LKR Sampath Bank PLC Interim Update Q3 16 Equity Research SAMP recorded a 36.4% growth in PAT for 9M16 and 37.7% growth in the same for 3Q16 on a considerable growth in interest and fee based income. NII has largely contributed with 23% increase to this PAT growth. However interest expenses have been up by 58% for 9M negatively impacting the bank on rising funding cost on growing interest rates. Net Fee & Commission Income also saw a 23% growth reflecting bank's strengths in credit, trade, card and electronic channel businesses. Total Assets has seen a growth of 18% and the loan advances has increased by 15% for 9M. Total Deposits has seen a 20% growth for 9M. Investment Consideration Slowing down private sector credit growth: SAMP's total asset base crossed LKR 600 bn mark while it continues to be one of the fastest growing LCB's recording 23% 5yr CAGR of its asset base. Despite Gvt's direction of curtailing down the private sector credit growth below 20% through policy rate tightening, country continued to see ~25% credit growth during 9 months which resulted LCB's continue with strong loan book growth including SAMP recording 15%. But it will be slowed down with gradual interest rate rise and thus we continue to maintain lowered advances forecast of 18% for 17 & 18 based on negativity stemming from policy tightening and budget 2017. Strong deposit growth on interest rate rise: Deposits saw 21% growth in 9M with a strong focus for FDs on rising interest rates. Accordingly we revised our deposit growth estimates to 20% for 16 resulting an increased funding cost for next 2 years. However we continue to maintain 16% deposit growth for 17 & 18 to fund reduced loan book growth for next 2 years. We further expect the lag between advances and deposit growth to be funded on non-deposit based funding. Possible negative impact from National Budget 2017: Introduction of Financial Transaction Levy of 0.05% and fee of 2% on cash transactions above LKR 5bn have been proposed through budget 2017 negatively impacting the banking sector. However exact implementation is yet to take place. Removal of notional tax credit on treasury bills, bonds and corporate debentures and introduction of tax on net interest instead of upfront tax are also on the cards since 2017. Further changes in Loan-to-Value (LTV) ratio will impact on bank's high yielding leasing portfolio with 7% exposure to the loan book. Non interest income to record steady growth: SAMP will continue to leverage on non fund based income sources such as credit cards and higher exchange gains arising from currency depreciation and other banking services. NPL below industry average with strong asset quality: SAMP's NPL continues to remain below industry average of 2.9% despite marginal increase in 3Q16. While bank continuing to reduce the exposure to gold, its increased exposure to leasing will not affect adversely to credit quality with increased taxes and currency depreciation. SAMP is currently trading at a trailing PE of 5.47X and PBV of 1.02X, comparatively attractive to sector multiples of 6.8X and 1.3X respectively. Valuation We have revised up our 16 financial estimation based on the stronger than expected performance in 9M2016. While we expect private sector credit to slowdown and increase in funding cost on rising interest rates