Sri Lankan Banking Sector

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2 Contents Executive Summary 03 Banking Sector Growth The Economy 05 Credit Growth 06 Loans 07 Deposits 09 Borrowings 10 Risks in the Banking System Credit Risk 11 Interest Rate Risk 12 Exchange Rate Risk 13 Profitability of the Banking Sector Net Interest Income 14 Net Interest Margins 15 Cost Structure 16 Return on Equity and Assets 17 Stability of the Banking System Capital Adequacy 18 CBSL Requirements under BASEL III 19 Credit Ratings and Liquidity 21 Competition in the Sector 22 Outlook for Listed Banking Stocks BFI Sector 24 Listed Banking Counters Commercial Bank of Ceylon (COMB) 26 Hatton National Bank (HNB) 29 Sampath Bank (SAMP) 32 Seylan Bank (SEYB) 35 National Development Bank (NDB) 38 DFCC Bank (DFCC) 41 Nations Trust Bank (NTB) 44 Pan Asia Banking Corporation (PABC) 47 Union Bank of Colombo (UBC) 50 2

3 Sri Lankan Banking Sector Executive Summary The Sri Lankan Banking system is strongly correlated with the economic activity of the country. Economic growth slowed down in the last couple of years compared to the rapid growth witnessed in the immediate post-conflict period. The consumption related loans peaked in 2015 and slowed down in The consumption heavy economy grew by 4.8% in 2015 and 4.4% in During 2016, construction, wholesale & retail trade, financial & business services and consumer durables contributed the most to private sector credit growth. These sectors accounted for 19.1%, 9.1%, 7.3% and 4.7% of total loans of commercial banks to the private sector. We anticipate Sri Lanka to move towards the upper middle income category within the next three years. However, as mentioned in our last update, in the short term, we do expect economic growth to be challenged by the weak global demand for Sri Lankan exports coupled with continued policy implementation with respect to fiscal consolidation. Hence, we estimate the economy to grow by 4.5%, 4.9% and 5.1% in 2017, 2018 and 2019 respectively. We expect banks to play a key role in financing the new and expanding corporates and the Small & Medium Enterprises (SME). To support the investment driven growth, we estimate the banking sector to grow by 15.0%, 15.8% and 16.0% in 2017, 2018 and 2019 respectively. Going forward, banks may have to shift from collateral based lending to cash flow based lending, introduce transparent fee structures and utilize the state of the art IT infrastructure in order to facilitate long-term growth. Further, analyzing and profiling customers via data analytics can be a stepping stone on moving towards cash flow based lending. Moreover, we expect IT infrastructures to be developed further to support virtual banking with most of the banks concluding on their aggressive physical branch network. Hence, the cost to income ratios are expected to improve in the long run. The loan growth of the banking sector recorded 17.7% in The Banks with higher loan share to SME and retail witnessed higher NIM expansion with AWPLR gaining 441 basis points (bps) during However, going forward we expect a slowdown in demand for new loans due to the impact of monetary and fiscal measures taken by the Government of Sri Lanka (GoSL) in Banking sector deposits grew by 16.5% in FY16 whilst the average weighted deposit rate (AWDR) increased by 197 bps compared to 2015 where the AWDR was mostly stagnant. This increase caused the CASA of the banking sector to decrease from 40.3% in 2015 to 37.1% in Continued to next page 3

4 Sri Lankan Banking Sector Executive Summary Continued Meanwhile, the banking sector borrowings declined by 3.5% in FY16 where foreign currency borrowings declined by 4.4%. During FY16, the listed banks raised LKR 58.5 Bn through debentures listed on the CSE, ascertaining an increasing trend on raising funds via capital markets. However, due to the 2017 budget proposal on tax exemptions removed on listed debentures, we expect corporate debenture issues to slow down in the medium term. Furthermore, with the increased consumption taxes, we expect demand for deposits to slow down. The weekly AWPLR and monthly AWDR increased only by 17 bps and 82 bps respectively during YTD FY17. We do not expect NIMs to further improve from FY16 levels due to reduction of upward pressure on interest rates coupled with declining CASA and increased competition for deposits. Therefore, with moderate net interest income growth we do not expect the growth in profitability witnessed last year to be sustained in the short to medium term. We expect the current interest rate environment and mid-single digit inflation to remain stable in the medium term. Furthermore, with the country been affected with floods in the 1HFY17, we expect impairments to increase slightly. However, we do not expect the banking system to face significant credit risk in the short term. Currently, most of the banks have a diversified loan portfolio coupled with relatively low NPLs. The Sri Lankan banking sector is relatively resilient to internal and external shocks when compared to other sectors. This is mainly due to industry practices and stringent regulations imposed by Central Bank of Sri Lanka (CBSL). However, 5 banks out of the 25 licensed commercial banks hold almost 70% of the total banking sector assets. CBSL has issued stringent capital requirements that's compliant with BASEL III guidelines. Further, domestic systematically important banks (with assets over LKR 500 Bn) have been imposed tighter capital requirements to further strengthen the banking system. The increased requirements of capital and liquidity will also further reduce the ability of banks to lend aggressively, going forward. The requirements are to be met by banks commencing 1 st July 2017 on a staggered basis where the full implementation will occur by 1 st January Hence, most of the banks are in the process of raising equity to strengthen capital ratios and buffers. Moreover, guidelines and requirements on leverage and liquidity ratios also have been imposed by CBSL further strengthening the system. Despite the strengthening of the regulatory framework, above measures are expected to reduce the ability of the banks to lend aggressively going forward. High competition, additional capital and leverage requirements amongst smaller banks will threaten their return on equity in the short run. Hence, we continue to support the banking consolidation which will further strengthen the system and improve banks access to financing via international capital markets. 4

5 The Economy Macro Economic Outlook for Sri Lanka Real GDP Growth Annual Average Inflation 1 Public Debt Budget Deficit Balance of Payments 2015 (A): 2015 (A): 2015 (A): 2015 (A): 2015 (A): 4.8% 3.8% 77.6% 7.4% USD (1.5) Bn 2016 (A): 2016 (A): 2016 (A): 2016 (A): 2016 (A): 4.4% 4.0% 79.3% 5.4% USD (0.5) Bn 2017 (E): 2017 (E): 2017 (E): 2017 (E): 2017 (E): 5.0% 2 6.0% % 2 4.6% 2 USD 1.1 Bn 3 NDBS research estimates 4.5% in 2017 Expected to remain in single digits High compared to peers Expected to improve with GoSL s fiscal consolidation plans The financial flows are expected to increase as a % of GDP Most of the factors are expected to improve that may facilitate sustainable economic growth 1 Based on NCPI 2 CBSL estimation 3 IMF estimation Sources: CBSL, IMF 5

6 Credit Growth Real GDP growth Balance of payments (USD Bn) GDP Vs Loan Growth 12.0% Loan growth is moving in tandem with the economy (R 2 = 0.52) 35.0% 1 8.0% 6.0% 4.0% 2.0% % % 1 5.0% Banking sector loan growth (E) 2018 (E) 2019 (E) (5.0%) Real GDP growth Balance of Payments and Loan Growth Banking sector loan growth (0.5) (1.0) (1.5) (2.0) Balance of payments Banking sector loan growth 35.0% % % 1 5.0% (5.0%) Banking sector loan growth Sources: CBSL, NDBS Research 6

7 Loans Loan Growth Going forward, we expect a slowdown in demand for new loans due to the impact of monetary and fiscal measures taken by the GoSL in As at end 2016, share of credit to the private sector, government & corporations to total domestic credit stood at ~65.2%, 29.2% and 5.6% respectively. In 1H2014, the credit growth slowed mainly due to the reduction in consumer lending via gold backed loans. Hence, banking industry faced an excess liquidity situation in % 6.0% 4.0% 2.0% Loan growth Banking sector loan growth picked up post war, but was curtailed by CBSL through, 1. Increasing policy rates 2. Imposing a credit ceiling (2.0%) Q1 Q2 Q3 Q LKR Tn From the beginning of 2015, credit demand increased throughout the year. Leasing & Hire Purchase picked up mainly due to import duty concessions, while consumer and housing loans grew due to increased spending power and attractive interest rates (1.0) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Loans Loan growth In 2016, the loans were mainly driven by construction and wholesale and retail trade. Monetary policy was tightened encouraging curtailed loan growth. Sources: CBSL, NDBS Research 7

