Price Volume - '000 Price Volume -'000 FC Research Analyst: Atchuthan Srirangan SEYLAN BANK PLC SRI LANKA Corporate Update STRONG BUY (V)/ BUY (NV) SEYB.N0000 Current Price: LKR 80 Fair Value: LKR 101 STRONG BUY SEYB.X0000 Current Price: LKR 63 Fair Value: LKR 70 BUY KEY DATA Share Price V/NV (LKR) 80.00/62.50 52w High/Low (LKR) (Voting) 120.50/80.10 52w High/Low (LKR) (Non-Voting) 81.50/56.50 Average Daily Volume (Shares) V/NV 76,126/207,048 Average Daily Turnover (LKR mn) V/NV 7.88/14.71 Issued Share Capital (Shares mn) Market Capitalisation (LKR mn) 14,237 Price Performance (%) 1 mth 3 mths 12mths SEYB -14.8% -19.9% -13.6% SEYB.X -12.7% -17.4% 4.7% ASPI -8.1% -9.9% -14.1% Major Shareholders as at 30th Sept 2015 Voting Sri Lanka Insurance Corp. Ltd 15.00% Brown & Co. 13.87% Employees Provident Fund 9.96% LOLC Investments Ltd 9.55% National Development Bank 7.50% Non-Voting LOLC 43.85% Employees Provident Fund 5.33% Commercial Bank/ Dunamis Capital 2.26% Mr.E.Thavagnanasooriyam & Mr.E.Thavagnanasundaram 1.57% Pershing S/A Averbach Grauson & Co. 1.50% Public Holdings V/NV 54% / 56% Figure 1: SEYB.N Price Volume Graph 125 115 105 95 85 75 Jan-15 Apr-15 Jul-15 Oct-15 Figure 2: SEYB.X Price Volume Graph 85 75 65 Volume 0 Price - Voting 2,000 1,500 1,000 500 4,000 3,000 2,000 1,000 P/E 31 Dec 2013 2014 2015E 2016E 2017E Net Interest Income (LKR mn) 9,861 11,199 12,136 15,919 18,220 Net Profit (LKR mn) 2,326 3,178 3,675 4,636 5,631 EPS (LKR) 6.8 9.2 10.8 13.6 16.5 YoY % Growth 12% 37% 16% 26% 21% Valuations JAN 2016 Voting - PER (x) 13.2x 9.8x 8.4x 6.6x 5.5x Voting - PBV (x) 1.4x 1.2x 1.1x 1.0x 0.9x Voting - Dividend Yield (%) 2.2% 2.8% 3.0% 3.7% 4.5% Non-Voting - PER (x) 10.0x 7.4x 6.3x 5.0x 4.1x Non-Voting - PBV (x) 1.0x 0.9x 0.9x 0.8x 0.7x Non-Voting - Dividend Yield (%) 2.9% 3.7% 3.9% 4.9% 6.0% NAVPS 65.7 73.0 78.5 88.6 100.8 Adjusted DPS (LKR) 2.0 2.5 2.7 3.4 4.1 Dividend Payout 29% 27% 25% 25% 25% SEYB as the 4 th largest private sector commercial bank in Sri Lanka with an asset base of LKR 277bn is likely to maintain its aggressive earnings growth trajectory to reach a CAGR of c.21% over 2014-17E. We expect SEYB growth to be driven via growing lending portfolio let by overdraft and trade related lending and improving cost-to-income ratio. We expect SEYB voting and non-voting shares to register total returns of c.29% and c.17% respectively including dividends over 1 year period. STRONG BUY (V), BUY (NV) Loan Book to grow by a CAGR of c.16% 2014-17E: We expect SEYB loan growth to reach c.18% 2015E, highest in the recent past while decelerating to c.14% in 2016E amidst possible rise in interest rates slowing down domestic credit growth. SEYB s loan growth is likely to emerge from overdraft and trade related segments supported by the Bank s 29% exposure to the overdraft segment providing high yield income to the bank. Cost-to-Income to drop to c. 46% by 2017E: SEYB Cost to Income is likely to further decline to c.46% in 2017E from the 50% in 2014 and 61% in 2012. The drop is likely to be driven via relocation of branches, optimal staff utilization increasing revenue per employee to LKR 7.8Mn by 2017E and bottoming out of interest rate spread increasing to 5.43% by 2017E. 55 0 Jan-15 Apr-15 Jul-15 Oct-15 Volume Price - Non-Voting Disclaimer on Shareholding: Source: CSE First Capital does not hold positions in SEYB nor does First Capital envisage taking positions in this share for the succeeding 7 trading days to this report. SEYB.N and SEYB.X to provide likely total returns of 29% and 17%: SEYB voting currently trades at a 6.6x PER and 1.0x PBV on 2016E earnings while the non-voting counter trades at a 5.0x PER and 0.8x PBV. Our 1 year target price for SEYB.N is LKR 101.0 (+26%) and LKR 70.0(+13%) for SEYB.X providing a total 1 year return of 29% and 17% respectively including dividend yields of 3% for SEYB.N and 4% for SEYB.X. STRONG BUY (V), BUY (NV).
