Sri Lanka Banking Sector Report - Pulling Through Macro Challenges - 09-May-2013

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SRI LANKA BANKING SECTOR

Pulling through macro challenges
Regional comparison of banking sector ROEs

Avg. ROEs
24% 22% 19.6% 20.7% P/BV (x) 3.0 2.5 2.0 1.5
Regional comparison of banking sector P/BVs
20%
18% 16% 14.0% 17.9% 16.4% 16.5%
2.2x 2.0x 1.9x
1.8x
1.8x 1.2x 1.2x
14%
12% 10% 11.2%
1.0
0.5 0.0
2012
2013E
2012
2013E
See page 83 for important disclaimer
Udeeshan Jonas Reshan Wediwardana CAL Research 1 May 2013
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SRI LANKA BANKING SECTOR

Page
I. Macro variables to challenge banking industry
a) Local private commercial banks loans to grow at a 2014-16E cagr of 18% b) Govt monetary easing to support a 17% LPCB loan growth in 2013E
II. ROEs of 20% for Sri Lanka banks vs. 16% for regional peers
III. CALs top 5 picks to provide an avg. 21% total 1- year return IV. CALs Banking Basket
25
34 55
V. Appendices
DuPont Analysis Summary Financial Statements
61
All figures have been calculated under IFRS

2
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CALs top 5 picks to avg. 22% vs. our coverage universe avg. of 19%
Core Bank Current Target Price 64.4 126.4 97.5 225.5 118.7 171 178 Price 79 149 112 254 133 190 184 Price upside 22% 18% 15% 13% 12% 11% 3% 2013E ROE 21.7% 17.0% 18.6% 19.3% 18.6% 17.0% 13.9% 2013E ROA 1.8% 1.9% 1.9% 1.6% 1.9% 1.9% 1.8% profit growth 2013E Nations Trust Bank Hatton National Bank - Non Voting Commercial Bank - Non Voting Sampath Bank Commercial Bank - Voting Hatton National Bank - Voting National Development Bank 19% 30% 26% 51% 26% 30% 54% Net profit 2013E 22% 14% 4% 5% 4% 14% 23% 1.2 0.9 1.3 1.1 1.6 1.1 1.1 PBV growth 2013E(x)
PER 2013E (x) 6.0 5.4 7.6 6.2 9.3 7.0 8.0
Dividend yield 2013E
Total Return
4.3% 26.4% 7.7% 25.6% 7.1% 21.9% 5.6% 18.2% 5.8% 17.9% 5.9% 17.0% 5.2% 8.5%
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I. Macro variables to challenge banking
industry in 2013
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I.
Macro variables to challenge banking industry in 2013
I. a) Local private commercial banks loans to grow at a 2014-16E cagr of 18%

CAL expects medium term total private sector credit growth (2013-16E) to be c.16%p.a. as SL approaches the regional private sector credit to GDP avg. of 46% on the back of 6% real GDP growth Local private commercial banks (LPCB) account for 42% of commercial banking assets & 54% of private
sector credit
CAL expects an 18% LPCB loan growth cagr (2014-16E) as govt and foreign banks continue to lose market share In 2013E, CAL expects LPCB loan growth to reduce to 17% as current economic conditions remain subdued This is against a LPCB loan growth of 19% in 2012 despite a credit ceiling Falling vehicle sales and an alternative debt market may further slow loan growth
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I.
Macro variables to challenge banking industry in 2013 (Continued)

In 1Q2013, AWPLRs were too high to boost loan growth despite excess liquidity Govts monetary actions may indicate that interest rates may edge lower in the short term Higher foreign inflows (USD 1.3bn YTD) and an appreciating LKR (+2% YTD) may support lowering of interest rates
I. b) Govt monetary easing to support a 17% LPCB loan growth in 2013E

