2012 BANKING SECTOR EARNINGS UPDATE

See page 20 for important disclaimer

Udeeshan Jonas Reshan Wediwardana March 2013
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CBSLs credit ceiling restricted loan growth for smaller banks in 4Q2012
Figure 1: Loan growth 4Q2012 QoQ
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC 0% COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC 3% 3% 2% NDB aggressively grew its loan book during 4Q2012 5% 15% 3% 10% 2% 1% 1% 5%
PABC came from a lower loan base in 3Q2012 after witnessing a 3.5% reduction between Jun Sep 2012

Figure 2: Loan growth (Jan-Dec 2012)

9% 30% 25% 20% 18% 18%
SAMP funded the excess 5% via foreign borrowing Increased USD lending to surpass the 18% loan cap

24% 20% 17% 18%

24% 23% cap 18% cap 15% 17%

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 to the credit ceiling imposed by the CBSL

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Source: Company Reports and CAL Research

Larger banks continued to improve net interest margins benefiting from their larger CASA base
Figure 3: Bps change in NIMs (Jan-Dec 2012)
40 20 0 COMB HNB -20 -40 -60 -30 SAMP NDB DFCC NTB -17 SEYB PABC UBC 15 6 6 25

Figure 4: NIMs from Dec 2011 to Dec 2012

6%
4.6% 5% 4.4% 4.7% 4.9%

5.4% 4.9% 4.1% 4.2% 3.8% 3.7%

4.6% 4.5% 4.3% 4.6% 4.6% 3.9%

4%
3%
-29

2%
-62

1% 0% COMB HNB SAMP NDB DFCC NTB PABC UBC NIMs as at 31st Dec 2011 NIMs as at 30th Sep 2012

-80 -80 -100

Figure 5: CASA ratio (Dec 2012)

50% 40% 30% 20% 10% 0% COMB HNB SAMP NDB DFCC NTB PABC UBC 45% 39% 35%

NIMs as at 31st Dec 2012

Banks with higher CASA ratios were able to improve NIMs despite the increase in interest rates.
25%
17% 22% 17% 20%

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.

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Source: Company Reports and CAL Research

Larger banks accessed low cost foreign funding during 2012 which supported NIM improvement
Figure 6: Foreign borrowings Dec 2011 vs. Dec 2012
20,000 18,000

16,000
14,000 12,000 LKR mn 10,000 8,000 6,000 4,000 2,000 0 COMB HNB SAMP

Increasing foreign borrowings by 173% enabled SAMP to grow its loan portfolio close to 23%

+173%
+48% +95% +170%

NDB

DFCC

NTB

PABC

UBC

Foreign borrowings as at Dec 2011

Foreign borrowings as at Dec 2012

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Source: Company Reports and CAL Research

Foreign borrowings assisted the banks to strengthen their lending capacity

Figure 7: Foreign borrowing as a % of total funding
8% 7% 6% 5% 6.7%

7.5%

4%
3% 2.3% 2% 1% 0% COMB 3.0% 2.2%

3.6% 3.1% 3.3% 2.1% 1.4% 0.8% 0.1% HNB SAMP NDB DFCC NTB 0.0% 0.2% 0.5% 0.2%

PABC

UBC

Foreign borrowing as a % of total funding - 2011

Foreign borrowing as a % of total funding - 2012 5

Total funding = Deposits + Borrowings

Source: Company Reports and CAL Research

Deposit growth outpaced loan book growth for majority of the banks
Figure 8: Deposit growth vs. loan book growth (Jan Dec 2012)
80% 60% 40% 20% 0% COMB HNB SAMP NDB DFCC NTB 2012 deposit growth SEYB PABC UBC 2012 loan book growth 18% 20% 72%

18% 17%

24% 24%

31% 17% 20% 18%

26% 15%

21%

24%

31% 17% 18%

Figure 9: Loan to Deposit ratio 2011 vs. 2012

250% 225% 157% 150% 100% 50% 0% COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC Loan-to-deposit ratio -2011 Loan-to-deposit ratio -2012 87% 85% 89% 90% 90% 90% 126% 112% 94% 88% 90% 85% 95% 90%

200%

92% 91%

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Source: Company Reports and CAL Research

Larger banks witnessed significant improvement in cost efficiencies

Figure 10: Cost-to-income ratios (2011 vs. 2012)
90% 80% 70% 60% 52% 50% 40% 30% 20% 10% 44%
LKR5.9bn capital gains from Aviva NDB deal has been excluded from the net income calculation