Index FC Research Figure 3: ASPI vs SEYB 1.0 Introduction 170 150 130 110 90 ASPI SEYB.N SEYB.X Source: CSE SEYB is the 4th largest private sector commercial bank in Sri Lanka with an asset base of LKR 277bn. The bank s ongoing turnaround and growth was fueled by the improved credit control procedures, also factoring in the improved loan growth stemming from reduced interest rates. Share Price Performance: Over the period of two years SEYB s share has outperformed the market mainly driven by aggressive growth prospective reached its high at LKR 120.5 for voting and LKR 81.5 for non-voting on May 2015. Due to ongoing adverse market conditions drag the share price to lower level. Currently voting trades at LKR 80.0 and non-voting at 62.5. Table 1: SL GDP Growth Forecasts SL GDP Growth Forecasts 2014 2015E 2016E CBSL 4.5% 5.5% 6.5% World Bank 5.3% 5.6% IMF 6.5% 6.5% ADB 6.3% 7.0% Standard Chartered 6.3% 6.8% Average 6.0% 6.5% 2.0 Loan Book to grow by a CAGR of c.16% 2014-17E Loan Book to be driven by expansion in the economy: We expect SEYB loan portfolio to grow 18% and 14% in 2015E and 2016E supported growth in the economy and the growing SME sector. Credit to Private Sector has grown by a CAGR of 16% 2011-14 and we expect it remain strong reaching a growth CAGR of 20% 2015E-17E. We expect Sri Lanka to grow above 6% despite the tough economic conditions globally as Sri Lankan economy and South Asia remains shielded by not being linked to the supply chain in China. Thereby, strong growth in the overall economy is likely to support growth in private sector credit. High yielding income from overdraft and trade related segments: SEYB s net interest income to grow by 31% to 16bn in 2016E is likely to emerge from overdraft and trade related segments supported by the Bank s 29% exposure to the overdraft segment providing high yield income to the bank with lower maturities. Figure 4: Loans and Advances By Products 7% 8% 7% 6% 5% 5% 30% 29% 51% 52% Dec-14 Sep-15 Others Overdraft Pawnining Trade Related Leases (Source: Quarterly Reports) 2
Lower CASA may result in higher cost of funding: We expect SEYB CASA ratio to decline from 42% in 2015E to 39% in 2016E with clients switching from saving deposits to fixed deposits on the back of higher interest rate regime. Figure 5: CASA in the industry 9M2015 Figure 6: CASA 49% 48% 47% 46% 42% 40% 39% 42% 39% 38% 27% 27% 27% 26% 25% 34% 33% 2012 2013 2014 2015E 2016E 2017E 2014 9M2015 (Source: Quarterly Reports) 3.0 Cost-to-Income to drop to c.46% by 2017E We expect the Bank to achieve cost-to-income of c. 47% in 2016E and c. 46% 2017E improving from 51% in 2015E and 50% in 2014. Relocation of branches, optimal staff utilization and bottoming out of net interest spreads are likely to support drop in the Cost-to-Income. Figure 7: Cost-to income Figure 8: Return on Average Equity 61% 16.89% 18.29% 57% 13.59% 14.48% 50% 51% 11.23% 11.19% 47% 46% 2012 2013 2014 2015E 2016E 2017E 2012 2013 2014 2015E 2016E 2017E 3.1 Relocation of branches to improve cost-to-income ratio SEYB s cost structure underwent multiple restructuring processes in order to rationalize its operations in a way that minimize the cost while strategically locating its new branches in profitable areas which resulted in a drastic decline in overall expenses of the bank. 3