Cap on NBFC deposits may also reduce deposit rates at lower risk banks
which may result in a continued reduction in AWPLR during 2Q2013 Higher foreign inflows (USD 1.3bn YTD) and an appreciating LKR (+2% YTD) may provide further support However, medium term interest rates are likely to revert upwards (+c.1.5-2%) as govt debt financing continues
and high inflationary pressure kicks in due to recent energy price hikes In 2013E, CAL expects industry NIMs to stagnate at 2012 levels (c.4.2%)
while industry NPLs remain manageable despite macro challenges (c.3.6%)
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I. a) Local private commercial banks loans to grow at a 2014-16E cagr of 18%
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CAL expects medium term total private sector credit growth (2013-16E) to be c.16%p.a...
Figure 1: CALs estimate of private sector credit growth
LKR 4,307bn
LKR 2,358bn
SL private credit should grow at a 16% cagr if it were to reach lower middle income peer avg. of 45% to GDP by 2016
2012
2016E
* Private sector credit includes government commercial banks, private local banks and foreign commercial banks
8
Source: CBSL & company annual reports
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as SL approaches the regional private sector credit to GDP avg. of 45% on the back of 6% real GDP growth
Figure 2: Regional private sector credit to GDP % - 2011
Private sector credit to GDP % 60% 50% 40% 49% Avg. 45%
Figure 3: Real GDP growth vs. Nominal GDP growth
51%
51%
16%
17%
16%
15% 13% 13% 13%
31%
30% 20% 10% 0%
28%
32%
8.0% 8.2% 6.4% 6.0% 6.0% 6.0% 6.0%
2010
2011
2012
2013E
2014E
2015E
2016E
Real GDP growth
Nominal GDP growth
* Lower middle income countries include: Cambodia, India, Pakistan, Indonesia, Bhutan & Sri Lanka
9
Source: CBSL, World Bank & CAL Research estimates
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Local private commercial banks (LPCB) account for 42% of commercial banking assets & 54% of private sector credit
Figure 4: Bank assets* market share 2011 vs. 2012
Total assets = LKR3.7tn Total assets = LKR4.5tn
Figure 5: Private credit market share 2012
14% 7% 11% 12%
LPCBs
14% 7% 10% 11% 12% 21%

21% 23.4% 18% 28.7%
1.6%
5.6%
8.4% 9.6% 16.3%
54%
13% 20%
8% People's Bank Bank of Ceylon Local commercial banks Foreign banks UBC PABC NDB SAMP COMB DFCC Vardhana NTB SEYB HNB
23%
24%
2011 BOC COMB Other LCPBs PB HNB
2012 Foreign banks SAMP
* Calculated based on total assets
10
Source: CBSL, Bank annual reports & CAL Research
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CAL expects an 18% LPCB loan growth cagr (2014-16E) as govt and foreign banks continue to lose market share
Figure 6: LPCB loan growth
LKR bn 3000 2500 2,492
Figure 7: Local & foreign banks market share
2010
2012
18%
2000 1,536 1500 1,114 1000 500 0
1,313
10.7% 89.3%
92.1 %
7.9%
2011
2012
2013E
2016E
Local banks' market share Foreign banks' market share
LPCB loan growth is expected to outpace private sector credit growth of 16% (2013-16E)
11
Source: CBSL & CAL Research estimates
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In 2013E, CAL expects LPCB loan growth to reduce to 17% as current economic conditions remain subdued
Figure 8: Export and import trade 2009-12
37% 21% 13% 19% 9% -7% 2009 -18%
Figure 9: Perceived Economic Opportunity Index

PEOI 1.8 1.75 1.7 1.65 1.6 1.57 1.56 1.67 1.77 1.74 1.69 1.66
Growth
40% 30% 20% 10% 0% -10% -20% -30% Growth in import trade
1.72
2010
2011
2012
1.55 1.5
Growth in export trade
Figure 10: LMD-Nielson Business Confidence Index

LMD - Nielson BCI 160 150 140 135 121 108 122 158 147
Figure 11: Industrial production index

Industrial production index (IPI) 116 114 112 110 108 106 104 102 100 98 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 113.7 111.2 107.5 104.2 104.5
139
134
140
130
120 110 100
106.5
103.8
12
Source: CBSL, LMD & FEF
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This is against a LPCB loan growth of 19% in 2012 despite a credit ceiling
Figure 12: 2012 bank loan growth (using SLAS figures)
30%
In 2012, LPCBs loans grew 19%, higher than the overall private sector credit growth of 18% in 2012
24% 24%
25%
Max. credit growth for banks borrowing abroad 24%
20%
20% 18% 18% 18%
Average loan growth - 19%

17% 17% 15%
15%
10%
5%
0% PABC SAMP DFCC NTB COMB HNB UBC NDB SEYB
13
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Falling vehicle sales and an alternative debt market may further slow loan growth
Figure 13: New vehicle registrations
100 Vehicle registrations ('000)
Figure 14: Debenture issues 2012 & 2013 announced till date
Value of debentures - LKR bn 50 45 40 35 30 Incentives provided in the 2013 govt budget for debenture issues provides an avenue for corporates to borrow long term at attractive rates 12 10 10 8 LKR 25bn 5 LKR 16bn
90 80 70
60 50 40 30 20 10 16 7 -56% 30 43 -30%
89 No of issues -38%
55
25
20 15
6
4 2 0
-66% 2
10 5 2012 2013 (announced to date)
Jan-Apr 12
Jan-Apr 13 Value of the issues No of issues
Source: Department of Motor Traffic & CAL Research
14
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I. b) Govt monetary easing to support a 17% LPCB loan growth in 2013E
15
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In 1Q2013, AWPLRs were too high to boost loan growth despite excess liquidity
Figure 15: Private sector credit growth (Jan-Feb 2013)
LKR bn 4000 3500 3000 AWPLR 11.5% AWPLR 14.3% 16% 10 14% 0 12% -10 -20 -30 -40 -50 -60 -70
Figure 16: Net injection/ absorption (LKR bn)