negatively impacting SAMP, its strong value drivers and above peer performance to overweigh this negativity. Accordingly with 17.62% cost of equity including 11.62% risk-free rate and 6% risk premium, our Residual Income Valuation model values the counter at LKR 279.12 which is a 6.53% upside to current share price. Thus we continue to maintain BUY recommendation for SAMP. 06 January 17 Recommendation Guidance, Important Disclosures and Analyst Certification: Page 07 BUY LOLC SEC Valuation LKR 279.12 12M Tgt Price (excl.dividend) LKR 296.00 Share Price LKR 262.00 Upside/(Downside) 6.53% 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) 46,369 Issued Quantity (Mn) 177 30-day avg T/O (LKR Mn) 6.03 Beta (6 months) 1.01 Financial Summary LKR Bn 12M Trail 16(E) 17(F) 18(F) Net Revenue 32.6 32.0 34.6 39.2 Net Profit 8.5 9.1 8.8 9.6 S/H's Equity 45.3 47.1 53.1 60.1 Total Assets 635.8 638.1 737.0 851.5 ROA (%) 1.5% 1.6% 1.3% 1.2% ROE (%) 20.2% 21.2% 17.5% 17.0% Price Multiples PE (X) 5.47 PBV (X) 1.02 Price to Sales (X) 0.74 Divdend Yield (%) 5.91% Price Behavior 300 280 260 240 220 200 180 02-Jan-16 02-Apr-16 02-Jul-16 02-Oct-16 02-Jan-17 Per Share Details as at 30.09.2016 (LKR) Earnings per share (trailing 12m) 47.89 Net Asset Value per share 255.82 Sales per share (trailing 12m) 354.15 Dividend Per Share (trailing 12m) 15.47 Shareholder Details as at 30.09.2016 Vallibel One Plc 14.95% Employee Provident Fund Srilanka 9.98% Silva Y S H I K 9.98% Rosewood Pvt Ltd 6.71% Shareholders below 5% 15.78% Analyst (s) SAMP Share Price Gayan Rajakaruna +94 115 889837 gayanraj@lolcsecurities.com ASI movement (adjusted to SAMP base price), LOLC SEC Research
Pawning LKR Mn Interim Update: Sampath Bank PLC 06 January 17 Graph 01: Net Interest Income and Profit LKR Mn 35000 30000 25000 20000 15000 10000 5000 0 2010 SAMP's 9M profit surpassed the yearly profit in 15. 2011 2012 Net Interest Income 2013 2014 2015 Profit 2016 F 2017 F 2018 F Graph 02: Loans Growth LKR Mn 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000-15% loan growth was witnessed in 9M16 2010 2011 2012 2013 2014 2015 2016 9M FX Loans LKR Loans Loan Growth 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Bloomberg Source: Bloomberg Graph 03: Customer Advances Portfolio Composition(as at 30.09.2016) Graph 04: Deposits Composition (as at 30.09.2016) 5% 12% 4% 3% 2% 7% 8% 17% 42% Overdrafts Term loans Lease & HP rentals Credit cards Pawning Export loans Housing loans Import loans 56.7% 2.9% 0.2% 6.5% 33.4% Demand Savings Call Deposits Fixed Deposits Certificates of Deposits Margin Deposits Others 0.3% Source: Annual Report 2015 Source: Annual Report 2015 Graph 05: Pawning Exposure is reducing while leasing increasing Graph 06: Movement of NPL Ratio 60,000 50,000 40,000 30,000 20,000 10,000 - SAMP's pawning exposure continues to declined to 3% by 16 9M. 2010 2011 2012 2013 2014 2015 2016 9M Pawning Pawning Exposure Leasing Exposure 30% 25% 20% 15% 10% 5% 0% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% SAMP's NPL has been declining, indicating an improving trend in credit quality. However NPL slightly increased during 9M16. 2010 2011 2012 2013 2014 2015 2016 9M Source: Annual Reports, LOLC Sec Research Source: Annual Report 2015 2 LOLC Securities Limited