Revenue/Employee (LKR Mn) FC Research Table 2: Peer Comparison Revenue/Employee Revenue / Employee (LKR 'Mn) COMB 8.1 HNB 7.8 DFCC 7.5 NDB 7.4 SAMP 6.0 SEYB 5.5 (Source: Annual Reports) 3.2 Improving bank efficiency via optimal staff utilization We expect employees to grow by a CAGR of mere c.3% 2015E-17E while total operating income is expected to improve with a CAGR of c.13% growing revenue per employee to LKR 7.3Mn in 2017E from LKR 5.5 Mn in 2014. SEYB has historically had significant amount of excess staff providing it one of the lowest revenue per employee ratio in the industry as at 2010. The new management has continuously focused on improving revenue per employee. SEYB has given couple of VRSs over the past years and now focus on re-aligning staff to improve revenue per employee. SEYB consciously declined its staff over the past few years up to 2014, while bank revenue has significantly improved. Figure 9: Revenue/Employee (LKR Mn) 8 7.36 7 6.65 6 5.53 5.64 5 4 3.80 4.24 3 2 2012 2013 2014 2015E 2016E 2017E 3.3 Net interest spreads bottoming out We expect SEYB s net interest spread to further decline to 4.73% in 2015E on the back of decline in interest rates over the past two years. The declining spread is likely to bottom out in 2015E and rebound to 5.41% 2016E and 5.43% 2017E amidst the upward push in interest rate. SEYB s large exposure to overdraft segment helps the bank to re-price its loan book faster than the re-pricing of their deposit. Figure 10: Net Interest Spreads 6.00% 5.00% 4.00% 2012 2013 2014 2015E 2016E 2017E 4
4.0 STRONG BUY SEYB.N and BUY SEYB.X with a total return of 29% and 17% P/E 31 Dec 2013 2014 2015E 2016E 2017E Net Interest Income (LKR mn) 9,861 11,199 12,136 15,919 18,220 Net Profit (LKR mn) 2,326 3,178 3,675 4,636 5,646 5,631 EPS (LKR) 6.8 9.2 10.8 13.6 16.5 YoY % Growth 12% 37% 16% 26% 22% 21% Valuations Voting - PER (x) 13.2x 9.8x 8.4x 6.6x 5.4x 5.5x Voting - PBV (x) 1.4x 1.2x 1.1x 1.0x 0.9x Voting - Dividend Yield (%) 2.2% 2.8% 3.0% 3.7% 4.5% Non-Voting - PER (x) 10.0x 7.4x 6.3x 5.0x 4.1x Non-Voting - PBV (x) 1.0x 0.9x 0.9x 0.8x 0.7x Non-Voting - Dividend Yield (%) 2.9% 3.7% 3.9% 4.9% 6.0% NAVPS 65.7 73.0 78.5 88.6 100.9 100.8 Adjusted DPS (LKR) 2.0 2.5 2.7 3.4 4.1 Dividend Payout 29% 27% 25% 25% 25% Target price: for SEYB.N is LKR 101.0 and LKR 70.0 for SEYB.X: Our 1 year target price for SEYB.N is LKR 101.0 (+26%) and LKR 70.0 (+13%) for SEYB.X which may provide a total 1 year return of 29% and 17% respectively. SEYB.N-STRONG BUY, SEYB.X-BUY. Valuation: SEYB voting currently trades at a 6.6x PER and 1.0x PBV on 2016E while the non-voting counter trades at a 5.0x PER and 0.8x PBV. SEYB may maintain a c.25% dividend payout which may result in a