8 Loans Sri Lanka Banking Sector Over Time LKR Tn FCY Loans LKR Loans 18.1% % 21.0% % 18.2% % 80.1% 81.9% 82.2% 81.8% 79.0% % 0.0 FY11 FY12 FY13 FY14 FY15 FY16 Outlook of Banks: Loans LKR Bn 1, FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC Banks (Listed Space): LKR/FCY Loans LKR Mn (As at 31 st Mar 2017) % 10.5% % FCY LKR % 89.5% 7.6% % 21.7% 8.8% 5.7% 92.4% 13.8% % 91.2% 13.5% 94.3% 86.2% 86.5% 0.0 COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC Outlook of Banks: Loan Growth 7 FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) 6 Curtailed loan growth expected in FY COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC *12 months ending March for FY14 and 9 months ending December for FY15 Sources: CBSL, Company reports, NDBS Research 8

9 Deposits Banks (Listed Space) Outlook: Deposits Deposits (LKR Bn) 1, ,000.0 We expect demand for deposits to slow down with increased consumption taxes CASA ratio 6 5 Banks with a larger branch network have been able to maintain a higher CASA ratio CASA decreased in FY16 due to increased interest rates COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Deposit growth 45.0% % % % 1 5.0% COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Loans to Deposits (LTD) LTD more than 100% due to credit lines (NDB, DFCC) and equity infusions (UBC) COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) *12 months ending March for FY14 and 9 months ending December for FY15 Source: Company reports 9

10 Borrowings % of Listed Debt Banks (Listed Space) Outlook: Borrowings LKR Bn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC *12 months ending March for FY14 and 9 months ending December for FY15 Banks (Listed Space): Listed Corporate Debt as % of Borrowings 4QFY % % % PABC NTB SEYB DFCC NDB SAMP Most of the banks have utilized the option of raising listed debt during the low interest rate environment that prevailed in the last couple of years However, going forward we expect a slowdown in corporate debenture issues due to the budget proposal made on removing the current exemption of WHT taxes HNB 1 5.0% COMB UBC Borrowings (LKR Bn) Source: CBSL 10

11 Credit Risk Risks in the Banking Sector Credit risk Quality of loans Credit exposure of the banking sector % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 2013: High gold backed NPLs 2014: Reducing trend in NPLs due to absence of high exposure to gold backed loans FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 15% 3% 2% 5% 5% 7% 4% 7% 14% 18% 11% 9% Trading Construction Manufacturing Agriculture and Fishing Infrastructure Consumption Financial Services Other Services Tourism Transport Services Other Four sectors account for 52% of the lending portfolio Gross Non-performing Advances Ratio Gross NPL 9.0% Net Non-performing Advances Ratio Net NPL 8.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% FY14 FY15 FY16 1QFY17 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% FY14 FY15 FY16 1QFY17 1.0% 1.0% COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC Sources: CBSL, World Bank 11

12 Interest Rate Risk Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Interest rate trends Policy rates, Treasury bill & bond rates and inflation Policy Rates and Lending/Deposit Rates 16.0% 14.0% 12.0% 1 8.0% 6.0% 4.0% SDFR and SLFR were increased 50 bps each in Feb and Jul 2016 whilst SRR increased by 150 bps in Jan Moreover, SDFR and SLFR were increased 25 bps in Mar 2017 AWDR SDFR AWPLR SLFR High interest rates and inflation discouraging loan growth 14.0% 13.0% 12.0% 11.0% 1 9.0% 8.0% 7.0% 6.0% Jun-17 Dec-16 Dec-15 Dec-14 Dec-13 Dec % 12.0% 1 8.0% 6.0% 4.0% 2.0% 364 day T Bill Inflation 5.0% 3m 6m 12m 3Y 4Y 5Y 10Y 15Y 20Y 30Y Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Sources: CBSL, Bloomberg 12

13 Exchange Rate Risk Key factors that influence a bank's operations Exchange rate risk LKR/USD Significant depreciation of 4.4% in 1QFY12 LKR depreciated by, 3.8% in % YTD LKR depreciated by, 4.7% in September May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Reserves declined due to widening trade deficit and outflows of foreign investments from the government securities market in 2016 However, foreign inflows were witnessed in both government securities market (including USD 1.5 international sovereign bond in May 2017) and Colombo Stock Exchange The likely disbursement of the 3 rd tranche under the IMF Extended Fund Facility (EFF) is expected to support the balance of payments and the country s reserve position USD Bn Months of imports Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-17 May Gross Official Reserves Gross Official Reserves (Months of Imports) Sources: CBSL, Bloomberg, NDBS Research 13

14 Net Interest Income Outlook of Banks Listed Space: Profitability Net interest income YoY growth (1) (2) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC Fee based income (net) as a % of net interest income Sri Lankan listed counters 1QFY17 In order to compensate for contracting NIMs, banks are concentrating more on increasing their fee based income which includes trade related fees, card fees etc Other countries FY COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC *12 months ending March for FY14 and 9 months ending December for FY15 Sources: Company reports, NDBS Research, Bloomberg Hong Kong India Singapore Sri Lanka UK USA 14

15 Net Interest Margins Net Interest Margins (NIMs) to reduce and stabilize 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Banks (Listed space) AWPLR increased by 441 bps whilst AWDR increased by 197 bps in However, weekly AWPLR and monthly AWDR increased only by 17 bps and 82 bps respectively during YTD FY17. COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Regional peers 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% FY11 FY12 FY13 FY14 FY15 FY16 Listed Banks: Profitability Non Interest Income as a % of Net Interest Income 8 Singapore Vietnam Thailand Sri Lanka Indonesia COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) *12 months ending March for FY14 and 9 months ending December for FY15 Sources: NDBS Research, World Bank, Bloomberg 15

16 Cost Structure FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Outlook of Banks Listed Space: Cost to Income Ratios 9 8 Personnel cost/income Other cost/income *12 months ending March for FY13 & FY14 and 9 months ending December for FY15 Outlook of Banks Listed Space: Profit after Tax LKR Bn COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC 0.0 COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC *12 months ending March for FY14 and 9 months ending December for FY15 FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Sources: Company reports, NDBS Research 16

17 Return on Equity and Assets Outlook of Banks Listed Space: ROE 25.0% % 1 Banks are expected to raise capital in the short to medium term to meet additional capital and liquidity requirements. We have not accounted for any additional equity infusions that has not yet been announced by banks. FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Outlook of Banks Listed Space: ROA 2.5% FY14 (A) FY15 (A) FY16 (E) FY17 (E) FY18 (E) FY19 (E) 2.0% 1.5% 1.0% 5.0% 0.5% COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC *12 months ending March for FY14 and 9 months ending December for FY15 Banking Sector ROE Decomposition FY10 FY11 FY12 FY13 FY14 FY15 FY16 COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC In FY15, increased leverage sustained the ROE The increase in financial leverage since FY14 caused the ROE of the sector to increase further in FY16 ROE, % Common Equity Margin = (Tier 1 Capital/ Common Equity), % RoRWAs = (Net Income/ RWAs), % Unit Risk = (RWAs/ Total Assets), % Financial Leverage = (Total Assets/ Tier 1 Capital), times Sources: Company reports, NDBS research 17

18 Capital Adequacy Outlook of Banks Listed Space Core Capital Ratio 45.0% % % % 1 5.0% = Core Capital. Total Risk Weighted Assets Current regulatory requirement = 5% Capital infusion by Culture Financial Holdings Limited COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Listed Space: Stated Capital LKR Bn 5.0 COMB and HNB are expected to issue LKR 10 Bn (June 2017) and LKR 15 Bn (July 2017) respectively through rights issues PABC raised LKR 2 Bn from its Feb 2017 rights issue Listed Space: Core and Total Capital* - 1QFY17 LKR Bn Core Capital Core Capital Ratio Total Capital Total Capital Ratio 25.0% % 1 5.0% 0.0 COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC Rights Issue in 2017 Capital raised from Scrip Dividend Stated Capital as at 31st December COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC *All stated values are bank figures Sources: Company reports, NDBS Research 18

19 CBSL Requirements under BASEL III Guidelines Minimum Capital Ratios Banks with assets of LKR 500 Bn and above (Listed LCBs: COMB, HNB and SAMP) Components of Capital 1-Jul-17 1-Jan-18 1-Jan-19 Minimum Common Equity Tier 1 (CET1) 4.50% 4.500% 4.50% Capital Conservation Buffer (CCB) 1.25% 1.875% 2.50% Capital Surcharge for Domestic Systematically Important Banks (D-SIBs) 0.50% 1.000% 1.50% Minimum CET1 + CCB + Capital Surcharge for D-SIBS 6.25% 7.375% 8.50% Minimum Total Tier 1 (Total Tier 1 + CCB + Capital Surcharge for D-SIBS) 7.75% 8.875% 10.00% Minimum Total Capital + CCB + Capital Surcharge for D-SIBs 11.75% % 14.00% Banks with assets less than LKR 500 Bn (Listed LCBs: SEYB, NDB, DFCC, NTB, PABC and UBC) Components of Capital 1-Jul-17 1-Jan-18 1-Jan-19 CET1 4.50% 4.500% 4.50% CCB 1.25% 1.875% 2.50% Minimum CET1 + CCB 5.75% 6.375% 7.00% Minimum Total Tier 1 (Total Tier 1 + CCB) 7.25% 7.875% 8.50% Minimum Total Capital + CCB 11.25% % 12.50% If a bank fail to comply with the above mentioned requirements, CBSL does not permit such banks to pay dividends or repatriate profits or adopt any other measure that will further deteriorate the regulatory capital position Based on our internal estimations for tier 1 capital ratios, we expect SAMP in FY17 and SEYB in FY19 to raise additional equity to meet Basel III tier 1 ratios Source: CBSL 19