Valuation We have taken cost of equity of 17.62% which includes 6% risk premium and 11.62% risk free rate. Hence with 8% mid-term growth and 5% terminal growth, our Residual Income Valuation model values the counter at LKR 279.12. At the current share price, SAMP is trading at forward PE of 5.47X and a forward PBV of 1.02X. Table 01: Valuation Sensitivity Matrix Terminal Growth Rate Share price in LKR Cost of Equity 15.6% 16.6% 17.6% 18.6% 19.6% 3% 279.87 278.89 278.05 277.31 276.67 4% 280.58 279.48 278.54 277.73 277.02 5% 281.44 280.18 279.12 278.21 277.43 6% 282.47 281.01 279.79 278.76 277.89 7% 283.75 282.00 280.59 279.41 278.42, LOLC SEC Research Table 02: Peer Comparison Name Price (LKR) Market Cap (USD Mn) ROA (X) Efficiency Ratio (%) Net Assets Growth-5yrs PBV (X) Div Yield (%) (%) Sampath Bank Plc (Sri Lanka) 262.00 309.2 1.5 59.7 18.3 5.5 1.0 2.2 Commercial Bank Of Ceylon Pl (Sri Lank 142.00 833.1 1.5 48.8 16.2 9.3 1.7 4.2 Hatton National Bank Plc (Sri Lanka) 224.90 598.6 1.8 59.9 20.5 6.3 1.1 2.2 Seylan Bank Plc (Sri Lanka) 92.00 172.5 1.3 61.5 15.6 8.0 1.2 3.0 National Development Bank Pl (Sri Lank 153.10 168.7 1.0 58.2 12.9 7.8 0.8 2.6 Dfcc Bank Plc (Sri Lanka) 120.00 212.1 1.1 60.9 15.5 10.3 0.8 2.1 Nations Trust Bank Plc (Sri Lanka) 79.40 122.1 1.5 60.9 17.4 6.8 1.1 2.6 Union Bank Of Colombo Plc (Sri Lanka) 15.00 109.2 0.5 83.9 29.8 36.6 1.0 0.3 Pan Asia Banking Corp Plc (Sri Lanka) 19.50 38.4 1.0 59.3 15.7 4.8 0.9 2.6 Prime Bank Ltd (Bangladesh) 17.70 231.5 0.9 0.0 8.7 8.4 0.7 8.5 Bank Tabungan Negara Persero (Indone 1800.00 1428.2 1.2 56.6 16.5 8.5 1.1 1.9 Union Bank Of Philippines (Philippines) 75.00 1605.5 2.4 62.9 10.6 7.6 1.2 2.0 PER (X), LOLC SEC Research 3 LOLC Securities Limited
Volume Rs Interim Update: Sampath Bank PLC 06 January 17 Table 04: Return comparison Graph 07: Share Price Movement 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 - % SAMP ASPI Index S&P SL 20 Index COMB 3 months -1.87-6.16-5.46-2.67 6 months 14.91-1.88 4.16 16.87 YTD 0.61-1.06-1.41-2.07 1 year 9.30-9.62-3.53 3.26 Volume Price SMAVG (50) SMAVG (100) 300 250 200 150 100 RSI (14) 75 50 25 0 1/2/14 7/2/14 1/2/15 7/2/15 1/2/16 7/2/16 1/2/17 Graph 08: PE Chart 10 9 8 7 6 5 4 1/2/14 7/2/14 1/2/15 7/2/15 1/2/16 7/2/16 1/2/1 Graph 10: Price per Sales 1.2 1.0 0.8 0.6 0.4 0.2 Graph 12: CSE PE Chart PE ratio Highest Average Lowest 0.0 1/2/14 7/2/14 1/2/15 7/2/15 1/2/16 7/2/16 1/2/17 Price to Sales ratio Highest Average Lowest 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 01/02/14 07/02/14 01/02/15 07/02/15 01/02/16 07/02/16 01/02/17 ASI PE ratio Highest Average Lowest Graph 09: PBV Chart 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 01/02/14 07/02/14 01/02/15 07/02/15 01/02/16 07/02/16 01/02 PBV ratio Highest Average Lowest Graph 11: Dividend Yield 5.0 4.0 3.0 2.0 1.0 Graph 13: CSE PBV Chart 0.0 1/2/14 7/2/14 1/2/15 7/2/15 1/2/16 7/2/16 1/2/17 SAMP dividend yield Highest Average Lowest 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 1/2/14 7/2/14 1/2/15 7/2/15 1/2/16 7/2/16 1/2/17 ASI PBV ratio Highest Average Lowest 4 LOLC Securities Limited