DPS of LKR 2.7 for 2015E translating into a dividend yield of 3.0% for the SEYB.N and 3.9% for the SEYB.X. 4.1 Fair value of LKR 101.0 for voting and LKR 70.0 for nonvoting with total return of 29% and 17% respectively Expected SEYB price for 2016E PER based target price 122 Justified PBV based target price 79 Average Target Price 101 Voting non-voting Spread 30% Average Target Price 70 SEYB Total Returns for 2016E Voting Non-Voting Target Price 101 70 Current Price 80 63 Dividend FY15E 2.7 2.7 Capital Gain % 26% 13% Dividend Yield % 3% 4% Total Return % 29% 17% 5
4.2 Justified PBV COE (K e) R f 10% R m 17% 1.10 K e =R f + (R m -R f ) 18% Justified PBV based Valuation 2016E ROAE 16% Growth 3% COE 18% PBV 89% NAVPS 88.6 Target Price - Voting 78.9 Spread 30% Target Price - Non-Voting 55.2 4.3 PER Band PE band based based Valuation 2016E EPS for 2016E 13.58 Average PER 9.0x Target Price 122 Spread 30% Target Price - Non-Voting 86 Figure 11: PER Band (Source: CSE and FC Research Estimates) 6
Appendix 1 Income Statement Income Statement P/E 31 December 2012 2013 2014 2015E 2016E 2017E Interest Income 21,135 24,976 23,422 24,537 34,427 38,175 Interest Expense (12,101) (15,115) (12,223) (12,402) (18,507) (19,956) Net Interest Income 9,034 9,861 11,199 12,136 15,919 18,220 Fees and Commission Income 1,760 2,208 2,347 2,868 3,271 3,789 Fees and Commission Expense (71) (88) (97) (115) (131) (152) Net Fees and Commission Income 1,689 2,120 2,250 2,753 3,140 3,637 Net Trading Income 331 696 1,079 700 402 506 Net Gain on Financial Investments 6 190 1,190 357 535 536 Other Operating Income 560 76 591 971 239 547 Total Operating Income 11,619 12,943 16,308 16,916 20,236 23,445 Impairment Charge / (Reversal ) for Loans and Advances 574 1,362 2,135 1,397 1,504 1,713 Net Operating Income 11,045 11,581 14,173 15,518 18,732 21,732 Operating Expenses Personnel Expenses 3,273 3,560 3,957 4,266 4,568 5,143 Depreciation of Property, Plant and Equipment 1,766 1,694 1,685 1,708 1,805 1,844 Other Operating Expenses 2,095 2,082 2,493 2,792 3,211 3,692 Total Operating Expenses 7,134 7,336 8,135 8,766 9,584 10,679 Operating Profit Before Value Added Tax (VAT) 3,911 4,245 6,038 6,752 9,148 11,053 Value Added Tax (VAT) on Financial Services 676 749 1,203 1,212 1,715 2,025 Profit Before Income Tax 3,235 3,496 4,835 5,540 7,433 9,029 Income Tax Expense 1,144 1,144 1,583 1,828 2,750 3,341 Profit for the Year 2,091 2,352 3,253 3,712 4,683 5,688 Profit attributable to: Equity Holders of the Bank 2,075 2,326 3,217 3,675 4,636 5,631 Non-Controlling Interests 16 26 36 37 47 57 Profit for the Year 2,091 2,352 3,253 3,712 4,683 5,688 EPS 6.1 6.8 9.4 10.8 13.6 16.5 7