20 CBSL Requirements under BASEL III Guidelines Minimum Capital Buffers Capital Conservation Buffer Capital surcharge for D-SIBs* Countercyclical Buffers *All LCBs and LSBs with total assets LKR 500 Bn Liquidity and Leverage Ratios Objective To ensure that banks build up capital buffers during normal times (i.e. outside the period of stress) which can be drawn down during stress periods D-SIBs must have a higher capacity for loss absorbance to cover the greater risks that they pose to the financial system To ensure that the banking sector is protected from system wide risks that could arise from excess credit growth It is expected to be implemented as and when excess aggregate credit growth is judged to be associated with a build-up of system wide risk and vary between 0% to 2.5% of risk weighted assets Banks to meet capital requirements on a staggered basis 1-Jan-15 1-Jan-16 1-Jan-17 1-Jan-18 Liquidity Coverage Ratio 60% 70% 80% 90% 100% 1-Jan-19 onwards BASEL III Leverage Ratio Net Stable Funding Ratio Minimum requirement of 4% for banks with asset LKR 500 Bn and 3% for banks with asset < LKR 500 Bn Commencing 31 st Mar 2017, banks are requested to report the ratio to CBSL for monitoring purposes CBSL has not issued guidelines yet However, CBSL expects to introduce minimum standards on Net Stable Funding Ratio starting from 1 st Jan 2018 Liquidity Coverage Ratio BASEL III Leverage Ratio Net Stable Funding Ratio Source: CBSL Objective To ensure the bank has an adequate stock of unencumbered high quality liquid assets (HQLA) to meet its liquidity needs for a 30 calendar day liquidity stress scenario To restrict the build-up of excessive leverage in the banking sector and capture both on and off-balance sheet sources of banks leverage Banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities 20

21 Credit Ratings and Liquidity Creditworthiness of Listed Banks: Fitch Ratings COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC National Long-Term Rating (lka) AA AA- A+ A- A+ AA- A BBB BB+ Outlook Stable Stable Negative Stable Stable Negative Stable Negative Stable Banks Listed Space: Statutory Liquid Assets Ratio FY14 (A) FY15 (A) FY16 (A) 1QFY17 (A) 6 5 Current regulatory requirement = 20% COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC *12 months ending March for FY14 indicate the pre merge value of DFCC Bank and 9 months ending December for FY15 indicates the post merge value of DFCC Bank Sources: Company reports, Fitch Ratings 21

22 Competition in the Sector Banks: DuPont Analysis for FY16 BOC PB COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC (a) Return on Equity 24.0% 21.2% 19.3% 18.7% 21.4% 14.6% 9.7% 7.4% 17.7% 19.8% 3.4% (b) Return on Assets = Profits/Assets 1.4% 1.2% 1.5% 1.9% 1.6% 1.2% 0.9% 1.3% 1.5% 1.1% 0.6% (d) 1-tax rate 64.1% 56.9% 60.7% 57.5% 58.8% 56.7% 55.3% 61.3% 53.1% 54.6% 66.0% (e) Pre ROA 2.2% 2.1% 2.5% 3.3% 2.7% 2.2% 1.6% 2.0% 2.8% 1.9% 0.9% (f) Contribution to Assets 2.5% 2.2% 2.7% 3.3% 2.9% 2.5% 2.0% 2.4% 3.1% 2.4% 1.2% (h) Operating Income to Assets 4.5% 4.5% 4.7% 6.4% 5.6% 5.4% 4.2% 4.4% 7.1% 5.3% 5.2% (j) Net Int Inc to Assets 3.4% 3.6% 3.5% 4.7% 3.9% 4.0% 2.7% 3.3% 5.1% 3.9% 3.4% (k) Non Int Inc to Assets 1.1% 1.0% 1.2% 1.7% 1.6% 1.4% 1.5% 1.0% 2.0% 1.4% 1.8% (i) Cost to Income 45.5% 51.9% 42.8% 48.3% 47.9% 54.7% 52.3% 45.2% 55.6% 55.6% 76.2% (g) Impairment to Assets 0.3% 0.1% 0.2% 0.1% 0.3% 0.3% 0.4% 0.3% 0.4% 0.4% 0.3% (c) Leverage = Assets/Equity (a) = (b)*(c) (b) = [1-(d)]*(e) (e) = (f)-(g) (f) = (h)*[1-(i)] (h) = (j)+(k) Curtailment in loan growth, stabilizing interest rates, slightly contracting NIMs, CBSL increased capital, leverage and liquidity requirements are expected to reduce ROEs in the short term. Sources: Company reports, NDBS Research 22

23 Contents Outlook for Listed Banking Stocks BFI Sector Listed Banking Counters Commercial Bank of Ceylon Hatton National Bank Sampath Bank Seylan Bank National Development Bank DFCC Bank Nations Trust Bank Pan Asia Banking Corporation Union Bank of Colombo 23

24 BFI Sector BFI Constantly Outperformed the ASPI & S&P SL20 21,000 19,000 17,000 15,000 13,000 11,000 9,000 Jul -12 Jan -13 Jul -13 Jan -14 Jul -14 Jan -15 Jul -15 Jan -16 Jul -16 Jan -17 BFI Indexed ASPI Indexed S&P SL20 Listed Counters Outlook Dividend Yield 7.0% FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% COMB HNB SAMP SEYB NDB DFCC* NTB PABC UBC *12 months ending March for FY14 and 9 months ending December for FY15 Sources: CSE, Company reports, NDBS Research 24

25 BFI Sector Price Multiples PBV comparison PBV (x) PER comparison PER (x) COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC 0.0 COMB HNB SAMP SEYB NDB DFCC NTB PABC UBC Regional performance PBV PBV( x) 2.5 Regional performance PER PER( x) 40.0 High in 2014 mainly due to UBC being above 200 times Vietnam Singapore Sri Lanka Thailand Singapore Thailand Indonesia Vietnam Sri Lanka Sources: Bloomberg, Company reports 25

26 Commercial Bank of Ceylon Target Price LKR Recommendation Hold Share Data (Voting) Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % DFCC Bank A/C No 1 124,294, Mr Y S H I Silva 83,676, Employees Provident Fund 81,758, SLIC Life Fund 42,382, CB NY S/A IFC 37,674, Price Performance (Voting) LKR LKR LKR ,836, , Volume, Mn Jul-16 Oct-16 Jan-17 Apr-17 Volume Price Adjusted ASPI COMB is the largest and only listed private bank with group assets amounting to more than LKR 1 Tn. It also has the largest branch network amongst private banks in Sri Lanka with 256 branches (and 657 ATMs) and a regional presence in Bangladesh (third largest foreign bank in Bangladesh, with 19 service points and 20 ATMs) since Moreover, in September 2016 the bank setup a tier I bank in Maldives with a 55% stake, amounting to an equity investment of LKR 1.0 Bn. The loans grew by 21.6% and 4.3% (unannualized) during FY16 and 1QFY17 respectively, whilst the banking sector grew by 17.7% during FY16. COMB s loan portfolio is well diversified with corporate sector and high yielding SME loan exposure accounting ~40% each. Further, the exposure to gold backed loans is almost near zero (0.2% at the end of 1QFY17). We expect a 3 year CAGR in loans of 14.7% from FY17 to FY19. During FY16 and 1QFY17, the deposits increased by 19.1% and 5.6% (unannualized) respectively, whilst the banking sector grew by 16.5% during FY16. Supported by the extensive reach across the country, COMB commands the highest group CASA ratio of 41.5% (as at 1QFY17) compared to the listed LCBs average of 28.1% (as at 1QFY17). We estimate a 3 year CAGR in deposits of 12.3% from FY17 to FY19, with COMB s large branch network. COMB raised LKR 10.1 Bn capital via a rights issue in June 2017 issuing 84.6 Mn voting shares and 5.8 Mn non-voting shares. The bank expects to utilize the funds to meet stringent tier I capital requirements issued by CBSL under BASEL III guidelines. We have considered the proceeds from the rights issue in our forecasts. VAT and NBT on financial services rose significantly in COMB and all the other banks due to impact of 15% VAT and 2% NBT which came into effect from November We expect COMB to maintain its consistent profit growth, low risk profile, adequate capital buffers and acceptable NPL levels. The bank s continuous effort to look at opportunities beyond the island is expected to support further growth. Sources: Bloomberg, Company reports, CSE, NDBS Research, Mihaaru, LBO, Fitch 26

