LKR Sampath Bank PLC Interim Update 3Q 2018 Equity Research SAMP recorded a 13.2% growth in PAT for 9M18 with substantial increase in NII and Fee based income despite 219% increase in impairment provision and LKR 1.4Bn trading losses. But 3Q profit growth remained flat mainly due to LKR 3.9Bn impairment provision booked by SAMP. 13.1% growth of loan book amid relative high interest rate regime has helped in NII growth. However interest expenses have been up by 19.5% for 9M, negatively impacting the bank on rising funding cost. Total Assets has seen a growth of 12% and customer deposits has seen a 7.3% growth for 9M. Increase in NPL due to poor performance of some sectors has been a major concern during the quarter. Investment Consideration Higher loan book growth amid challenging macro-economic backdrop: SAMP has seen above industry loan growth in 1H18 (SAMP: 10%, Industry: 7.9%) with its high risk appetite and growing franchise which we expect to continue, but at a slower pace due to the need of capital management and pressure on asset quality with lackluster economic outlook. Accordingly we estimate annual 15% loan book growth in 2018 and 2019. Steady Net Interest Margins (NIMs): Bank has managed to maintain NIMs at historical levels through robust loan growth and timely repricing despite volatile interest rate regime due to changing political and economic outlook. High NPLs to impact profitability in short term: Gross NPL has increased to 4.25% from 1.64% in Dec 2017 due to challenges in construction and agriculture sectors. Bank has seen an increased exposure to more high risk segments, creating pressure on asset quality specially in high interest rate regime. Loan loss provision has increased to 1% in 9M18 from 0.4% in 9M17 due to deteriorating asset quality and application of IFRS 9. We expect impairment charges to rise further in short term due to asset quality pressure. But earnings growth coming from lending and fee based income growth is likely to negate the impact. Reducing operational cost impacting profitability: Bank's cost-to-income ratio has gradually come down over the years with its process efficiencies and continuous effort to bring IT to the business. We expect operational costs to remain modest despite higher assets growth over peers, improving its profitability. Sufficient capital buffer to maintain CARs: SAMP successfully raised LKR 7.6Bn in 4Q17 and LKR 12.53Bn in 1Q18 through right issues to strengthen its Tier I capital. It has raised LKR 7.5Bn Tier II capital via debenture issue in 1Q18 and has decided to raise upto LKR 7Bn Tier II capital most likely in 1Q19. Despite its relatively weaker capital position in previous quaters affecting its share price, the bank has now managed to keep its CARs fairly above the minimum limits which will bode positively on market prices. Therefore further equity capital infusion is unlikely in 1H19. But we expect the bank to continue to focus on capital management and earnings retention via scrip dividend payouts in short term to preserve its capital base. Historically low price multiples: SAMP is currently trading at a trailing PE of 4.9X and PBV of 0.76X, which are one of the lowest over 10 years' time horizon. With the inclusion to the MSCI Frontier Market 100 Index, the counter may also gain more foreign investor attention in the coming year. Valuation The counter continues to remain fundamentally attractive based on its strong value drivers despite its sharp share price fall inline with recent equity market downturn. With improved capital base and expected earnings growth, we believe that SAMP share price has now more scope to appreciate. Accordingly with 17.03% cost of equity, our Residual Income