Appendix 2 Statement of Financial Position Statement of Financial Position P/E 31 December 2012 2013 2014 2015E 2016E 2017E Assets Cash and Cash Equivalents 6,554 5,180 6,673 6,097 6,958 11,909 Balances with Central Bank of Sri Lanka 8,029 7,505 7,432 8,281 10,893 12,526 Placements with Banks and Finance Companies - 970 2,334 1,197 1,388 1,597 Derivative Financial Instruments 51 287 191 365 416 482 Financial Assets - Held for Trading 2,468 11,192 2,534 4,128 11,970 8,259 Reverse Repurchase Agreements 173 5,730 17,763 4,128 8,379 9,636 Loans and Advances to Customers 124,728 136,553 154,963 182,721 207,975 241,124 Financial Investments - Available-for-Sale 11,358 14,002 23,838 26,416 32,318 35,790 Financial Assets - Held to Maturity 19,823 24,130 22,520 20,638 22,743 24,777 Property, Plant and Equipment 3,042 4,460 4,576 4,585 4,628 4,779 Leasehold Rights 618 619 609 611 648 669 Investment Properties 1,203 1,044 1,183 1,174 1,165 1,157 Intangible Assets 202 141 280 320 363 408 Deferred Taxation Assets 482 136 - - - - Other Assets 6,563 5,559 6,660 7,309 8,319 9,645 Total Assets 185,297 217,509 251,558 267,970 318,162 362,759 Liabilities Due to Banks 6,138 11,544 11,615 12,545 15,054 18,064 Derivative Financial Instruments 279 383 211 475 551 633 Due to Customers 146,727 167,371 185,924 206,376 239,396 275,305 Repurchase Agreements 3,675 4,574 12,420 5,482 6,239 7,234 Other Borrowings 10 13 15 17 19 22 Debentures 1,212 3,243 7,656 7,180 17,180 17,180 Current Tax Liabilities 683 1,091 1,323 1,376 1,431 1,489 Other Liabilities 5,962 5,091 6,038 6,280 6,531 6,792 Total Liabilities 164,685 193,310 225,238 239,729 286,401 326,719 Equity Attributable to Equity Holders of the Parent Stated Capital 10,225 10,530 10,530 10,530 10,530 10,530 Statutory Reserve Fund 726 842 996 1,181 1,416 1,700 Retained Earnings 6,062 7,150 9,294 10,258 12,574 15,387 Other Reserves 2,376 4,140 4,376 5,111 6,038 7,164 19,389 22,662 25,195 27,080 30,558 34,781 Non-Controlling Interest 1,222 1,538 1,124 1,160 1,204 1,258 Total Equity 20,611 24,199 26,320 28,240 31,762 36,039 Total Liabilities and Equity 185,297 217,509 251,558 267,970 318,162 362,759 NAVPS 56.2 65.7 73.0 78.5 88.6 100.8 8
Appendix 3 Ratio Analysis Ratio Analysis 2012 2013 2014 2015E 2016E 2017E Leverage Tier 1 (5%) 14.36% 14.58% 14.04% Tier 2 (10%) 14.37% 15.75% 14.98% Equity / Assets 10% 10% 10% 10% 10% 10% Interest Sensitivity Net Interest Spread 5.25% 4.85% 4.81% 4.73% 5.41% 5.43% Net Interest Margin 6.43% 6.05% 5.95% 5.91% 6.86% 6.80% Avg. yield on earning assets 13.29% 13.62% 10.86% 10.25% 12.68% 12.13% Avg. cost of funds 8.03% 8.78% 6.05% 5.52% 7.27% 6.70% Earnings Return on Average Equity 11.23% 11.19% 13.59% 14.20% 16.25% 17.41% Return on Average Assets 1.18% 1.17% 1.39% 1.43% 1.60% 1.67% Cost / Income 61% 57% 50% 52% 47% 46% Cost / Average Assets 4.0% 3.6% 3.5% 3.4% 3.3% 3.1% Cost / Branch (Rs.'Mn) 48,530 48,581 51,816 54,110 56,709 60,336 Rev. / Employee (Rs.'Mn) 3,796 4,245 5,534 5,644 6,652 7,359 Asset Quality Asset Growth 10.5% 17.4% 15.7% 6.5% 18.7% 14.0% Deposit Growth 18.3% 14.1% 11.1% 11.0% 16.0% 15.0% Loan Growth 17.2% 9.5% 13.5% 17.9% 13.8% 15.9% Liquidity Loan / Deposits 85% 82% 83% 89% 87% 88% Loan / Total Assets 67% 63% 62% 68% 65% 66% Deposit / Liabilities 89% 87% 83% 86% 84% 84% CASA 34% 33% 39% 42% 39% 38% 9
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