27 Commercial Bank of Ceylon FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR) PBV (X)** Tier 1 (%) *Restated to existing no of shares **P/Es and PBVs from FY14-FY16 have been calculated using the year-end share price, P/Es and PBVs FY17-FY19 have been calculated on target price ***No Scrip Dividends included Income Statement Figure in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 61,933 66,339 81,315 95, , ,465 Less: Interest expense 34,613 35,772 48,186 59,476 68,345 77,562 Net interest income 27,320 30,567 33,128 35,935 39,734 43,904 Non-interest income 10,151 10,966 11,270 11,779 13,697 15,748 Total operating income 37,471 41,534 44,398 47,713 53,430 59,652 Less: Impairment charge/(reversal) 3,209 4,100 1,583 1,561 1,936 2,276 Net operating income 34,262 37,434 42,815 46,153 51,495 57,376 Less: Operating expenses 15,720 17,421 18,991 19,386 21,368 23,362 Operating profit before tax 18,542 20,013 23,824 26,766 30,127 34,014 Share of profit/(loss) of associates Less: Tax 7,306 8,167 9,364 10,901 12,269 13,852 Profit after tax 11,243 11,859 14,466 15,875 17,868 20,173 Less: Non-controlling interest 4 4 (44) (25) (5) 2 Profit attributable to equity holders 11,239 11,855 14,510 15,900 17,873 20,171 27

28 Commercial Bank of Ceylon Balance Sheet Figure in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 20,622 20,107 32,924 35,047 32,156 34,693 Balances with CBSL 19,634 28,221 43,935 49,634 55,715 62,248 Placements with banks 14,508 17,194 11,718 13,437 15,084 16,852 T-bills & investments 312, , , , , ,044 Loans & receivables to other customers a 407, , , , , ,404 Other assets 21,910 23,490 28,935 32,754 35,824 39,497 Intangible assets ,133 1,132 1,132 1,132 Total assets 797, ,183 1,020,984 1,156,606 1,290,034 1,428,871 Liabilities Due to other customers 529, , , , ,724 1,053,263 Borrowings 26,862 33,680 72,613 73,486 75,418 76,888 Debt issued and other borrowed funds 147, , , , , ,658 Other liabilities 22,585 19,244 21,495 27,295 28,282 30, , , ,168 1,053,995 1,168,978 1,292,354 Shareholder's Funds Stated capital 21,458 23,255 24,978 36,950 36,950 36,950 Reserve fund 4,327 4,922 5,648 6,443 7,337 8,345 Retained earnings and other reserves 45,421 42,787 48,366 58,420 75,977 90,428 71,206 70,964 78, , , ,723 Non-controlling interest Total liabilities and shareholders' funds 797, ,183 1,020,984 1,156,606 1,290,034 1,428,871 28

29 Hatton National Bank Target Price LKR Recommendation Hold Share Data (Voting) Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % Employees' Provident Fund 32,793, SLIC - Life Fund 32,451, Milford Exports (Ceylon) Limited 26,604, Mr Sohli Edelji Captain 24,418, Stassen Exports Ltd 23,060, Price Performance (Voting) LKR LKR LKR ,971,677 82, Volume, Mn Jul-16 Oct-16 Jan-17 Apr-17 Volume Price Adjusted ASPI HNB is the second largest private bank with group assets of LKR Bn. Further, the bank has the second largest branch network in Sri Lanka with 252 branches in the listed space. The loans grew by 17.8% and 5.1% (unannualized) during FY16 and 1QFY17 respectively. The acquisition of HNB Grameen in 2014 continues to benefit HNB with higher exposure to the micro lending sector. Moreover, HNB Grameen contributed LKR 1.3 Bn of profit in FY16. We estimate loans with a high share in SME and retail (~30 and ~20% respectively) to grow at a 3 year CAGR of 16.4% from FY17 to FY19. The deposits grew by 18.5% and 2.3% (unannualized) during FY16 and 1QFY17 respectively as a result of the well expanded branch network across the country. Due to the shift into higher yielding fixed deposits witnessed in the industry, the CASA declined from 35.7% in FY16 to 35.2% in 1QFY17, above the listed LCBs average of 28.1% (as at 1QFY17). However, with stabilizing interest rates we expect HNB to maintain it s CASA around 30% in the next 3 years. Furthermore, we estimate a 3 year CAGR in deposits of 16.6% from FY17 to FY19. The net fee income grew by 23.7% YoY to LKR 7.7 Bn in FY16 mainly due to the growth in the credit card business along with trade finance, guarantees and remittances. (We estimate a 3 year CAGR of 12.3% in non-interest income dominated by fee income through FY17 to FY19). HNB expects to raise LKR 15.0 Bn via a rights issue in July 2017 issuing 56.0 Mn voting shares and 14.1 Mn non-voting shares. The bank expects to utilize the funds to meet stringent tier I capital requirements issued by CBSL under BASEL III guidelines. We have considered the proceeds from the rights issue in our forecasts. Therefore, we estimate a 8.2% upside potential based on the theoretical ex-right price (calculated based on current price) of LKR Considering HNB s presence across the country, maturing portfolio, exposure towards the key thrust sectors of the economy lead by the SME sector, exposure towards a high quality micro portfolio, high CASA, increased focus in digital banking, we estimate a 3 year CAGR in profits of 12.8% from FY17 to FY19. Sources: Bloomberg, Company reports, CSE, NDBS Research 29

30 Hatton National Bank FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR) PBV (X)** Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs for FY14-FY16 have been calculated using the year-end share price, P/Es and PBVs for FY17-FY19 have been calculated on target price ***No Script Dividends included Income Statement Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 53,063 56,894 81,534 97, , ,711 Less: Interest expense 27,078 27,200 42,445 54,835 66,603 78,079 Net interest income 25,985 29,694 39,089 43,124 49,464 56,632 Non-interest income 11,838 12,951 14,277 16,653 18,571 20,207 Total operating income 37,823 42,644 53,366 59,777 68,035 76,839 Less: Impairment charge/(reversal) 2,533 1, ,079 2,512 Net operating income 35,290 41,622 52,857 59,660 65,956 74,327 Less: Operating expenses 19,734 22,460 25,773 28,503 31,456 34,570 Personnel cost 8,108 9,155 10,416 11,029 12,352 13,834 Depreciation of property & equipment 1,331 1,251 1,394 1,476 1,736 1,940 Other operating expenses 10,295 12,054 13,963 15,998 17,368 18,797 Share of profit/(loss) of associates Operating profit before tax 15,699 19,222 27,234 31,239 34,594 39,858 Less: Tax 5,631 8,126 11,569 13,636 15,100 17,398 Profit after tax 10,068 11,096 15,665 17,603 19,494 22,460 Less: Non-controlling interest ,014 1,168 Profit attributable to equity holders 9,820 10,554 14,756 16,688 18,480 21,292 30

31 Hatton National Bank Balance Sheet Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 18,518 16,594 20,867 49,938 51,583 57,576 Balances with CBSL 16,908 20,096 33,778 39,366 45,945 53,641 T-bills & investments 130, , , , , ,319 Loans & receivables 401, , , , , ,744 Other assets 27,635 32,279 41,619 49,208 57,863 68,059 Intangible assets 1,090 1,001 1,180 1,234 1,234 1,234 Total assets 596, , ,451 1,068,035 1,223,201 1,405,573 Liabilities Due to other customers 425, , , , ,625 1,008,282 Borrowings 48,481 85,421 97,761 99, , ,390 Debt issued and other borrowed funds 33,503 33,630 44,475 69,187 73,408 80,663 Insurance provision 6,842 8,553 10,669 13,230 16,273 20,016 Other liabilities 12,406 16,104 18,863 22,939 25,909 28, , , , ,478 1,082,850 1,245,583 Shareholder's Funds Stated capital 13,290 13,827 15,340 31,793 31,793 31,793 Reserve fund 3,160 3,760 4,560 5,394 6,318 7,383 Retained earnings and other reserves 51,455 57,978 71,391 82,433 97, ,696 67,905 75,564 91, , , ,872 Non-controlling interest 1,734 2,179 3,021 3,936 4,950 6,118 Total Liabilities and shareholders' funds 596, , ,451 1,068,035 1,223,201 1,405,573 31