20
+5%
2006 2106
+1.2%
2358 2386
10%
2500
2000 1500
8%
6% 4% 2%
Excess liquidity
1000
Dec 2011 Feb 2012 Dec 2012 Feb 2013
0%
Private sector credit growth reduced to 1.2% from Dec 2012 to Feb 2013 compared to a 5% growth for the corresponding period last year
Excess liquidity in the monetary system may also indicate that short term interest rates may edge lower
16
Source: CBSL
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Govts monetary actions may indicate that interest rates may edge lower in the short term
Figure 17: Maximum cap on NBFC 1-yr deposit rates
18% 17% 16% 15% 14% 13% 12%
Jan-Feb 2012 March 2012 April - June - July July - Sep Oct - Dec Jan-March May 2012 2012 2012 2012 2013
Figure 18: Net credit to the government (M2b)

LKR bn 1100 1050 60% 50% 51% 47% 45% 37% 37% 50%
16.8% 16.3% 15.6% 14.7%
16.7%
53%
1000
33%
14.5%
30%
32% 32% 25% 17%
40% 30% 20% 10% 0%
950 900 850 800 Jun-12 Jan-12 Jul-12 Apr-12 May-12 Nov-12 Mar-12 Aug-12
13.2%
Net Credit to the Government
YOY %
In Jan 2013, CBSL imposed a cap on NBFC deposit rates. Rates cannot exceed AWPLR+2% for deposits with maturity of <1 year The governments effort to reduce borrowings may support a fall in interest rates
The government may need to cut interest rates to reach its private credit and economic growth targets
17
Source: CBSL
Dec-12
Feb-12
Sep-12
Oct-12
Jan-13
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Higher foreign inflows (USD 1.3bn YTD) and an appreciating LKR (+2% YTD) may further support low interest rates
Figure 19: Exchange rate (LKR/USD)
USD mn
Figure 20: Net foreign inflows (Jan-Mar 2013)

1800 1600 1400 1200 1000 800 1,656
LKR/USD
133 132
131
130 129 128 127 126 125 124
600
400 200 0
414
Jan-Mar 2012
Jan-Mar 2013
USD mn Balance of trade Worker remittances Portfolio investment Earnings from tourism Inflows to the govt (bills and bonds) Total net foreign inflows
Jan-Mar 2012 Jan- Mar 2013 -2,779 1,508 164 267 1,255 414.1 -2,129 1,560 39 318 1,869 1656.4
% -23% 3% -76% 19% 49% 300%
18
Source: CBSL and Oanda.com
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Cap on NBFC deposits may also reduce deposit rates at lower risk banks
Figure 21: Deposit rate gap in Jan 2013
Deposit rates 17.0% 16.5% 16.0% 200bps Avg. 1yr FD rate for NBFCs - 15.92%
Figure 22: Deposit rate gap in Apr 2013

Deposit rates
15.5% 15.0% 15.0%

Maximum cap for 1-yr deposit rates for NBFCs - 14.45%
15.5%
15.0% 14.5% 14.0% 13.5% 13.5% 13.5% 13.0% 13.0% 12.5% 12.0% Avg. 1yr FD bank rate - 13.9%
15.0% 14.5%
75bps
14.5% 14.0% 14.0% Avg. 1-yr FD rates for banks - 13.7% 14.0% 13.5% 13.0% 13.0% 12.5% 12.0%
14.0% 14.0% 14.0% 14.0%
13.5% 13.5% 13.5% 13.5% 13.5%
NDB COMB SAMP HNB DFCC NTB
SEYB PABC UBC
Governments imposition of maximum deposit rates for NBFCs may drive deposit rates for lower risk banks downward, thereby reducing cost of funding
19
Source: Bank websites & CAL Research
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which may result in a continued reduction in AWLR during 2Q2013

Figure 23: Gap between 1yr treasury rates and AWPLR
Interest rates (%) 15.5
14.5
13.5
332bps
12.5
11.5
10.5
9.5
In 1Q2013, the banks remained reluctant to cut lending rates even amidst treasury rates declining c.150bps (Dec 2012- May 2013) The spread between treasury rates and AWLR likely to reduce towards mid-year, which is expected to drive the 17% LPCB loan growth
8.5
7.5
T-Bill 364 days
AWPLR AWLR
222bps
20
Source: CBSL
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However, medium term interest rates are likely to revert upwards (+c.1.5-2%) as govt debt financing continues
CAL expects interest rates to rise by 1.5%-2% by year-end as inflation kicks in and govt debt is financed
Figure 24: Government foreign & local debt
LKR bn 7,000 6,000
Figure 25: Government foreign & local debt

