banking sector 4q2012-earnings update

7/29/2019 Banking Sector 4Q2012-Earnings Update

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2012 BANKING SECTOR EARNINGS UPDATE

1

Udeeshan Jonas

Reshan Wediwardana

March 2013

See page 20 for important disclaimer



CBSL’s credit ceiling restricted loan growth for smallerbanks in 4Q2012

2

Larger banks maintained moderate loan growth while

smaller banks had to restrict their loan growth as they

approached the 18% credit cap

DFCC, NTB, SAMP and PABC loan growth was curtailed due tothe credit ceiling imposed by the CBSL

Figure 1: Loan growth 4Q2012 QoQ Figure 2: Loan growth (Jan-Dec 2012)

Source: Company Reports and CAL Research

3% 3%

2%

5%

3%2%

1%

9%

1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC

PABC came from a lower loan base

in 3Q2012 after witnessing a 3.5%

reduction between Jun – Sep 2012

NDB aggressively grew its loan

book during 4Q201218% 18%

24%

17%

20%18%

15%

24%

17%

0%

5%

10%

15%

20%

25%

30%


18% cap

23% cap

Increased USD lending to

surpass the 18% loan cap

SAMP funded the excess 5%

via foreign borrowing



Larger banks continued to improve net interest marginsbenefiting from their larger CASA base

3

Figure 4: NIMs from Dec 2011 to Dec 2012Figure 3: Bps change in NIMs (Jan-Dec 2012)

Figure 5: CASA ratio (Dec 2012)

However, most banks were able to improve NIMs in the

last quarter as they focused on high yield clients in a credit

rationed environment, except for PABC and UBC.


15

25

6 6

-30

-17

-29

-80

-62

-100

-80

-60

-40

-20

0

20

40


45%39%

35%

25%

17%

22%

17%20%

0%

10%

20%

30%

40%

50%

COMB HNB SAMP NDB DFCC NTB PABC UBC

Banks with higher CASA ratios were able to improve NIMs

despite the increase in interest rates.

4.4%4.7%

4.1%3.7%

4.9% 4.5%

5.4%

4.6%4.6% 4.9%

4.2%3.8%

4.6%4.3%

4.6%

3.9%

0%

1%

2%

3%

4%

5%

6%


NIMs as at 31st Dec 2011 NIMs as at 30th Sep 2012

NIMs as at 31st Dec 2012



Larger banks accessed low cost foreign funding during2012 which supported NIM improvement

4

Figure 6: Foreign borrowings – Dec 2011 vs. Dec 2012


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


L K R m n

Foreign borrowings as at Dec 2011 Foreign borrowings as at Dec 2012

+95%

+173%

Increasing foreign borrowings by 173% enabled

SAMP to grow its loan portfolio close to 23%

+48%

+170%



Foreign borrowings assisted the banks to strengthentheir lending capacity

5

2.3% 2.2%

3.1%3.3%

2.1%

0.8%

0.0%

0.5%

3.0%

3.6%

6.7%

7.5%

1.4%

0.1% 0.2% 0.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%


Foreign borrowing as a % of total funding - 2011 Foreign borrowing as a % of total funding - 2012

Figure 7: Foreign borrowing as a % of total funding

Source: Company Reports and CAL ResearchTotal funding = Deposits + Borrowings



Deposit growth outpaced loan book growth formajority of the banks

6

Figure 8: Deposit growth vs. loan book growth (Jan – Dec 2012)


18% 18%24%

17% 20% 18% 15%24%

17%20% 17%24%

31%

72%

26%21%

31%

18%

0%

20%

40%

60%

80%


2012 loan book growth 2012 deposit growth

87% 89% 90%

126%

225%

94% 90% 95% 92%85% 90% 90%112%

157%

88% 85% 90% 91%

0%

50%

100%

150%

200%

250%


Loan-to-deposit ratio -2011 Loan-to-deposit ratio -2012

Figure 9: Loan to Deposit ratio 2011 vs. 2012



Larger banks witnessed significant improvement in costefficiencies…

7

Figure 10: Cost-to-income ratios (2011 vs. 2012)