Table 05: Revised Financial Summary Forecast Figures in LKR Mn (31st Dec) 14 15 16 (9M) 16 (E) 17 (F) 18 (F) Income Statement Interest Income 39,756 39,787 41,064 56,692 73,248 85,265 Interest Expenses 22,915 21,156 24,062 34,147 48,321 55,949 Net Interest Income 16,841 18,631 17,002 22,545 24,927 29,316 Non Interest Income 6,630 9,310 7,104 9,471 9,661 9,854 Net Revenue 23,471 27,941 24,106 32,016 34,588 39,170 Provisions for Loan Losses 1,581 993 958 1,277 1,156 1,365 Net Revenue After Provisions 21,890 26,948 23,148 30,739 33,432 37,805 Non-Interest Expense 14,603 17,161 13,798 18,397 21,156 24,330 PBT 7,247 9,790 9,350 12,342 12,276 13,475 Tax Provision 1,979 3,161 2,407 3,209 3,503 3,845 PAT 5,268 6,628 6,944 9,134 8,773 9,630 Minority Interests 4 5 3 5 6 6 Net Profit 5,263 6,623 6,940 9,129 8,767 9,624 Balance Sheet Cash & Near Cash Items 62,330 40,249 50,265 41,782 53,562 64,749 Short-Term Investments 31,811 63,053 84,391 91,503 88,758 86,095 Net Loans 334,530 421,297 485,860 489,147 577,843 682,569 Long-Term Investments 984 63 17 69 76 84 Net Fixed Assets 8,389 8,697 9,027 9,218 9,771 10,358 Other Assets 4,746 5,289 6,233 6,347 6,981 7,680 Total Assets 442,790 538,647 635,792 638,067 736,992 851,534 Customer Deposits 339,679 407,164 491,118 488,596 566,772 657,455 ST Borrowings & Repos 12,500 8,663 8,179 7,947 8,742 9,616 Other Short-Term Liabilities 2,515 5,112 4,098 4,690 5,159 5,675 Long-Term Borrowings 46,120 68,589 75,887 78,320 90,068 103,578 Other Long-Term Liabilities 7,372 9,916 11,137 11,323 13,021 14,974 Total Liabilities 408,186 499,444 590,420 590,876 683,761 791,298 Minority Interest 92 95 97 104 115 126 Share Capital & APIC 4,470 5,381 6,471 6,471 6,471 6,471 Retained Earnings & Other Equity 30,041 33,727 38,804 40,616 46,645 53,638 Total Equity 34,604 39,203 45,372 47,191 53,230 60,236 Total Liabilities & Equity 442,790 538,647 635,792 638,067 736,992 851,534, LOLC SEC Research 5 LOLC Securities Limited
Table 06: Forecast Ratios 14 15 16 (9M) 16 (E) 17 (F) 18 (F) Banking Ratios Return on Assets - after tax 1.3% 1.3% 1.1% 1.6% 1.3% 1.2% Return on Common Equity 15.9% 18.0% 15.3% 21.2% 17.5% 17.0% Efficiency Ratios 62.2% 61.4% 57.2% 57.5% 61.2% 62.1% Net Interest Spread 5.4% 4.9% 2.9% 4.6% 4.4% 4.5% Common Equity/Total Assets 7.8% 7.3% 7.1% 7.4% 7.2% 7.1% Prov Loan Losses/Total Loans 0.5% 0.2% 0.2% 0.3% 0.2% 0.2% Total Loans/Total Deposits 100.6% 105.3% 98.9% 101.8% 103.5% 105.3% Total Loans/Total Assets 77.2% 79.6% 76.4% 77.9% 79.6% 81.3% Deposits/Assets 76.7% 75.6% 77.2% 76.6% 76.9% 77.2% Earning Assets/Int Bearing Liabilities 93.4% 101.1% 100.2% 102.1% 101.2% 100.7% Growth Ratios Interest Income Growth -6.1% 0.1% 41.6% 42.5% 29.2% 16.4% Interest Expense Growth -15.8% -7.7% 58.6% 61.4% 41.5% 15.8% Net Interest Income Growth 11.6% 10.6% 22.9% 21.0% 10.6% 17.6% Net Revenue Growth 10.8% 19.0% 21.7% 14.6% 8.0% 13.2% Net Income Growth 44.8% 25.8% 36.4% 37.8% -4.0% 9.8% Earning Assets Growth 9.7% 31.6% 17.7% 19.9% 14.7% 15.3% Assets Growth 13.2% 21.6% 18.0% 18.5% 15.5% 15.5% Net Worth Growth 9.0% 13.3% 15.8% 20.4% 12.8% 13.2% Net Loan Growth 20.0% 25.9% 15.3% 16.0% 18.0% 18.0% Deposit Growth 13.1% 19.9% 20.6% 20.0% 16.0% 16.0% Earnings per share (LKR) 31.37 38.47 39.21 51.61 49.57 54.41 Book Value per share (LKR) 205.53 226.96 255.82 266.06 300.12 339.64 PE Ratio (X) 7.7 6.5 6.7 5.1 5.3 4.8 Price to Book Value (X) 1.2 1.1 1.0 1.0 0.9 0.8 Dividend Yield (%) 4.2% 4.7% 5.9% 5.9% 5.7% 6.2%, LOLC SEC Research 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. 7 LOLC Securities Limited
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