/C No.1 24,416, Employees Provident Fund 17,525, LOLC Investments Ltd 16,88, Bank of Ceylon No.1 Account 13,198, Name of shareholders No. of Non-voting Shares Stake % Lanka Orix Leasing Company PLC 71,688, Employees Provident Fund 14,795, Pershing LLC S/A Averbach Grauson & Co 3,94, Commercial Bank of Ceylon PLC/Dunamis Capital PLC 3,818, Mr. E Thavagnanasooriyam & Mr. E Thavagnanasundaram 2,649, Source: Company Data 57

59 SEYLAN BANK PLC INTERIM UPDATE Branch network further expanded in FY214 Net interest income to grow LKR million % A 212A 213A 214A 215F 5. Number of Branches No of ATMs Net interest income (LKR m) Net interest margin (NIM) (%) Recurring EPS will boost in FY215E Credit grew at a 3YCAGR of 14% ,.2 LKR million LKR 25, 2, 15, 1, 5, A 212A 213A 214A 215F 211A 212A 213A 214A 215F Total Gross Loans and Advances (LKR m) Total other Asets (LKR m) Net profit attributable to equity holders (LKR m) Basic EPS (LKR) Growth of Total Assets % Liquidity position Lending book segregation 215F Pawning, 5% 214A Overdrafts, 3% 213A 212A 211A ADR % Consumer, & Other Loans, 65% Pawning exposure decreased continuously Deposit grew at a 3Y CAGR of 16% 14.% 13.1% % 1.% 1.% % 6.% 5.3% LKR million % 4.% 2.% 5.5.% 212A 213A 214A Pawning as a % of Loans 211A 212A 213A 214A 215F Deposit (LKR million) Growth of Deposit % 58

60 SEYLAN BANK PLC INTERIM UPDATE Deposits segregation Treasury function continuously growing Other Deposits, 3% Margin Deposits, % Demand Deposits, 8% 12.% 1.% 15.15% 13.28% 7.6% 8.% 2.3% 14.41% 23.67% 6.% 4.% 8.95% 71.75% 67.94% Savings Deposits, 3% 2.% Time Deposits, 58%.% Banking Treasury Property/Investments Others Low cost of funding Relatively weak assets quality but promising outlook 45% 16.% 4% 35% 41% 34% 33% 39% 37% 14.% 12.% 1.% 8.% 3% 6.% 4.% 25% 2.% 2% 211A 212A 213A 214A 215F.% 211A 212A 213A 214A 215F CASA ratio Gross NPL Net NPL Improved operating efficiency 9% 8% 7% 6% 5% 4% 3% 2% 1% % 211A 212A 213A 214A 215F Cost to income ratio All charts were sourced by: Company & 59

61 SEYLAN BANK PLC INTERIM UPDATE KEY FINANCIAL DATA Profit & loss (LKR m) Year ended December 211A 212A 213A 214A 215F Net interest income 7,774 9,4 9,861 11,199 12,355 Net Fees & Commission Income 1,43 1,688 2,12 2,25 2,475 Net Trading Gain/Loss ,78 1,24 Other Operating income 1, ,779 1,868 Total banking income 11,126 11,518 12,941 16,36 17,722 Total operating expenses 8,917 7,297 7,334 8,133 8,982 Provisions ,362 2,134 1,753 Operating profit 1,56 3,95 4,245 6,39 6,987 Earnings from associates VAT ,23 1,397 Tax expense 571 1,144 1,144 1,582 1,845 NPAT Recurring 989 2,85 2,353 3,254 3,745 NPAT including non recurring 989 2,85 2,353 3,254 2,871 Net profit attributable to equity holders 1,6 2,66 2,328 3,181 2,86 Diluted EPS Recurring Book value per share DPS Balance sheet (LKR m) Year ended December 211A 212A 213A 214A 215F ASSETS Cash and cash equivalents 4,55 6,554 5,18 6,673 7,996 Trading capital 11,358 14,1 23,838 22,846 Loans, advances & leases 1, , , , ,887 Other assets 62,463 42,65 61,769 66,79 61,368 TOTAL ASSETS 167, , ,53 251, ,97 LIABILITIES Deposits 12, , , , ,786 TOTAL LIABILITIES 148,39 164, ,36 225,232 24,82 EQUITY SHAREHOLDERS' FUNDS 17,946 19,493 22,657 25,192 26,16 Minorities 1,95 1,222 1,537 1,124 1,188 TOTAL EQUITY 19,41 2,715 24,194 26,316 27,295 Key perfomance indicators Year ended December 211A 212A 213A 214A 215F Earnings and profitability Net interest margin (NIM) (%) Non interest income margin (%) Cost to income ratio (%) Norm'd NPAT growth (%) Norm'd EPS growth (%) Operating profit margin (%) Tax rate (%) Total assets yield (%) ROE (%) ROA (%) Capital adequacy Tier 1 ratio (%) Tier 2 ratio (%) Total capital Ratio (%) Leverage ratio (x) Asset quality Gross NPL ratio (%) Net NPL ratio (%) Individual impairment to gross loans (%) Collective impairment to gross loans (%) Total impairment to gross loans (%) Loan growth (%) Liquidity Deposit growth (%) Loans to deposit ratio (%) Valuation multiples P/E (Voting) (x) P/E (Non voting) (x) P/BV (Voting) (x) P/BV (Non voting) (x) Mcap/risk weighted assets (x) Mcap/deposits (x) Dividend yield (Voting) (%) Dividend yield (Non voting) (%) Source: Company Data, Candor Historical data is based on interim financial statements. Therefore data may slightly vary from annual report figures. 6

62 SEYLAN BANK PLC TECHNICAL ANALYSIS SEYB has been trading above its medium term trend support pattern since early 215 and has managed itself to break above key resistance level LKR 1 together with major candle bullish candle movements. Currently, the stock trades within its key technical range which is between LKR 16 to LKR 1. Based on weekly Fibonacci projections, if SEYB manages to penetrate above resistance level LKR 16.8, the next key resistant level would be Further, analyzing the down side if SEYB fails to hold above its key support LKR 1 levels, it can be expected to find moderate support at LKR 97.7 & LKR 95. levels. It is also worth noting that LKR 89.9 is very strong support level for SEYB based on its historical behavior at this price level. Currently, the daily RSI is slightly overbought & weekly RSI is also almost at overbought levels. Therefore based on RSI levels it is recommended to hold. Support/Resistance LKR Resistant Resistant Resistant Current Price 16.2 Support Support2 1. Support Source: Candor TA 61

63 SEYLAN BANK PLC (NON VOTING) TECHNICAL ANALYSIS SEYBX has recently managed to break above its key resistance LKR 66.8 level & has triggered a major bullish candle within the projected Fibonacci levels. Further, based on the weekly candle chart pattern the stock has been trading within an uptrend price channel since October 214. If the stock is able to continue to trade within this channel, it can be projected to reach its Fundamental target price range LKR 79.8 to LKR 87.8 levels by April 216. Based on daily candle chart pattern, currently the stock has key supports at LKR 65.4 & LKR 6.6. However, the daily RSI is slightly overbought & weekly RSI is also almost at overbought levels. Therefore based on RSI levels it is recommended to hold. Support/Resistance LKR Resistant Resistant Resistant Current Price 69. Support Support Support Source: Candor TA 62