Valuation model values the counter at LKR 355.78 which is a 45% upside to current share price. Substantially discounted price multiples of the counter will also justify our primary valuation. Thus we continue to maintain BUY recommendation for SAMP. BUY LOLC SEC Valuation LKR 355.78 12M Tgt Price (excl.dividend) LKR 312.60 Share Price LKR 245.00 Upside/(Downside) 45.22% Risk Level Medium (refer page 07 for recommendation guidance) Share Details Bloomberg Ticker CSE Sector GICS Sector SAMP SL Banks, Finance and Insurance Financials Market Cap (LKR Mn) 67,894 Issued Quantity (Mn) 281 30-day avg T/O (LKR Mn) 44.25 Beta (6 months) 1.08 Financial Summary LKR Bn 12M Trail 18(E) 19(F) 20(F) Net Revenue 54.2 52.1 59.2 67.2 Net Profit 13.8 13.5 17.9 19.9 S/H's Equity 89.8 97.8 115.0 133.4 Total Assets 925.5 931.9 1075.1 1255.2 ROA (%) 1.6% 1.5% 1.8% 1.7% ROE (%) 18.6% 16.2% 16.8% 16.0% Price Multiples PE (X) 4.97 PBV (X) 0.77 Price to Sales (X) 0.60 Cash Divdend Yield (%) 0.98% Price Behavior 340 320 300 280 260 240 220 200 07-Dec-17 07-Mar-18 07-Jun-18 07-Sep-18 Per Share Details as at 30.09.2018 (LKR) Earnings per share (trailing 12m) 49.29 Net Asset Value per share 319.57 Net Revenue per share (trailing 12m) 410.75 Scrip Dividend Per Share (trailing 12m) 17.20 Shareholder Details as at 30.09.2018 Vallibel One Plc 14.95% Silva Y S H I K 9.98% Employee Provident Fund Srilanka 9.97% Matthews International Capital Man 8.83% Shareholders below 5% 56.27% Analyst (s) SAMP Share Price Gayan Rajakaruna +94 115 889835 gayanraj@lolcsecurities.com ASI movement (adjusted to SAMP base price) 07 December 18 Recommendation Guidance, Important Disclosures and Analyst Certification: Page 07
% of total loan book Graph 01: Net Interest Income (NII) and Profit LKR Mn 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000-31.2% QoQ growth of NII and 0.8% degrowth of Profit for 3Q18. Bank has maintained 19.5% profit CAGR over last 5 years. Our estimate is 16.2% profit CAGR for next 3 2010 2011 2012 2013 Net Interest Income 2014 2015 2016 Profit 2017 2018 F 2019 F 2020 F Source: Bloomberg, LOLC Sec Estimates Graph 02: Loan Book Growth LKR Mn 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000-13.2% loan growth was witnessed in 9M18. There is 18.6% growth in foreign currency lending in 9M18. FX Loans LKR Loans Gross Loan Book Growth 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Bloomberg Graph 03: Customer Advances Portfolio Composition(as at 30.09.2018) Graph 04: Deposits Composition (as at 30.09.2018) Overdrafts 2.4% 0.5% 5.1% 5% 4% 4% 2% 11% 7% 6% 15% 46% Term loans Lease & HP rentals Credit cards Pawning Export loans Housing loans Import loans 63.7% 28.3% 0.0% Demand Savings Call Deposits Fixed Deposits Certificates of Deposits Margin Deposits Others Source: Annual Report 2015 Source: Annual Report 2015 Graph 05: Pawning and leasing exposures remain low Graph 06: Movement of NPL Ratio 30% 25% 20% 15% 10% 5% 0% Bank continues to focus on core banking operations with less exposure to high yielding risky assets. 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Significant increase in NPL due to delays in receiving dues for completed construction projects and low performance of agriculture sector due to adverse weather experienced in previous year. Pawning Exposure Leasing Exposure Source: Annual Reports, LOLC Sec Research Source: Annual Reports, Interim financials 2 LOLC Securities Limited