32 Sampath Bank Target Price LKR Recommendation Hold Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % Vallibel One PLC 27,840, Mr Y S H I Silva 18,597, Employees' Provident Fund 18,568, Rosewood (Pvt) Limited - A/C No 1 12,368, MATTHEWS Asia Growth Fund 8,533, Price Performance LKR LKR LKR ,190,488 71, Volume, Mn Jul-16 Oct-16 Jan-17 Apr-17 Volume Price Adjusted ASPI Sampath bank is the third largest listed private bank with group assets worth LKR Bn. Due to the aggressive branch expansion post-war (41.6% of the 226 branches opened during FY09 to FY11), SAMP currently is the third largest branch network in the listed space while having 229 branches across the country. The group loan portfolio grew by 22.0% and 9.0% (unannaulized) during FY16 and 1QFY17 respectively. Further, SAMP s loan portfolio is well diversified with corporate sector and high yielding SME loan exposure accounting for 55% and 40% respectively. The exposure to gold backed loans recorded a 3.1% by end of 1QFY17. We expect a 3 year CAGR in loans of 19.9% from FY17 to FY19. The deposits grew by 25.9% and 5.5% (unannaulized) in FY16 and 1QFY17 respectively, whilst the CASA ratio declined from 38.5% (FY16) to 38.1% (1QFY17) as a shift was made towards high yielding fixed deposits in the backdrop of rising interest rates that was witnessed industry wide. We estimate a 3 year CAGR in deposits of 19.5% from FY17 to FY19. Moreover, bank s core and total capital ratios decreased from 8.3% and 12.9% in FY16 to 7.7% and 11.9% in 1QFY17 respectively. The core capital ratio significantly declined from 11.8% (FY12) to 7.7% (1QFY17). This was mainly due to zero risk weighted gold backed loans being re-allocated to risk weighted loan segments such as consumer and retail since early Hence, going forward, an equity infusion would help to avoid the core capital ratio declining further and also meet the BASEL III requirements. We expect the bank to raise capital via a rights issue during FY17. The well diversified loan portfolio, strong growth in term loans and the focus on increased fee income will help SAMP s profits to grow. We estimate a 3 year CAGR in profits of 14.1% from FY17 to FY19. Sources: Bloomberg, Company reports, CSE, NDBS Research 32

33 Sampath Bank FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR) NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR) PBV (Times) Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs from FY14-FY16 have been calculated using the year-end share price, P/Es and PBVs FY17-FY19 have been calculated on target price ***No Scrip Dividends included Income Statement Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 39,696 39,706 58,976 74,059 88, ,048 Less: Interest expense 22,915 21,156 35,021 46,669 56,524 68,752 Net interest income 16,781 18,550 23,955 27,390 31,969 37,296 Non-interest income 4,999 8,192 10,001 11,294 12,832 14,900 Total operating income 21,780 26,742 33,957 38,684 44,801 52,196 Impairment (charge)/reversal (1,581) (993) (1,535) (2,558) (3,200) (3,589) Net operating income 20,199 25,749 32,422 36,126 41,601 48,607 Less: Operating expenses (12,180) (13,962) (16,266) (17,483) (19,061) (21,650) Personnel cost (5,341) (6,524) (7,835) (8,585) (9,653) (10,949) Other operating expenses (6,839) (7,438) (8,431) (8,897) (9,408) (10,700) Operating profit before tax 8,019 11,787 16,156 18,644 22,540 26,958 Tax (3,578) (5,159) (6,655) (8,893) (10,752) (12,859) Profit after tax 4,441 6,628 9,501 9,751 11,788 14,099 Non-controlling interest (4) (5) (5) (6) (7) (8) Profit attributable to equity holders 4,436 6,623 9,496 9,745 11,781 14,091 33

34 Sampath Bank Balance Sheet Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 11,645 13,713 17,222 15,904 16,666 16,702 Balances with CBSL 17,607 21,342 33,725 40,298 48,171 57,694 Placements with banks 1,792 5,193 8,750 11,906 14,962 17,920 T-bills & investments 64,258 63,435 88, , , ,566 Loans and receivables 334, , , , , ,919 Other assets 12,563 13,298 17,767 21,370 25,545 30,158 Intangible assets Total assets 442, , , , ,869 1,134,354 Liabilities Due to other customers 339, , , , , ,145 Borrowings 15,061 12,538 17,113 19,538 23,355 26,224 Debt issued & other borrowed funds 43,611 65,171 84,179 97, , ,751 Other liabilities 9,835 14,571 16,513 18,317 20,071 21, , , , , ,588 1,048,974 Shareholder's Funds Stated capital 4,470 5,381 6,471 8,705 8,705 8,705 Reserves 28,510 31,867 40,934 47,958 59,504 73,313 34,511 39,109 49,742 59,487 71,268 85,359 Non controlling interest Total liabilities & shareholders' funds 442, , , , ,869 1,134,354 34

35 Seylan Bank Target Price LKR Recommendation Hold Share Data (Voting) Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % Sri Lanka Insurance Corporation Ltd 26,942, Brown & Company PLC A/C No 1 24,921, Employees Provident Fund 17,705, LOLC Investments Ltd 17,155, National Development Bank PLC A/C No 2 15,671, Price Performance (Voting) LKR Jun-16 Sep-16 Dec-16 Mar-17 LKR LKR ,613, , Volume, Mn Volume Price Adjusted ASPI In December 2008, Seylan Bank was confronted by a sudden, unexpected crisis of public confidence resulting from the controversy surrounding the "Golden Key Credit Card Company" which was a subsidiary of the Ceylinco Group of companies. With the timely intervention of CBSL, a new board of directors was appointed to manage the bank. During FY10, SEYB profits increased by 176.7% YoY to LKR 1.2 Bn. From FY10 to FY16, the group increased it s profits at a 6 year CAGR of 23.0%. During FY16 and 1QFY17, SEYB recorded a loan growth of 22.2% and 2.8% (unannualized) respectively. The high yielding SME loan portfolio accounting for ~55% of total loans, we expect a 3 year CAGR in loans of 16.5% from FY17 to FY19. During FY16, the deposits grew by 21.8% whilst during 1QFY17 deposits grew at a slower pace of 0.2% (unannualized) with CASA weakening from 32.5% in FY16 to 31.2% in 1QFY17. We estimate a 3 year CAGR in deposits of 14.2% from FY17 to FY19. SEYB is to continue its branch expansion (currently 166 branches) with a lean model, which was adapted recently. Therefore, we estimate the cost to income ratios to improve from 57.8% (1QFY17) to 56.7%, 56.3% and 55.3% in FY17, FY18 and FY19 respectively. One of the main reason for Seylan Bank s above peer average NPL of 4.9% (1QFY17) is the legacy portfolio. However, the current NPL is a significant improvement from 33.6% in 4QFY09. Nonetheless, we expect a recovery in the NPLs in the coming years which will improve the Bank s bottom line as well. With Seylan de-risking itself from its crisis in 2008, we expect the bank to continue with its profitability recorded in the last couple of years. Amid increasing competition we expect Seylan bank to continue to grow its loan portfolio, mainly in the SME sector and improve its fee based income structure. Sources: Bloomberg, Company reports, CSE, NDBS Research 35

36 Seylan Bank FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR)* PBV (X)** Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs for FY14-FY16 have been calculated using the year-end share price, P/Es and PBVs for FY17-FY19 have been calculated on target price ***No Script Dividends included Income Statement Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 23,422 24,167 33,473 40,571 47,337 54,486 Less: Interest expense 12,223 12,309 20,193 25,582 30,375 35,207 Net interest income 11,199 11,857 13,280 14,989 16,962 19,279 Non-interest income 5,109 4,342 4,534 4,767 4,970 5,176 Total operating income 16,308 16,199 17,813 19,756 21,932 24,455 Less: Impairment charge/(reversal) 2, ,325 1,616 1,906 Net operating income 14,173 15,710 16,859 18,431 20,316 22,549 Less: Operating expenses 8,135 8,631 9,745 11,195 12,347 13,519 Personnel cost 3,957 4,222 4,642 5,178 5,795 6,370 Depreciation of PPE & other expenses 4,178 4,409 5,103 6,017 6,552 7,149 Operating profit before tax 6,038 7,079 7,114 7,236 7,969 9,030 Less: Tax 2,786 3,193 3,079 3,575 3,938 4,462 Profit after tax 3,253 3,886 4,035 3,661 4,032 4,568 Less: Non-controlling interest Profit attributable to equity holders 3,179 3,855 4,013 3,641 4,007 4,538 36