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 0
LKR bn
6,000 5,133
5,000 4,000 3,000
-100 -200 -300 -400 -157
-172 -206 -246 -310
2139
2,000 1,000 996 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total foreign debt Total debt 957 2,329 1,760 2,025 1,449 1,103 1,326 2,767
-500
-600
-476
-446 -450 -489
The government may need to finance the budget deficit via borrowings from the local market which may spike interest rates in the medium term
-507
21
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and high inflationary pressure kicks in due to recent energy price hikes
Figure 26: Colombo Consumer Price Index ( Base: 2006/07=100) Index 172 170 168 166 164 162 160 158 156 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13
*Electricity price hike of c. 40%, will take effect starting May 2013
22
Source: CBSL
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In 2013E, CAL expects industry NIMs to stagnate at 2012 levels (c.4.2%)

Figure 27: Industry net interest margins NIMs 4.9% 4.8% 4.8% 4.7% 4.7% 4.6% 4.6%
4.5%
4.5% 4.4% 4.4% 4.3% 4.3%
4.2%
4.2% 4.1% 4.0% 3.9% 3.8% 2006 2007 2008 2009 2010 2011 2012
4.2%
2013E
23
Source: CBSL and CAL Research
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while industry NPLs remain manageable despite macro challenges (c.3.6%)

Figure 28: AWLR vs. gross NPLs on a 1-year time lag
25% 15.3% 20% 19.3% 15.3% 19.3% 13.7% 18.2% 15.7% 15% 9.3% 10% 7.0% 6.3% 5% 5.6% 5.2% 8.5% 9% 16.6% 14.8% 15.4% 18.1% 20.1% 17.4% 14.8% 13.4% 11% 15% 13% 17% Gross NPL AWLR
7% 5.4%
5% 3.8% 3.6% 3% 2012
0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
AWLR (LHS)
Gross NPL (RHS)
* The NPLs are plotted with a one year time lag 24

Source: CBSL
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25
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In 2013E, CAL expects industry ROEs of 20% and ROAs of 1.9% (vs. regions 16% and 1.5%) while NIMs remain stable (avg.c.4.2% vs. regions 3.5%) Cost-to-income ratios (53% vs. regions 49%) are likely to improve as industry-wide branch additions slow Fee income from credit cards, remittances and e-banking still have vast scope for growth (7% vs. regions 15%) Sri Lanka banks are also better geared for Basel III implementation and are attractively valued compared to peers
In 2013E, dividend yields are likely to avg. 5.2% vs. regions 2.8%
26
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In 2013E, CAL expects industry ROEs of 20% and ROAs of 1.9% (vs. regions 16% and 1.5%)
Figure 29: Regional comp of avg. ROEs
Avg. ROEs 24% 22.3% 22% 20% 18% 16% 14% 12% 10% 12.0% 11.2% 17.9% 18.0% 16.5% 16.5% Avg. 16% 14.5% 14.0% 16.4% 20.8% 19.6% 20.7%
Figure 30: Regional comp of avg. ROAs

Avg. ROAs 3.0% 2.5% 2.4% 1.9% 1.9% 2.5%
2.0% 1.5% 1.5% 1.3%

1.0% 0.5% 0.0%
1.8% Avg. 1.5% 1.2% 1.2% 1.2% 1.0%
1.7%
15.6%
1.2% 1.2%
2012
2013E
2012
2013E
27
Source: Maybank Kim Eng & CAL Research estimates
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while NIMs remain stable (avg. c.4.2% vs. regions 3.5%)

Figure 31: Avg. NIMs* of regional peer banks 6.6%
4.2%
Regional avg. 3.5%
3.2% 2.6%
3.2%
3.4%
1.8%
Singapore
Malaysia
Thailand
India
Philippines
Sri Lanka
Indonesia
2012
2013E
* Based on average earning assets
28
Source: CBSL & Maybank Kim Eng Research
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Cost-to-income ratios (53% vs. regions 49%) are likely to improve as industry-wide branch additions slow
Figure 32: Regional Cost-to-income comparison
Cost to Income
60% 53% 50% 40% 30% 20% 10% 0% Sri Lanka Singapore Malaysia Thailand Indonesia Philippines 49% 44% 43% Avg. 49% 50% 57% Branch additions 180 160 140 120 100 80 60 40 62 95 69 160
Figure 33: Sri Lanka sector wise branch additions 2009-12
20
2009 2010 2011 2012
COMB, HNB & SAMP expanded branch networks rapidly over the last 2 years and are now in the phase of consolidation. In 2013, CAL expects a total of 12 branches to be added by these three banks. The smaller banks delayed branch expansions and may see an increase in cost-to-income ratios as branches are added this year.
29
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Fee income from credit cards, remittances and e-banking still have vast scope for growth (7% vs. regions 15%)
Figure 34: Regional fee income as a % of (Fee + NII )
Fee based income/Gross income 25% 20% 15% 10% 5% 0% 10% 7% 20%
Avg. 15%
Figure 35: Worker remittances (USD mn)