Medium Term Growth Rate Valuation We have used Residual Income valuation in deriving the value for SAMP. Accordingly we estimate total valuation for the company at LKR 100 billion. SAMP's current book value (as at 30.09.2018) stands at LKR 89.7 billion. We value the share at LKR 355.78 and maintain our recommendation BUY for the counter. At the current share price, SAMP is trading at forward PE of 3.8X and a forward PBV of 0.6X. We have estimated the cost of equity of 17.03% by taking 10.03% risk free rate as per 3 Year Treasury Bond rate and 7% equity risk premium. We have taken a mid-term residual income growth (4-6 years) of 5% and persistence factor of 0.7(>6 years) in valuing SAMP. Table 01: Valuation Sensitivity Matrix Share price in LKR Cost of Equity 15.0% 16.0% 17.0% 18.0% 19.0% 3% 393.56 373.93 355.63 338.55 322.57 4% 394.22 374.29 355.70 338.36 322.16 5% 394.90 374.65 355.78 338.18 321.74 6% 395.58 375.01 355.85 337.99 321.31 7% 396.28 375.38 355.92 337.79 320.87 Table 02: Peer Comparison Name Price Market Cap (USD Mn) ROA (X) ROE (%) Net Assets Growth-5yrs (%) Sampath Bank Plc (Sri Lanka) 245.00 378.8 1.6 18.6 19.9 4.3 0.8 1.0 Commercial Bank Of Ceylon Pl (Sri Lank 118.80 661.3 1.6 16.5 15.5 6.4 1.0 3.8 Hatton National Bank Plc (Sri Lanka) 218.80 574.6 1.8 14.8 18.8 4.7 0.8 3.0 Seylan Bank Plc (Sri Lanka) 77.40 125.0 1.1 12.6 12.4 6.2 0.7 1.3 National Development Bank Pl (Sri Lank 108.00 126.7 1.1 13.4 5.7 4.2 0.5 3.5 Dfcc Bank Plc (Sri Lanka) 95.00 140.5 1.0 7.7 8.5 6.0 0.5 5.3 Nations Trust Bank Plc (Sri Lanka) 90.00 139.5 1.3 16.3 16.3 6.0 0.8 N/A Union Bank Of Colombo Plc (Sri Lanka) 11.20 68.2 0.4 3.2 27.9 22.0 0.7 0.9 Pan Asia Banking Corp Plc (Sri Lanka) 14.30 36.5 1.1 14.0 20.3 4.0 0.5 N/A Prime Bank Ltd (Bangladesh) 17.20 232.6 0.8 8.5 3.4 9.1 0.8 3.7 Bank Tabungan Negara Persero (Indone 2720.00 1987.2 1.3 14.9 16.1 8.8 1.2 2.1 Union Bank Of Philippines (Philippines) 66.15 1529.1 1.4 10.1 9.3 8.9 0.8 2.8 PER (X) PBV (X) Cash Div Yield (%) 3 LOLC Securities Limited
Volume Rs Table 03: Return comparison Graph 07: Share Price Movement % SAMP ASPI Index S&P SL 20 Index COMB 3 months -12.27-1.40-0.68-4.12 6 months -24.21-5.20-10.19-8.26 YTD -16.09-5.24-12.98-11.39 1 year -21.05-5.49-13.94-11.07 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 - Volume Price SMAVG (50) SMAVG (100) 100 75 RSI (14) 50 25 0 350 300 250 200 150 100 Graph 08: PE Chart 7 6.5 6 5.5 5 4.5 4 3.5 3 Graph 10: Price per Sales 1.0 0.8 0.6 0.4 0.2 Graph 12: CSE PE Chart PE ratio Highest Average Lowest 0.0 Price to Sales ratio Highest Average Lowest 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 12/08/15 06/08/16 12/08/16 06/08/17 12/08/17 06/08/18 ASI PE ratio Highest Average Lowest Graph 09: PBV Chart 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 12/08/15 06/08/16 12/08/16 06/08/17 12/08/17 06/08/18 PBV ratio Highest Average Lowest Graph 11: Cash Dividend Yield 3.0 2.5 2.0 1.5 1.0 0.5 0.0 SAMP dividend yield Highest Average Lowest Graph 13: CSE PBV Chart 2.0 1.8 1.6 1.4 1.2 1.0 0.8 ASI PBV ratio Highest Average Lowest 4 LOLC Securities Limited
Table 04: Revised Financial Summary Forecast Figures in LKR Mn (31st Dec) 2016 2017 2018 (9M) 2018 (E) 2019 (F) 2020 (F) Income Statement Interest Income 58,976 83,909 75,844 94,966 104,249 112,310 Interest Expenses 35,021 53,612 46,601 57,524 62,537 66,150 Net Interest Income 23,955 30,297 29,243 37,442 41,712 46,160 Non Interest Income 10,001 12,175 11,663 14,611 17,533 21,039 Net Revenue 33,957 42,473 40,906 52,053 59,245 67,199 Provisions for Loan Losses 1,535 2,634 7,114 7,442 4,279 4,506 Net Revenue After Provisions 32,422 39,839 33,792 44,611 54,966 62,693 Non-Interest Expense 19,208 22,329 18,953 25,956 30,173 35,075 PBT 13,214 17,510 14,839 18,654 24,793 27,618 Tax Provision 3,712 4,828 4,892 5,143 6,942 7,733 PAT 9,501 12,683 9,946 13,511 17,851 19,885 Minority Interests 5 0 0 0 0 0 Net Profit 9,496 12,683 9,946 13,511 17,851 19,885 Balance Sheet Cash & Near Cash Items 59,696 66,938 67,243 63,724 