77%

64%
55%

61% 54% 50% 50% 42% 44%

63%

61%

62% 62% 53%

59%

63%

0%
COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC Cost-to-income ratio - 2011 Cost-to-income ratio -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

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Source: Company Reports and CAL Research

as they slowed down branch expansion

Figure 11: New branch additions in 2011 & 2012
Total Branches 40
35 New branch additions 30 26 25 20 15 10 5 0 COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC Branch additions during 2011 Branch additions during 2012 14 10 7 2 3 13 11 9 9 7 9 9 6 14 23

244

247
37 35

227

69

148

63

147

73

36

Source: Company Reports and CAL Research

Moderate fee income growth also boosted core profit growth for COMB & HNB
Figure 12: Fee and other income growth 2012 YoY
120% 100% 80% 60% 40% 20% 0% COMB -20% -40% -41% -60% Fee and other income growth 2012 YoY Fee and other income growth 4Q2012 YoY 9
Source: Company Reports and CAL Research

Higher fee and other income (including bond portfolio gains) enabled NTB to compensate for the declining NIMs

101%

39%
16% 13% 17% 23% 10% 12% 20% 18%

HNB

SAMP -13%

NDB

DFCC -24%

NTB

PABC

UBC -2% -33%

-15%

Core banking profits were stellar for the bigger banks

Figure 13: Core banking profits 2012 YoY
60% 50% 40% 30% 20% 10% 0% COMB HNB SAMP NDB DFCC NTB 15% 14% 1% 0% PABC UBC -20% -40% -28% COMB HNB SAMP NDB -15% DFCC -2% NTB PABC -5% UBC 39% 47% 39% 33%

Figure 14: Core banking profits 4Q2012 YoY

100% 80% 60% 40% 23% 20% 54% 36% 90%
Includes capital gain from bond portfolio

-10% -20% -30% -40%

-60%
-80%

-79%
-100%

*Core banking profit = Net income - Non interest income

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Source: Company Reports and CAL Research

One-off forex translation gains from foreign operations boosted COMB & SAMPs core profits further
Figure 15: Forex income (Jan-Dec 2012)
5000 4500 LKR mn 3500 LKR mn 4000 +105%

Figure 16: Forex income (Oct-Dec 2012)

1000

900
800 700 600 500 400 300 200 100

-24%

3000
2500 2000 1500 1000 500 0 COMB HNB SAMP NDB DFCC NTB PABC UBC +159%

+64%

-99% -69%

0
-100 COMB HNB SAMP NDB DFCC NTB PABC UBC

Forex income for 2011

Forex income for 2012

Forex income for 4Q2011 (LKR mn) Forex income for 4Q2012 (LKR mn)

COMB and SAMPs core profits were boosted by the forex translation gain resulting from the 15% LKR depreciation (Jan-Dec 2012)

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

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Larger banks outperformed with higher core profitability even after excluding forex income in 2012
Figure 17: Core banking profit (excluding forex) 2012 YoY
60% 46% 40% 24% 20% 20% 14% 7% 0% COMB HNB SAMP NDB DFCC NTB PABC -13% UBC -50% 0% COMB HNB SAMP NDB DFCC NTB PABC -17% UBC 50% 39% 1% 3% 36% 150% 122% 100% 90%

Figure 18: Core banking profit (excluding forex) 4Q2012 YoY

53%

-20%

-100% -40% -150% -48% -60%

-94%

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Source: Company Reports and CAL Research

COMB & HNB substantially increased their loan loss provisioning compared to other banks.
Figure 19: Increase/(decrease) in loan loss provisioning (2012 vs. 2011)
2000 1500 600 1000 400 500

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

800

200
0 COMB -500 -200 -1000 -400 -1500 provisioning adjustment - 4Q2011 HNB SAMP NDB DFCC NTB PABC UBC 0 COMB HNB SAMP NDB DFCC NTB PABC UBC

provisioning adjustment - 2011

Provisioning adjustment - 2012

Provisioning adjustment - 4Q2012

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Source: Company Reports and CAL Research

amidst witnessing improvement in asset quality

Figure 21: Gross NPLs %
16% 14% 12%
100

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

13.0%

150

136

10%
8% 6% 4% 2% 0% COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC Gross NPL ratio as at 31st Dec 2011 Gross NPL ratio as at 31st Dec 2012 3.4% 3.7% 2.1% 1.3% 4.8% 2.8%
-50 -100 -150 50 40 3 0 COMB HNB -6 -27 SAMP NDB DFCC -2 NTB SEYB