Worker's Remittances (USD mn) 6,000 5,000 4,000 3,000 2,000 1,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Workers Remittances (Mn) (LHS) Workers Remittances / Current GDP (RHS) 2% 0%
20%
7.6% 8.0% 7.6% 7.7%
7.2%
8.7% 7.9% 8.3%
10% 8% 6% 4%
14% 11%
Figure 36: Credit card penetration by country

52%
Figure 37: Active credit card users - SL

No of active credit cards (000) 1,000 900 800 700 600 779 862 952
28.4% 19.3% 6.2%
4.7% Sri Lanka
Indonesia
Thailand
Malaysia
Singapore 500 2010 2011 2012
30
Source: CBSL & CAL Research
Worker Remittances/ Current GDP
7,000
10.1%
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Sri Lanka banks are also better geared for Basel III implementation
Figure 38: Tier 1 capital ratio of banks Figure 39: Tier 2 capital ratio of banks
25% 20.4% 20% 15% 10% 5% 0% UBC DFCC NDB SEYB HNB NTB PABC COMB SAMP
25% 20.7%
19.0% 18.8%
14.7% 13.9% 13.8% 13.3% 12.6% 11.9%
20% 15% 10%
19.5%
18.2% 17.5%
16.6%
15.8%
14.7%
13.8% 13.8%
Tier 2 capital minimum requirement - 10%
Tier 1 capital minimum requirement - 5%
5% 0% NDB UBC NTB DFCC HNB PABC SEYB COMB SAMP
Basel III requires banks to maintain a Tier 1 capital ratio of 7% (vs. 5% at present)
31
Source: Bank Reports & CAL Research
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and are attractively valued compared to peers

Figure 40: Avg. P/BV of regional country banks
3.0 2.5x 2.5 2.0 1.5 1.0 0.5 0.0 2.2x 2.0x 2.4x 2.1x 1.9x 1.9x1.8x 2.1x 1.8x 1.3x 1.4x 1.2x 1.2x
Figure 41: Avg. PER (x) of regional country banks

PER (x) 20.0
P/BV (x)
18.0
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
16.6x
11.1x
11.1x
11.1x
10.9x
10.5x
7.0x
2012
2013E
2012
2013E
32
Source: Maybank Kim Eng Research & CAL Research estimates
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In 2013E, dividend yields are likely to avg. c.5.2% vs. regions 2.8%
Figure 42: 2012 & 2013E dividend yield of banking sector stocks
6.0% 5.1% 5.0% 5.2%
Dividend yield
4.0% 3.0% 3.0% 2.4% 2.0%
3.8%
3.7%
3.8%
3.8%
1.9% 1.3% 1.5%
2.1%
1.0%
0.0% Thailand Malaysia Singapore 2012 2013E Philippines Indonesia Sri Lanka
33
Source: Maybank Kim Eng Research & CAL Research estimates
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III. CALs top 5 picks to provide an avg. 19% total 1-year return
34
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III. CALs top 5 picks to provide an avg. 19% total 1- year return
CALs top picks to avg. 22% vs. our coverage universe avg. of 19% Less volatile and improving NIMs the key to sustainable ROEs
A higher CASA base remains the core advantage for larger banks
Banks with a lower CASA base may witness higher cost of funding if interest rates rise In 2013, low cost foreign borrowings for the larger banks may contribute marginally to NIM improvements while removal of the credit ceiling may boost growth for smaller aggressive banks However, maintaining NIMs by lending to high yield, riskier segments may be unsustainable over the long run for aggressive banks as credit quality deteriorates
However, fee based income may be a viable alternative for NTB and NDB to compensate for low NIMs Whilst branch consolidation may improve cost-to-income ratios at the larger banks, late entry into branch expansion may add pressure on smaller banks cost-to-income ratios
Core profitability has been on an upward trend for CALs banking sector stock picks and in 2013E, are likely to witness avg. core profit growth of 33%
However, maintaining profitability via lower provisioning is unsustainable at a few smaller banks CALs top 5 banking picks have sustainable ROAEs (Avg. 18%) and superior ROAs (Avg. 1.7%) CALs picks also have attractive trailing valuations and reasonable dividend yields (avg.5.4%) The fall in gold prices a red herring A further 10% decline manageable
35
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CALs top 5 picks to avg. 22% vs. our coverage universe avg. of 19%
Core Bank Current Target Price 64.4 Price 79 149 112 254 133 190 184 Price upside 22% 18% 15% 13% 12% 11% 3% 2013E ROE 21.7% 17.0% 18.6% 19.3% 18.6% 17.0% 13.9% 2013E ROA 1.8% 1.9% 1.9% 1.6% 1.9% 1.9% 1.8% profit growth 2013E Nations Trust Bank 19% 30% 26% 51% 26% 30% 54% Hatton National Bank - Non Voting 126.4 Commercial Bank - Non Voting Sampath Bank Commercial Bank - Voting Hatton National Bank - Voting National Development Bank 97.5 225.5 118.7 171 178 Net profit 2013E 22% 14% 4% 5% 4% 14% 23% 1.2 0.9 1.3 1.1 1.6 1.1 1.1 PBV growth 2013E(x) PER 2013E (x) 6.0 5.4 7.6 6.2 9.3 7.0 8.0 Dividend yield 2013E
Total Return
4.3% 26.4% 7.7% 25.6% 7.1% 21.9% 5.6% 18.2% 5.8% 17.9% 5.9% 17.0% 5.2% 8.5%
36
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Less volatile and improving NIMs the key to sustainable ROEs