73,437 81,783 Short-Term Investments 73,229 23,392 27,616 24,562 25,790 27,079 Net Loans 514,105 637,808 720,760 725,934 835,423 978,660 Long-Term Investments 14,945 77,108 86,097 92,530 111,036 133,243 Net Fixed Assets 10,709 12,631 13,130 14,526 16,705 19,211 Other Assets 7,414 8,839 10,682 10,607 12,728 15,273 Total Assets 680,099 826,717 925,527 931,882 1,075,119 1,255,250 Customer Deposits 512,550 634,641 680,851 691,366 795,641 932,057 ST Borrowings & Repos 17,113 9,156 28,201 11,903 14,284 17,140 Other Short-Term Liabilities 4,471 5,730 8,313 7,162 8,953 11,191 Long-Term Borrowings 84,179 91,257 102,402 104,946 120,688 138,791 Other Long-Term Liabilities 12,042 17,024 15,992 18,726 20,599 22,658 Total Liabilities 630,356 757,808 835,759 834,103 960,164 1,121,838 Minority Interest 0 0 0 0 0 0 Share Capital & APIC 6,471 16,308 32,796 32,796 32,796 32,796 Retained Earnings & Other Equity 43,271 52,601 56,973 64,984 82,159 100,616 Total Equity 49,742 68,908 89,769 97,780 114,955 133,412 Total Liabilities & Equity 680,099 826,717 925,527 931,882 1,075,119 1,255,250 5 LOLC Securities Limited
Table 05: Forecast Ratios 2016 2017 2018 (9M) 2018 (E) 2019 (F) 2020 (F) Banking Ratios Return on Assets - after tax 1.6% 1.7% 1.6% 1.5% 1.8% 1.7% Return on Common Equity 21.4% 21.4% 18.6% 16.2% 16.8% 16.0% Efficiency Ratios 56.6% 52.6% 46.3% 49.9% 50.9% 52.2% Net Interest Spread 5.0% 5.1% 3.2% 4.7% 4.6% 4.4% Common Equity/Total Assets 7.3% 8.3% 9.7% 10.5% 10.7% 10.6% Prov Loan Losses/Total Loans 0.3% 0.4% 1.0% 1.0% 0.5% 0.5% Total Loans/Total Deposits 101.9% 102.0% 108.7% 107.6% 107.6% 107.4% Total Loans/Total Assets 76.8% 78.3% 79.9% 79.9% 79.6% 79.8% Deposits/Assets 75.4% 76.8% 73.6% 74.2% 74.0% 74.3% Earning Assets/Int Bearing Liabilities 99.3% 101.6% 104.2% 105.6% 105.8% 106.1% Growth Ratios Interest Income Growth 48.2% 42.3% 24.9% 13.2% 9.8% 7.7% Interest Expense Growth 65.5% 53.1% 19.5% 7.3% 8.7% 5.8% Net Interest Income Growth 28.6% 26.5% 34.7% 23.6% 11.4% 10.7% Net Revenue Growth(before provision) 21.5% 25.1% 32.9% 22.6% 13.8% 13.4% Net Income Growth 43.4% 33.6% 13.2% 6.5% 32.1% 11.4% Earning Assets Growth 24.5% 22.5% 13.5% 14.3% 15.4% 17.2% Assets Growth 26.3% 21.6% 12.0% 12.7% 15.4% 16.8% Net Worth Growth 27.2% 38.5% 30.3% 41.9% 17.6% 16.1% Gross Loan Growth(with out impairement) 21.8% 23.9% 13.2% 15.0% 15.0% 17.0% Deposit Growth 25.9% 23.8% 7.3% 8.9% 15.1% 17.1% Earnings per share (LKR) 53.69 58.38 37.52 48.10 63.55 70.79 Book Value per share (LKR) 281.06 317.23 319.57 348.09 409.23 474.94 PE Ratio (X) 4.9 4.9 5.0 5.1 3.9 3.5 Price to Book Value (X) 0.9 0.8 0.8 0.7 0.6 0.5 Dividend Yield (%) 2.2% 1.5% 1.0% 1.0% 2.1% 2.9% 6 LOLC Securities Limited
Recommendation Guidance LOLC SEC Valuation BUY expected return > 10% in excess of benchmark return SELL expected return less than benchmark return HOLD expected return between 0% and 10% in excess of benchmark return Investment Horizon: 3 years 12 months target price (12M Tgt Price) is based on the expected capital appreciation of the share excluding dividend. Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka. Risk Level Evaluation High: Maximum price volatility to be up or down more than 50% monthly Medium: Maximum price volatility to be up or down between 25% - 50% monthly. Low: Maximum price volatility to be up or down less than 25% monthly. Risk Level is calculated taking the historical standard deviation measures. Financial Glossary EPS = Earnings per Share ROA = Return on Assets (adjusted net profit/average total assets) ROE = Return on Equity (adjusted net profit/average total equity) CAGR = Compound Annual Growth Rate ((End Value/Start Value) ^ (1/number of years) -1) GP= Gross Profit EBITDA= Earnings before