37 Seylan Bank Balance Sheet Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 9,007 8,558 8,670 9,676 7,054 9,131 Balances with CBSL 7,432 8,564 16,212 18,547 20,799 23,219 T-bills & investments 66,847 74,772 81,106 94, , ,095 Loans & receivables to other customers 154, , , , , ,121 Other assets 13,029 13,338 15,979 18,233 20,799 23,830 Intangible assets Total assets 251, , , , , ,655 Liabilities Due to other customers 185, , , , , ,351 Borrowings 11,841 19,850 17,836 29,865 33,170 36,662 Debt issued and other borrowed funds 20,076 18,590 28,470 34,580 41,239 48,882 Other liabilities 7,398 8,266 8,401 9,431 10,374 11, , , , , , ,306 Shareholder's Funds Stated capital 10,530 10,530 10,530 11,228 11,228 11,228 Reserve fund 996 1,187 1,388 1,570 1,770 1,997 Retained earnings and other reserves 13,670 14,571 17,103 19,220 22,673 26,984 25,195 26,288 29,020 32,019 35,672 40,210 Non-controlling interest 1,124 1,067 1,065 1,085 1,110 1,139 Total liabilities and shareholders' funds 251, , , , , ,655 37

38 National Development Bank NDB Securities (Pvt) Ltd is a subsidiary company of NDB Capital Holdings Ltd which is a subsidiary of National Development Bank PLC. Target Price LKR Recommendation Hold Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % Bank of Ceylon A/C No 1 16,995, Employees Provident Fund 16,620, Mr R S Captain 13,989, SLIC - General Fund 9,746, Dr S Yaddehige 8,876, Price Performance LKR Jul-16 Oct-16 Jan-17 Apr-17 LKR LKR ,485, , Volume, Mn Volume Price Adjusted ASPI NDB was established as a state-owned development bank in 1979, transforming itself subsequently in 2005, into a development-oriented commercial bank with the acquisition of ABN-AMRO Bank. Currently, the bank operates 106 branches with 28 branches opened since January Hence, the group balance sheet has also expanded and records an asset base of LKR Bn (1QFY17). During FY16 and 1QFY17, group recorded a loan growth of 8.6% and 6.0% (unannualized) respectively. The loan book comprises of retail & SME, corporate, project finance and other, accounting for 40%, 34%, 23% and 3% respectively. We estimate a 3 year CAGR in loans of 11.8% from FY17 to FY19. Group deposits increased by 10.5% and 11.8% (unannualized) during FY16 and 1QFY17 respectively. The bank has grown its deposit base to be in line with it s changed model of an LCB since Hence the bank records a relatively low CASA ratio at 21.7% in 1QFY17 which declined from 22.8% in FY16. We estimate a 3 year CAGR in deposits of 11.4% from FY17 to FY19 due to the challenge in mobilizing deposits with increased interest rates and competition. Bank s core ratio slightly declined from 9.3% in FY16 to 9.2% in 1QFY17. Total capital ratio also declined further from 13.0% in FY16 to 12.8% in 1QFY17. The bank has indicated a possibility of an equity infusion to be pursued by 1HFY18 in order to support the bank s growing franchise coupled with preparations to migrate to Basel III. NDB is well positioned to grow its presence in the SME sector whilst strengthening the retail banking sector. However, with the increased pressure on NIMs, high competition from it s peers and transition to new strategic plan, we estimate a 3 year CAGR in profits of 5.1% from FY17 to FY19. Sources: Bloomberg, Company reports, CSE, NDBS Research 38

39 National Development Bank FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR)* PBV (X)** Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs for FY14-FY16 have been calculated using the year-end share price, P/Es and PBVs for FY17-FY19 have been calculated on target price ***No Script Dividends included Income Statement Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 21,152 21,432 28,961 34,225 38,191 42,817 Less: Interest expense 13,239 13,625 20,100 24,561 28,109 31,773 Net interest income 7,913 7,807 8,861 9,664 10,082 11,044 Non-interest income 5,053 5,484 4,816 4,791 5,729 6,423 Total operating income 12,966 13,291 13,677 14,455 15,811 17,467 Less: Impairment charge/(reversal) , ,248 1,624 Net operating income 12,437 12,545 12,252 13,507 14,563 15,843 Less: Operating expenses 5,911 6,830 7,159 7,647 8,296 9,075 Personnel cost 3,172 3,634 3,793 4,178 4,501 4,839 Other operating expenses 2,738 3,196 3,366 3,469 3,795 4,236 Share of profit/(loss) of associates Operating profit before tax 6,624 5,793 5,094 5,859 6,268 6,768 Less: Tax (2,378) (2,123) (2,279) (3,032) (3,244) (3,503) Profit after tax 4,246 3,670 2,815 2,827 3,024 3,266 Less: Non-controlling interest (112) (128) (124) (113) (121) (130) Profit attributable to equity holders 4,134 3,542 2,691 2,714 2,903 3,135 39

40 National Development Bank Balance Sheet Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 5,996 13,002 8,437 8,274 9,361 11,310 Balances with CBSL 6,741 7,000 11,815 13,100 14,608 16,324 T-bills & investments 76,420 80,833 87,757 92,607 96, ,618 Loans & receivables 175, , , , , ,036 Other assets 4,129 4,476 4,621 5,195 5,793 6,473 Intangible assets Total assets 269, , , , , ,169 Liabilities Due to other customers 151, , , , , ,448 Borrowings 18,842 31,833 37,046 42,915 49,114 55,586 Debt issued & other borrowed funds 61,926 60,498 59,233 60,985 62,967 65,437 Other liabilities 8,078 9,470 9,923 10,419 10,992 11, , , , , , ,068 Shareholder's Funds Stated capital 1,145 1,163 1,246 2,209 2,209 2,209 Reserve fund 1,011 1,243 1,246 1,246 1,246 1,246 Retained earnings and other reserves 25,720 25,976 27,444 28,853 31,413 34,205 27,876 28,382 29,937 32,308 34,868 37,660 Non-controlling interests 923 1,019 1,077 1,190 1,311 1,441 Total liabilities and shareholders' funds 269, , , , , ,169 40

41 DFCC Bank Target Price LKR Recommendation Hold Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % Bank of Ceylon A/C No 2 38,039, Hatton National Bank PLC A/C No 1 32,396, SLIC - Life Fund 26,509, Employees' Provident Fund 24,368, Melstacorp Limited 22,175, Price Performance LKR Jul-16 Oct-16 Jan-17 Apr-17 LKR LKR ,097,688 56, Volume, Mn Volume Price Adjusted ASPI DFCC Bank, the country s first specialized development bank was incorporated by an Act of Parliament in 1955, as a part of the GoSL s initiative to create a strong institution to support the private sector with medium and long-term financing. In October 2015, DFCC Vardhana Bank PLC (DVB) (LCB, previously 99.2% owned by DFCC bank) was amalgamated with DFCC Bank, with DFCC Bank (DFCC) surviving as the amalgamated entity. The combined entity has over 139 branches islandwide. The group recorded assets of LKR Bn by the end of 1QFY17. The loan growth during FY16 and 1QFY17 was 20.1% and (0.5%) (unannualized) respectively. With high focus on SME and project lending (accounting for 50-55% of the loan portfolio) we estimate a 3 year CAGR in loans of 10.3% from FY17 to FY19. However, the gross NPL recorded 3.3% in 1QFY17 slightly above the peer average of 3.1% mainly due to the high exposure in the SME and Micro sector. DFCC funding mainly depends on mobilizing deposits and securing long-term funds through credit lines from multilateral and bilateral agencies. However, the low cost deposits CASA, one of the lowest in the industry declined from 20.3% (FY16) to 17.3% (1QFY17). Therefore, we estimate a 3 year CAGR in deposits of 13.8% from FY17 to FY19. The NIMs are expected to continue to contract mainly due to repricing on the liability side. DFCC s slow deposit growth due to high competition and tight market liquidity is expected to further increase interest expenses. The bank s expertise and long term presence in SME lending, product offering ranging from SME and Micro financing to commercial banking, increased focus in catering to emerging SMEs (segment in transition stage from Micro to SME), strong capital ratios and rapid expansion of the branch network to the under banked segment is expected to drive profits at a 3 year CAGR of 18.8% from FY17 to FY19. Sources: Bloomberg, Company reports, CSE, NDBS Research 41

42 DFCC Bank FY14/15 (A) 9MFY15/16 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR)* PBV (X)** Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs for FY14/15-FY15/16 have been calculated using the year-end share price, P/Es and PBVs for FY17-FY19 have been calculated on target price ***No Script Dividends included Income Statement Figures in LKR Mn FY14/15 (A) 9MFY15/16 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 16,099 15,309 24,206 29,501 33,010 37,143 Less: Interest expense 9,408 8,923 15,263 19,246 21,856 24,757 Net interest income 6,691 6,385 8,943 10,254 11,154 12,385 Non-interest income 3,978 2,184 2,774 3,393 3,796 4,271 Total operating income 10,669 8,570 11,717 13,647 14,950 16,657 Impairment (charge)/reversal (247) (795) (916) (938) (1,016) (1,337) Net operating income 10,422 7,774 10,801 12,709 13,934 15,319 Less: Operating expenses 4,275 4,710 5,302 5,428 5,901 6,473 Personnel cost 2,213 2,630 2,980 2,972 3,210 3,475 Other operating expenses 2,063 2,081 2,322 2,456 2,691 2,998 Share of profit/(loss) of associates Operating profit before tax 6,300 3,143 5,660 7,399 8,193 9,036 Tax (1,861) (1,501) (2,191) (2,630) (2,913) (3,212) Profit after tax 4,439 1,642 3,469 4,769 5,280 5,824 Non-controlling interest (76) (49) (54) (76) (84) (93) Profit attributable to equity holders 4,362 1,592 3,415 4,692 5,196 5,730 42