Figure 43: 2012 change in net interest margins (bps)
2012 - Change in NIMs (bps) 40 25 20 HNB -20 -40 -60 (62) -80 (80) -100 2011 2012 0.0% SEYB HNB PABC COMB NTB SAMP UBC NDB COMB NDB SAMP NTB (17) (29) 2.0% 1.0% SEYB UBC PABC 3.0% 15 6 6 5.0% 4.0%
Figure 44: Net interest margins of SL banks*

6.0% 5.2% 4.9% 4.6% 4.6%
4.3%
4.2%
3.9%
3.8%
*Based on average earning assets
37
Source: Bank annual reports, Maybank Kimeng reports & CAL Research
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A higher CASA base remains the core advantage for larger banks
Figure 45: Bank CASA Ratios
CASA Ratio No of branches 50% 45% 40% 35% 30% 25% 20% 15% 10% COMB HNB SAMP SEYB NDB NTB UBC PABC 24% 22% 20% 17% 50 100% 80%
Figure 46: Savings deposit market share of banks

100%
300
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2%2% 1% 2% 3%
9%
2% 1% 3% 5%
1%
45%
250 39% 34% 31% 150 100 200
9% 17% 27%
17% 29%
35%
36%
Savings deposit market share - 2011
Savings deposit market share - 2012
COMB
HNB
SAMP
SEYB
NDB
NTB
DFCC
PABC
UBC
Figure 47: Current deposit market share of banks

1% 4% 2% 7% 7% 10% 13% 23% 33%
Current account deposit market share 2011
1% 3% 2% 8% 8% 10% 15% 22% 31%