Improvement in cost-to-income ratios for COMB and SAMP would be partly attributable to higher

income resulting from the forex gain from the LKR depreciation

52%

64%61%

50%

42%

63%62%

53%

63%

44%

55% 54%

50%

44%

61% 62%59%

77%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


Cost-to-income ratio - 2011 Cost-to-income ratio -2012

LKR5.9bn capital gains

from Aviva NDB deal has

been excluded from the

net income calculation



…as they slowed down branch expansion

8

Figure 11: New branch additions in 2011 & 2012

26

35

37

13

2

9

11

23

9

14

7

109

3

7

14

9

6

0

5

10

15

20

25

30

35

40


N e w

b r a n c

h a d d i t i o n s

Branch additions during 2011 Branch additions during 2012

244 63 147 73 36227 69 148247


Total

Branches



Moderate fee income growth also boosted core profitgrowth for COMB & HNB

9


Figure 12: Fee and other income growth 2012 YoY

16% 17%

-13% -15%

12%

39%

20%

-2%

13%

23%

10%

-41%

-24%

101%

18%

-33%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%


Fee and other income growth 2012 YoY Fee and other income growth 4Q2012 YoY

Higher fee and other income

(including bond portfolio gains)

enabled NTB to compensate for

the declining NIMs



Core banking profits were stellar for the bigger banks

10

Figure 14: Core banking profits – 4Q2012 YoY

*Core banking profit = Net income - Non interest income

Figure 13: Core banking profits – 2012 YoY


39%

47%

39%

15% 14%

33%

1%

-28%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%


23%

54%

36%

-15%

-2%

90%

-5%

-79%-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%


Includes capital gain

from bond portfolio



One-off forex translation gains from foreign operationsboosted COMB & SAMP’s core profits further

11

Figure 15: Forex income (Jan-Dec 2012) Figure 16: Forex income (Oct-Dec 2012)

COMB and SAMP’s core profits were boosted by the forex

translation gain resulting from the 15% LKR depreciation

(Jan-Dec 2012)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000


L K R m n

Forex income for 2011 Forex income for 2012

+105%

+159%

-100

0

100

200

300

400

500

600

700

800

900

1000


L K R m n

Forex income for 4Q2011 (LKR mn)

Forex income for 4Q2012 (LKR mn)

-24%

+64% -99%

-69%

However, the 3% LKR appreciation from Oct-Dec 2012

resulted in a decline in forex income for 4Q2012 for COMB

and SAMP.

Source: Company Reports and CBSL



Larger banks outperformed with higher core profitabilityeven after excluding forex income in 2012

12

Figure 18: Core banking profit (excluding forex)

4Q2012 YoY

Figure 17: Core banking profit (excluding forex)

2012 YoY


24%

46%

20%

7%

14%

36%

-13%

-48%

-60%

-40%

-20%

0%

20%

40%

60%


39%

53%

90%

1% 3%

122%

-17%

-94%

-150%

-100%

-50%

0%

50%

100%

150%




COMB & HNB substantially increased their loan lossprovisioning compared to other banks….

13

Figure 19: Increase/(decrease) in loan lossprovisioning (2012 vs. 2011)

Figure 20: Increase/(decrease) in loan lossprovisioning (4Q2012 vs. 4Q2011)


-1500

-1000

-500

0

500

1000

1500

2000


provisioning adjustment - 2011 Provisioning adjustment - 2012

-400

-200

0

200

400

600

800


provisioning adjustment - 4Q2011

Provisioning adjustment - 4Q2012



…amidst witnessing improvement in asset quality…

14

Figure 21: Gross NPLs % Figure 22: Improvement in in Gross NPLs (bps 2011-12)