43 DFCC Bank Balance Sheet Figures in LKR Mn FY14/15 (A) 9MFY15/16 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 5,386 4,316 5,760 4,813 4,936 8,495 Balances with CBSL 2,616 5,554 8,063 9,123 10,395 11,886 T-bills & investments 59,633 68,503 74,259 85,673 97, ,521 Loans & receivables to other customers 138, , , , , ,617 Other assets 3,652 3,386 4,734 5,362 6,110 6,987 Intangible assets Total assets 210, , , , , ,854 Liabilities Due to other customers 92, , , , , ,706 Borrowings 6,010 24,451 18,209 22,212 25,942 29,662 Debt Issued and other borrowed funds 59,902 63,015 79,172 83,293 87,678 95,085 Other liabilities 3,724 5,123 6,554 7,832 9,321 10, , , , , , ,451 Shareholder's Funds Stated capital 4,716 4,716 4,716 4,716 4,716 4,716 Reserve fund 1,545 1,834 2,004 2,239 2,499 2,785 Retained earnings and other reserves 41,648 37,166 40,130 43,395 47,138 51,388 47,909 43,716 46,850 50,349 54,352 58,890 Non-controlling interest Total liabilities and shareholders' funds 210, , , , , ,854 43

44 Nations Trust Bank Target Price LKR Recommendation Hold Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % John Keells Holdings PLC 46,121, HWIC Asia Fund 34,591, Mackinnons Keells Limited 22,830, Central Finance Company PLC A/C No 3 20,715, Janashakthi General Insurance Limited 18,582, Price Performance LKR Jul-16 Oct-16 Jan-17 Apr-17 LKR LKR ,607,283 21, Volume, Mn Volume Price Adjusted ASPI NTB has been one of the fastest growing banks in the last couple of years. The bank recorded an average ROE of above 19.1% during last five years. NTB s strong presence in consumer lending helped the bank to grow at a faster pace than the industry in the past. The group assets recorded LKR Bn by the end of 1QFY17. The group loans increased by 23.7% and 8.7% (unannualized) in FY16 and 1QFY17 respectively. As of Dec 2016, the corporate segment (mainly focusing on the mid corporates), retail and SME and leasing accounted for ~26%, 52% and 21% respectively. After the 70% Loan to Value (LTV) restriction was imposed on leasing in 2016, the CBSL issued a direction in February 2017 proposing a 25% LTV on three wheelers and a 50% LTV on motor cars and vans. We estimate a 3 year CAGR in loans of 20.8% from FY17 to FY19. During FY16 and 1QFY17 group deposit increased by 17.3% and 10.7% (unannualized) respectively. The low cost CASA ratio has declined steeply from 32.3% (FY16) to 27.8% (1QFY17) compared to the listed LCBs falling by 139 bps. We estimate a 3 year CAGR in deposits of 20.4% from FY17 to FY19 due to increased competition and slowing demand based on tax impositions made last November. CBSL increased the ceiling on the interest rate of credit cards to 28% from 24%, to be effective from 1 st of July We expect this to improve NIMs of the bank, with banks credit card segment amounting to 9.9% of its loan portfolio. However, the regulated LTV ratio for leasing and demand on higher yielding deposits may have an unfavorable impact on NIMs. Therefore, we expect the group NIMs to shrink from 5.4% (FY16) to 5.1% in FY17 and decrease to 5.0% in FY18 and remain at same level in FY19. We estimate a 3 year CAGR in profits of 15.1% from FY17 to FY19. Sources: Bloomberg, Company reports, CSE, NDBS Research 44

45 Nations Trust Bank FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR)* PBV (X) Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs from FY14-FY16 have been calculated using the year-end share price,p/es and PBVs for FY17-FY19 have been calculated on target price ***No Scrip Dividends included Income Statement Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 17,452 16,628 21,384 26,104 31,865 38,691 Less: Interest expense 8,513 7,523 11,598 15,055 18,828 23,093 Net interest income 8,940 9,105 9,786 11,048 13,037 15,598 Non-Interest Income 3,177 3,414 3,925 4,475 5,019 5,810 Total operating income 12,117 12,519 13,711 15,523 18,056 21,408 Less: Impairment charge/(reversal) 1, ,326 1,664 Net operating income 10,935 11,534 13,020 14,527 16,730 19,744 Less: Operating expenses 6,363 6,862 7,620 8,522 9,629 11,013 Personnel cost 2,700 2,883 3,331 3,704 4,151 4,648 Depreciation of property & equipment Other operating expenses 3,339 3,602 3,927 4,423 5,028 5,855 Operating profit before tax 4,571 4,672 5,400 6,005 7,101 8,731 Less: Tax 2,035 2,058 2,531 2,953 3,533 4,357 Profit after tax 2,537 2,614 2,869 3,052 3,568 4,374 45

46 Nations Trust Bank Balance Sheet Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 6,900 6,392 4,188 5,781 8,580 9,787 Balances with CBSL 3,992 5,284 8,512 10,246 12,371 14,814 T-bills & investments 44,645 38,688 43,664 51,231 59,645 68,780 Loans and receivables 98, , , , , ,877 Other assets 3,614 3,530 4,333 4,940 6,009 7,275 Intangible assets 1,283 1,224 1,189 1,139 1,139 1,139 Total assets 158, , , , , ,671 Liabilities Deposits 111, , , , , ,538 Borrowings 18,136 15,546 21,242 28,360 36,449 43,781 Debt issued and other borrowed funds 10,189 10,163 14,145 14,637 16,568 19,840 Other liabilities 5,552 6,223 7,494 8,599 9,499 10, , , , , , ,741 Shareholder's Funds Stated capital 5,101 5,101 5,101 5,101 5,101 5,101 Reserve fund ,127 1,346 Retained earnings and other reserves 8,255 9,409 11,423 13,861 16,789 20,483 13,895 15,171 17,321 19,911 23,018 26,931 Total liabilities and shareholders' funds 158, , , , , ,671 46

47 Pan Asia Banking Corporation Target Price LKR Recommendation Hold Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % K D D Perera 132,724, Bansei Securities Co. Ltd 66,384, Seylan Bank PLC/ Lanka Century Investments PLC 29,287, D C C Joseph 25,998, K D H Perera 23,305, Price Performance LKR Jul-16 Oct-16 Jan-17 Apr-17 LKR LKR ,561, , Volume, Mn Volume Price Adjusted ASPI PABC recorded an asset base of LKR Bn in 1QFY17. PABC launched an aggressive branch expansion (currently 82 branches) with 52.5% of its branches opening during 2010 to Along with the branch expansion the loan growth also has increased rapidly. However, loan growth has slowed down during FY16 under slight pressure due to new additions to NPLs. During FY16 and 1QFY17 loans grew by 13.5% and 2.0% (unannualized) respectively. Due to significant exposure towards retail and SME which accounted for 77.3% total loan portfolio in FY16, we estimate a 3 year CAGR in loans of 12.2% from FY17 to FY19. During FY16 and 1QFY17 deposits grew by 17.7% and 2.5% (unannualized) respectively. Further, the bank s CASA declined from 20.3% (FY16) to 19.6% (1QFY17). We estimate a 3 year CAGR in deposits of 13.0% from FY17 to FY19. We expect the LKR 1.2 Bn raised by PABC via the rights issue in March 2017 to strengthen capital buffers and meet CBSL stringent capital requirements in the short term. We expect with the commencement of the new strategic plan of under the direction of the newly appointed CEO and the expectation on an aggressive expansion of branch network across the country, we estimate a 3 year CAGR in profits of 10.4% from FY17 to FY19. Sources: Bloomberg, Company reports, CSE, NDBS Research 47