Current account deposit market share 2012
CASA (LHS)
Branches (RHS)
60%
40%
Smaller banks are unable to attract a larger CASA deposit base despite offering higher yields (c.6-9% vs. larger banks c.4%) on savings deposits.
20% 0% COMB HNB
SAMP
SEYB
NDB
NTB
PABC
UBC
DFCC
38
Source: Bank annual reports & CAL Research
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Banks with a lower CASA base may witness higher cost of funding if interest rates rise
Figure 48: Change in cost of funding in 2012
A c.300bps increase in interest rates in 2012 resulted in banks with a lower CASA base witnessing higher increases in cost of funding With demand deposit rates at 0% and savings deposit rates remaining almost flat (at c.4%), the change in cost of funding for larger banks with a larger CASA base was relatively small
Change in cost of funding % in 2012
19% 2.8% 2.9% 17% 2.1% 15% 13% 11%
3.0%
2.5% 2.0% 2.0% 1.7% 1.6%
1.9%
1.5%
9.6%
1.0% 8.0% 8.3% 8.6%
9.6%
9.7% 9% 7% 5%
7.2%
0.5%
7.2%
0.0% COMB HNB SEYB SAMP NDB NTB PABC UBC
Cost of funding 2012 %
3.5%
3.3%
39
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In 2013, low cost foreign borrowings for the larger banks may contribute marginally to NIM improvements...
Figure 49: Foreign borrowings as a percentage of gross loans and advances
Foreign borrowings - LKR mn
In 2013, COMB raised USD75mn via a 10yr subordinated debt agreement from IFC
8.4%
15,000 11,644 10,000
9.0%
In 2013, NDB intends to raise USD250mn according to the provisions mentioned in the govt budget
8.0% 7.0% 6.0%
6,606
4,228
4.4% 3.4%
8,791 SAMP HNB COMB
In 2013, SAMP raised 5,000 USD100mn loan via a syndicated loan from HSBC which may 0 increase foreign borrowings as a % of total loans -5,000 to 14%
6,559
5.0% 4.0%
6,735
6,940
3,853 NDB
3.0% 1,943 DFCC1.5% -499 2.0% 1.0%
In 2013, HNB intends to raise USD150mn (provisional)
Incremental foreign borrowings in 2012 (LHS) Foreign borrowings (LKR mn) in 2011 (LHS) Foreign borrowings as a percentage of gross loans in 2012 (RHS)
In 2013, DFCC raised USD45mn via 0.0% a syndicated loan by HSBC. DFCC is likely to raise USD250mn as mentioned in the govt budget
COMB & SAMP may only have to partially hedge for exchange rate risk as they hold foreign assets which may be used to match foreign loans. COMB, HNB and SAMP have the ability to raise foreign loans at lower rates (< c.6%) compared to peers due to their size, ratings and credit quality. Higher swap costs (c.8-10%) make foreign borrowings unaffordable for smaller banks
F. borrowings as a % of gross loans
20,000
9.3%
10.0%
40
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...while the removal of the credit ceiling may boost growth for smaller aggressive banks
Figure 50: Gross loan book growth under IFRS - 2012 Figure 51: Loan growth for selected banks 2013E
24% 22%
20% 20% 17% 15% 17% 20% 19% 22%
19%
17% 17% 17% 18%
SEYB
UBC
NDB
HNB
COMB
NTB
DFCC
SAMP
PABC
NDB
HNB
COMB
DFCC
NTB
SAMP
DFCC, SAMP , NTB & PABC have maintained 5-yr loan growth cagrs above 20%, as they started from lower loan book bases. These banks were able to easily reach the 18-23% credit ceiling imposed by the Central Bank in 2012.
CALs assumptions on loan growth are based on a recovery in credit growth in 2H2013
41
Source: Bank annual reports
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However, maintaining NIMs by lending to high yield, riskier segments may be unsustainable over the long run for aggressive banks...
Figure 52: Yield on Assets for banks 2011 vs. 2012
18% 16% 15.3% 15.2% 14.7% 14.0%
14%
12% 10% 8% 6% 4% 2% 0% PABC NTB UBC
13.3%
13.0%
12.4%
11.9%
SEYB 2011
SAMP 2012
HNB
COMB
NDB
Smaller aggressive banks maintain higher NIMs by providing loans to higher risk clients in the SME, pawning and personal loan segments. NTBs higher yields are attributable to higher interest on credit card loans and providing value added services to high yield corporate clients. 42
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as credit quality deteriorates

Figure 53: 2012 Bank NPLs
Gross NPLs 14% 12% 10% 8% 6% 4% 1.3% 2.1% 2.8% 3.4% 3.7% 5.4% 4.2% 13.0%
Figure 54: Impaired loans as a percentage of gross loans

Impaired loans/ Gross loans
10%
8% 6.2% 6% 4% 2% 4.7% 4.2% 4.0%
3.4%
2%
0%
2.6%
2.5%
2.4%
NDB
SAMP
NTB
COMB
HNB
PABC
UBC
SEYN
0%
SEYB UBC PABC COMB SAMP NDB 2011 2012 HNB NTB
Figure 55: 2012 Change in NPLs (bps)

Change in gross NPLs 150 100 50 0 -50 -100 3 SAMP -58 -125 NTB COMB -6 HNB -27 PABC UBC SEYN 59 136
-2
NDB
With the introduction of IFRS accounting from 2013, loan loss provisioning was replaced with impairment accounting where a loan asset is impaired (reduced in value) if the carrying value of the loan exceeds the future expected cash flows from the customer
-150
43
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However, fee based income may be a viable alternative for NTB and NDB to compensate for low NIMs
Figure 56: Fee and commission based income
Fee & Commission income/Net Interest, fee & commission income
30% 26.9% 25% 21.8% 20%
NTB has been successful in increasing its fee based income (e.g. credit cards) compensating for the decline in NIMs NDB signed a bankassurance agreement with AIA which may contribute to fee based income. 17.9% 15.7% 15.5% 14.4% 13.6% 10.5%
15%
10%
5%
0% NTB NDB PABC SEYB SAMP HNB COMB UBC
2011
2012
44
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Whilst branch consolidation may improve cost-toincome ratios at the larger banks...
Figure 57: Cost-to-income ratios of local banks
Operating cost/ Net interest, fee & commission income 90% 80% 70% 60% 51% 50% 40% 30% 20% 10% 0% COMB NDB NTB HNB 2011 SAMP 2012 PABC SEYB UBC 60% 60% 68% 63% 68%
82%
68%
COMB, HNB & SAMP rapidly expanded their branch network during the last 2 years and now are in the phase of consolidation. The other smaller banks delayed branch expansion and will see the impact in the cost-toincome ratios from increased branch additions during the year.
45
Source: CBSL & CAL Research
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late entry into branch expansion may add pressure on smaller banks cost-to-income ratios
Figure 58: Branch penetration by region (Western vs. Non Western province)
760 688
Figure 59: Estimated branch additions for 2013