59

5.4% 4.2%

PABC

UBC

-58

SAMPs gross NPLs improved by 58bps

-125

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Source: Company Reports and CAL Research

leading to higher provisioning coverage for HNB & COMB compared to deteriorating coverage for most other banks
Figure 23: Provisioning coverage (2011 vs. 2012)
120% 100% 80% 60% 44% 40% 20% 0% COMB HNB SAMP NDB DFCC NPL Cover - 2012 NTB PABC UBC NPL Cover - 2011 32% 36% 35% 81% 80% 112% 100%

50% 41% 41% 36% 21% 15% 38% 31%

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Source: Company Reports and CAL Research

Overall profitability growth for 2012 was c.24-32% for COMB, HNB & SAMP
Figure 24: Net profit growth for 2012 YoY
40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -38% COMB HNB SAMP NDB DFCC NTB PABC -2% UBC 9% 24% 32% 26% 11% 25%

Figure 25: Net profit growth for 4Q2012 YoY

60% 41% 40% 22% 20% 0% COMB -20% -40% -60% -80% -100% -89% HNB SAMP NDB -10% DFCC -15% NTB PABC UBC 48% 25% 24%

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Source: Company Reports and CAL Research

SL banks continue to remain attractive on relative valuation multiples

Figure 26: P/BV based on SLFRS Accounting
2.0 1.7x 1.5 P/BV (x) 1.1x 1.4x 1.0x 0.9x 1.3x 1.4x

1.2x 1.0x
0.9x

1.0 0.5
0.0 COMB HNB SAMP

NDB

DFCC

NTB

PABC

UBC

COMB.X

HNB.X

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

35.0 30.0 25.0 PER (x) 29.4x

20.0
15.0 10.0 5.0 0.0 COMB HNB SAMP NDB DFCC NTB SEYB PABC UBC COMB.x HNB.x SEYB.x 9.1x 10.6x

7.3x

7.4x

8.1x

9.9x 7.1x
6.4x 7.6x 5.9x 5.9x

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Source: Company Reports and CAL Research

IFRS implementation may create positive first day balance sheet gains
Figure 28: NAVPS pre & post SLFRS implementation
180 160 140 120 NAVPS 100 80 60 40 20 -

Figure 29: P/BV pre & post SLFRS implementation

+7% 168 +0%

+5%
123 130

156

152 151

+36%
138

2.0 1.8 1.6 1.4 P/BV (x) 1.2 1.0

1.7x 1.7x 1.5x 1.4x 1.2x 1.1x 1.2x 1.0x 1.0x 1.3x 1.3x 1.2x 1.4x 1.2x 1.1x 1.4x

+1%
63 64

101

1.0x

+1%
44 44

1.0x

0.9x

0.9x

0.8
0.6 0.4 0.2 0.0

+2%
14 14

+2%
15 15

COMB

HNB

SAMP

NDB

DFCC

NTB

PABC

UBC

NAVPS - SLAS

NAVPS - SLFRS P/BV using SLAS P/BV using SLFRS

* Only the investment portfolio revaluation is taken into account for DFCC

Source: CSE & Company Reports

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2012 dividend yields for the non-voting shares for bigger banks remain attractive
Figure 30: Dividend yields of the banking sector stocks for 2012
8.0% 7.1% 7.0% 6.0% Dividend yield % 5.0% 4.0% 6.9%

5.8%

5.7%

5.7%

5.6%

5.4%

3.6%

3.4%

3.3%

3.2%

3.0%
2.0% 1.0% 0.0% HNB.X COMB.X COMB PABC HNB SAMP SEYB.X NTB NDB DFCC SEYB UBC 1.0%

* Scrip dividends are included in the dividend yield calculation 19

Source: CSE & Company Reports

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 its directors, officers, consultants, employees, outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.

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Contacts
Research Team Tel No: +94 11 231 7777 (General) Email: teamresearch@capitalalliance.lk Purasisi Jinadasa Tel No: +94 11 231 7786 Email: purasisi@capitalalliance.lk

Udeeshan Jonas Tel No: +94 11 231 7746 Email: udeeshan@capitalalliance.lk

Reshan Wediwardana Email: reshan@capitalalliance.lk Dushan De Silva Email: dushan@capitalalliance.lk Thushani De Silva Email: thushani@capitalalliance.lk Ananya Udeshi Email: ananya@capitalalliance.lk

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