48 Pan Asia Banking Corporation Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR)* PBV (X)** Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs for FY14-FY16 have been calculated using the year-end share price, P/Es and PBVs for FY17-FY19 have been calculated on target price ***No Script Dividends included Income Statement Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 7,542 9,039 13,367 16,626 19,051 21,824 Less: Interest expense 4,802 5,076 8,733 11,028 12,774 14,854 Net interest income 2,740 3,963 4,633 5,598 6,277 6,970 Non-interest income 1,287 1,672 1,709 1,929 2,058 2,084 Total operating income 4,027 5,634 6,342 7,526 8,334 9,054 Impairment (charge)/reversal (815) (751) (528) (724) (963) (1,294) Net operating income 3,212 4,884 5,814 6,802 7,371 7,760 Less: Operating expenses 2,458 2,980 3,523 3,863 4,218 4,538 Personnel cost 1,081 1,389 1,614 1,719 1,908 2,113 Depreciation of property & equipment Other operating expenses 1,198 1,369 1,684 1,919 2,084 2,196 Operating profit before tax 755 1,904 2,291 2,939 3,153 3,222 Tax (339) (863) (1,039) (1,402) (1,504) (1,537) Profit after tax 415 1,041 1,252 1,537 1,649 1,685 Non-controlling interest Profit attributable to equity holders 415 1,041 1,252 1,537 1,649 1,685 48

49 Pan Asia Banking Corporation Balance Sheet Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 1,334 1,393 1,703 2,596 2,160 1,329 Balances with CBSL 3,248 4,167 6,219 6,861 7,757 8,803 T-bills & investments 3,989 14,690 22,491 30,872 37,227 43,569 Loans & receivables 67,944 85,130 96, , , ,318 Other assets 3,039 2,074 2,135 2,213 2,292 2,376 Intangible assets Total assets 79, , , , , ,703 Liabilities Due to other customers 64,895 77,697 91, , , ,027 Borrowings & debt issued 4,969 15,430 22,189 25,212 29,084 33,667 Other borrowed funds 3,160 7,097 6,763 8,233 9,307 10,562 Other liabilities 1,846 1,785 2,171 2,497 2,871 3,302 74, , , , , ,558 Shareholder's Funds Stated capital 1,549 1,549 1,549 3,614 3,614 3,614 Retained earnings 2,719 3,712 4,754 5,993 7,339 8,718 Other reserves ,735 5,773 6,872 10,253 11,681 13,145 Non-controlling interest Total liabilities & shareholders' funds 79, , , , , ,703 49

50 Union Bank of Colombo Target Price LKR Recommendation Hold Share Data Market Price as at Week Range Shares in Issue (as at ) Average Daily Volume (52 Weeks) Estimated Free Float (%) Main Shareholders as at No. of Shares % Culture Financial Holdings Ltd 763,984, Vista Knowledge Pte Ltd 64,677, Associated Electrical Corporation Ltd 29,237, Mr A I Lovell 23,974, Mr C P A Wijeyesekera 18,508, Price Performance LKR LKR LKR ,091,406, , Volume, Mn In October 2014, Texas Pacific Group (TPG), one of the leading global investment firms with USD 65 Bn in assets under management, through its affiliate, Culture Financial Holdings Ltd., acquired 70% equity stake in UBC. The private placement raised LKR 11.4 Bn (USD 84.7 Mn) at LKR per share, one of the largest foreign direct investment to Sri Lanka. UBC recorded an asset CAGR of 38.3% during FY15 and FY16. As at end of 1QFY17 the asset base of the group was LKR Bn. Group loans increased by 38.2% and 7.9% (unannualized) during FY16 and 1QFY17 respectively. As of March 2017, corporate, SME and retail segments accounted for 47%, 40% and 13% of the loan portfolio respectively. Bank expects to further increase its exposure to corporate banking and retail banking to penetrate into new target markets. Hence, we estimate a 3 year CAGR in loans of 26.3% from FY17 to FY19. Group deposits increased by 38.2% and 9.6% (unannualized) during FY16 and 1QFY17 respectively. Group CASA ratio declined from 21.5% (FY16) to 20.6% (1QFY17). Sustaining CASA will be relatively difficult for UBC due to competition from the larger banks coupled with the increased interest rates. However, we expect a 3 year CAGR in deposits of 21.8% from FY17 to FY19. We expect with the strategic investments on expansion and improved banking services, an estimated 3 year CAGR in profit of 17.3% from FY17 to FY Jul-16 Oct-16 Jan-17 Apr-17 Volume Price Adjusted ASPI Sources: Bloomberg, Company reports, CSE, NDBS Research 50

51 Union Bank of Colombo Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) EPS (LKR)* NIM (%) Cost to Income (%) ROE (%) Forward P/E (X)** DPS (LKR)*** Dividend Yield (%) BV (LKR)* PBV (X)** Tier 1 (%) *Restated according to the existing number of shares **P/Es and PBVs for FY14-FY16 have been calculated using the year-end share price, P/Es and PBVs for FY17-FY19 have been calculated on target price ***No Script Dividends included Income Statement Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Interest income 4,483 4,999 8,466 11,026 13,670 17,057 Less: Interest expense 2,512 2,558 5,445 7,238 9,195 11,600 Net interest income 1,971 2,440 3,020 3,788 4,475 5,457 Non-interest income ,558 1,874 2,461 2,900 Total operating income 2,744 3,420 4,578 5,662 6,936 8,356 Less: Impairment charge/(reversal) (527) (260) (252) (405) (580) (786) Net operating income 2,217 3,160 4,326 5,257 6,356 7,570 Less: Operating expenses 1,984 2,732 3,487 4,208 5,000 5,904 Personnel cost 785 1,159 1,567 1,908 2,328 2,728 Depreciation of property & equipment Other operating expenses 905 1,208 1,493 1,812 2,098 2,486 Operating profit before tax ,049 1,356 1,666 Less: Tax (155) (174) (286) (486) (629) (772) Profit after tax Less: Non-controlling interest (47) (32) (49) (45) (58) (71) Profit attributable to equity holders

52 Union Bank of Colombo Balance Sheet Figures in LKR Mn FY14 (A) FY15 (A) FY16 (A) FY17 (E) FY18 (E) FY19 (E) Assets Cash and cash equivalents 12,569 3,622 5,820 4,327 4,141 3,261 Balances with CBSL 949 1,307 2,488 3,340 4,070 4,965 T-bills & investments 4,545 17,156 18,197 20,964 22,563 23,891 Loans & receivables to other customers 30,867 50,418 69,672 87, , ,228 Other assets 2,324 2,572 2,855 3,249 3,959 4,830 Intangible assets 1,304 1,470 1,502 1,508 1,508 1,508 Total assets 52,558 76, , , , ,683 Liabilities Due to other customers 30,324 41,624 57,525 69,880 85, ,873 Due to banks 2,146 7,156 12,770 16,771 22,563 30,123 Borrowed funds 1,941 9,276 10,947 13,627 17,029 20,775 Other liabilities 1,651 1,774 2,325 3,494 4,257 5,194 36,061 59,830 83, , , ,964 Shareholder's Funds Stated capital 16,335 16,335 16,335 16,335 16,335 16,335 Warrants issued Retained earnings and other reserves (216) (14) ,140 1,853 16,185 16,386 16,609 16,914 17,475 18,188 Non-controlling interest Total liabilities and shareholders' funds 52,558 76, , , , ,683 52

53 Disclaimer This document is based on information obtained from sources believed to be reliable, but NDB Securities (Pvt) Ltd., (NDBS) accepts no responsibility or makes no warranties or representations, express or implied, as to whether the information provided in this document is accurate, complete or up-to-date. Furthermore, no representation or warranty is made by NDBS as to the sufficiency, relevance, importance, appropriateness, completeness or comprehensiveness of the information contained herein for any specific purpose. Prices, opinions and estimates reflect our judgment on the date of original publication and are subject to change at any time without notice. NDBS reserves the right to change their opinion at any point in time as they deem necessary. There is no guarantee that the target price for the stock will be met or that predicted business results for the company will be met. NDBS accepts no liability whatsoever for any direct or consequential loss or damage arising from any use of these reports or their contents. References to tax are based on our understanding of current law and Inland Revenue practices, which may change from time to time. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressee only and is not to be taken as substitution for the exercise of judgment by addressee. The information contained in any research report does not constitute an offer to sell securities or the solicitation of an offer to buy, or recommendation for investment in, any securities within Sri Lanka or any other jurisdiction. The information in any research report is not intended as financial advice. Moreover, none of the research reports is intended as a prospectus within the meaning of the applicable laws of any jurisdiction and none of the research reports is directed to any person in any country in which the distribution of such research report is unlawful. Past results do not guarantee future performance. NDBS cautions that any forward-looking statements in any research report implied by such words as anticipate, believe, estimate, expect, and similar expressions as they relate to a company or its management are not guarantees of future performance. The investments in undertakings, securities or other financial instruments involve risks. Any discussion of the risks contained herein should not be considered to be a disclosure of all risks or complete discussion of the risks which are mentioned. NDBS and its associates, their directors, and/or employees may have positions in, and may affect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other financial services for these companies.