-6 -27

-58

-2

40

3

-125

59

136

-150

-100

-50

0

50

100

150


SAMP’s gross NPLs

improved by 58bps

3.4% 3.7%

2.1%1.3%

4.8%

2.8%

13.0%

4.2%

5.4%

0%

2%

4%

6%

8%

10%

12%

14%

16%


Gross NPL ratio as at 31st Dec 2011

Gross NPL ratio as at 31st Dec 2012



…leading to higher provisioning coverage for HNB & COMBcompared to deteriorating coverage for most other banks

15

Figure 23: Provisioning coverage (2011 vs. 2012)


32%35%

81%

112%

50%

41%

21%

38%36%

44%

80%

100%

41%36%

15%

31%

0%

20%

40%

60%

80%

100%

120%


NPL Cover - 2011 NPL Cover - 2012



24%

32%

26%

9%11%

25%

-2%

-38%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%


Overall profitability growth for 2012 was c .24-32% forCOMB, HNB & SAMP

16

Figure 25: Net profit growth for 4Q2012 YoYFigure 24: Net profit growth for 2012 YoY


22%

41%48%

-10%-15%

25% 24%

-89%-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%




SL banks continue to remain attractive on relativevaluation multiples

17

Figure 26: P/BV based on SLFRS Accounting

Figure 27: Annualized PER (x) based on SLAS Accounting


9.1x7.3x 7.4x 8.1x

10.6x

7.1x

9.9x

6.4x

29.4x

7.6x5.9x 5.9x

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC COMB.x HNB.x SEYB.x

P E R ( x )

1.7x

1.1x

1.4x

1.0x0.9x

1.3x1.2x

1.0x

1.4x

0.9x

0.0

0.5

1.0

1.5

2.0

COMB HNB SAMP NDB DFCC NTB PABC UBC COMB.X HNB.X

P / B V ( x )



IFRS implementation may create positive first day balancesheet gains

1.7x

1.2x

1.5x

1.0x

1.2x

1.3x1.2x

1.1x

1.4x

1.0x

1.7x

1.1x

1.4x

1.0x0.9x

1.3x

1.2x

1.0x

1.4x

0.9x

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

P /

B V ( x )

P/BV using SLAS P/BV using SLFRS

Figure 29: P/BV pre & post SLFRS implementationFigure 28: NAVPS pre & post SLFRS implementation

18

* Only the investment portfolio revaluation is taken

into account for DFCC

63

123

156 152

101

44

14 15

64

130

168

151

138

44

14 15

-

20

40

60

80

100

120

140

160

180


N A V P S

NAVPS - SLAS NAVPS - SLFRS

+2%

+1%

+5%

+7% +0%

+1%

+2%

+36%

Source: CSE & Company Reports



2012 dividend yields for the non-voting shares forbigger banks remain attractive

19

7.1%6.9%

5.8% 5.7% 5.7%5.6%

5.4%

3.6% 3.4%3.3% 3.2%

1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

HNB.X COMB.X COMB PABC HNB SAMP SEYB.X NTB NDB DFCC SEYB UBC

D i v i d e n d y i e l d %

Figure 30: Dividend yields of the banking sector stocks for 2012

Source: CSE & Company Reports

* Scrip dividends are included in the dividend yield calculation



Disclaimer

This document has been prepared and issued on the basis of publicly available information,internally developed data and other sources, believed to be reliable. Capital Alliance Securities

(Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates

given constitute a judgment as of the date of the material and are subject to change without

notice. This report is not intended as an offer or solicitation for the purchase or sale of any

financial instrument. The recipient of this report must make their own independent decision

regarding any securities, investments or financial instruments mentioned herein. Securities or

financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities(Private) Limited it’s directors, officers, consultants, employees, outsourced research providers

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offence.

20



Contacts

Research Team

Tel No: +94 11 231 7777 (General)

Email: [email protected]

Purasisi Jinadasa

Tel No: +94 11 231 7786


Udeeshan Jonas

Tel No: +94 11 231 7746


Reshan Wediwardana


Dushan De Silva


Thushani De Silva


Ananya Udeshi


21

banking sector 4q2012-earnings update

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