interest, tax, depreciation and amortization PBT= Profit before tax PAT= Profit after tax NP= Net Profit PBV= Price to book value ratio PE= Price to earnings ratio Analyst certification: The Analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) of the research certify that the views expressed in this research accurately reflect the personal view of the analyst(s) about the subject securities and issuers and/or other subject matter as appropriate and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. No part of the compensation received by the analyst(s) was, is or will be directly or indirectly related to specific inclusion of specific recommendation or views in this research. On a general basis analyst s performance appraisal may be influenced by quality of the content and efficacy of the research. The analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) receive compensation based on overall revenues of LOLC Securities Limited and its holding company (Lanka ORIX Company PLC LOLC Group), which may include brokerage revenue from transactions involved with the securities mentioned in this research. General Disclaimer: LOLC Securities Limited is a company incorporated in Sri Lanka and licensed by the Securities and Exchange Commission of Sri Lanka to operate as a stockbroker/stock dealer in Sri Lanka. LOLC Securities Limited is a trading member of Colombo Stock Exchange. This research is based on information from sources that LOLC Securities Limited believes to be reliable. Whilst reasonable care has been taken to ensure accuracy of the information presented in the research, LOLC Securities Limited does not give a guarantee on the accuracy of the information presented in the paper nor will take the responsibility on investment decisions taken based on the information provided by the research and hence LOLC Securities Limited nor its employees accepts any liability whatsoever for any loss arising from investments decisions taken using the information provided in this paper. The reader also should note this paper does not give recommendations to any particular category of investors and investor should consult investment advisors for further clarifications regarding risks involved in investing in equity market. Investing in securities has inherent risks with no guaranteed return and price may be subjected to significant volatilities. No part of this report should be considered as a solicitation to buy or sell any security or product or to engage in or refrain from engaging in any transaction. LOLC Securities Limited or its employees may or may not hold positions in the securities discussed in the research and the information provided in the research should not be construed as a buy or sell instruction for any securities mentioned in the research, Unless otherwise specifically mentioned. This research is intended for general use for clients of LOLC Securities Limited and must not be copied in whole or in part or distributed to any third party for commercial use without permission from LOLC Securities Limited. If the reader is not the intended recipient please inform LOLC Securities Limited immediately by return email to research@lolcsecurities.com. LOLC Securities Limited s other staff including sales people, traders and other professionals may provide oral or written market commentaries or trading strategies to our clients which reflect opinions which are contrary to the opinions expressed in this research which may be influenced by different circumstances. For U.S. persons only: This research report is a product of LOLC Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. 7 LOLC Securities Limited
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