No of target branch additions for 2013 12 10 10 8 6 10 10
No of branches/ (population 000)
800 700 600 500 400 300 200 100 HNB COMB SAMP SEYB Wetern Province PABC NDB NTB 58 98 51 128 66 253 172 120 117 158 162 370 425
6
4 2 0 0 SAMP
343
UBC
COMB
HNB
NTB
NDB
DFCC
Outside Western province
Smaller banks have lower branch penetration outside the Western province
46
Source: Annual reports, bank data & CBSL
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Core profitability has been on an upward trend for CALs banking sector top picks...
Figure 60: Core profit as a percentage of average assets
Core profit as a % of average assets With one-off gains and subjective impairment provisioning having the ability to boost profits and ROEs, CAL believes core profits to be a good indicator of underlying bank profitability.
3.5%
3.0% 2.5% 2.0% 1.5% 1.1% 1.0% 0.5% 0.0% NTB COMB HNB SEYB 2011 2012 NDB 2.8% 2.6% 2.3%
3.2% 2.7% 2.3% 1.9% 2.3% 1.9%
1.7%
1.8%
1.6%
1.3% 1.1% 1.0%
PABC
SAMP
UBC
SEYB shows an increase due to the inclusion of VRS cost in 2011

*Under IFRS, CAL defines core profits as (Net interest income + Fee based income operating expenses
47
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...and in 2013E, are likely to witness avg. core profit growth of 33%
Figure 61: Core profit as a percentage of average assets
60% 51% 50% 40% 30% 20% 10% 0% SAMP NDB HNB COMB NTB 38% 30% 26%
Avg.33%
19%
48
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However, maintaining profitability via lower provisioning is unsustainable at a few smaller banks
Figure 62: Provisioning coverage under SLAS
120% 2011 2012
Provisioning Coverage
100%
100%
80% 80%
60% 44% 40% 36% 36%
31%
28%
20%
15%
0% NDB SAMP HNB COMB NTB UBC SEYB PABC
Providing lower impairment charges for bad losses to boost profitability may not be sustainable over the long run
49
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CALs top 5 banking picks have sustainable ROAEs (Avg. 18%)

Figure 63: Recurring ROEs of banks 2012
ROAE- Recurring
30%
25% 21.7% 20% 20.8% 20.7%
17.4%
15% 14.1% 13.9% 10.4% 10%
9.8%
5%
0% PABC NTB COMB HNB 2011 2012 SAMP NDB SEYB UBC
50
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and superior ROAs (Avg. 1.7%)

Figure 64: Average ROAs for 2012
Average ROA 2.5%
2.1% 2.0% 1.9% 1.9% 1.9% 1.7% 1.7%
1.7%
1.5% 1.2%
1.0%
0.5%
0.0% COMB HNB NDB SAMP NTB UBC PABC SEYB
51
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CALs picks also have attractive trailing valuations

Figure 65: 2012 PER (x) and PBV of banking sector stocks
P/BV (x) PER (x) 5.0 16.2x 4.5 4.0 3.5 10.9x 3.0 2.5 9.3x 8.3x 7.1x 8.0x 9.8x 10.0 16.0 14.0 12.0 18.0
7.2x
2.0
1.5 1.0 0.5 -
6.2x 1.31 1.39 1.39
6.9x 1.39 1.42 1.52
1.89
8.0 6.0 4.0 2.0 -
0.98
1.11
1.15
HNB.X
NDB
SEYB
HNB
SAMP
NTB
PABC
UBC
COMB.X
COMB
P/BV (x)
PER (x)
52
Source: CSE & CAL Research
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and reasonable dividend yields (avg.5.4%)

Figure 66: 2012 dividend yield of banking stocks
8.8%
6.7%
6.6%
5.6%
5.4%
5.2%
4.9% 4.4%
3.3%
2.8%
0.8%
NDB
HNB.X
COMB.X
COMB
SAMP
HNB
SEYB.X
PABC
NTB
SEYB
UBC
53
Source: CSE & CAL Research
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The fall in gold prices a red hearing A further 10% decline manageable
Figure 67: Banks exposure to pawning loans
Pawning loans/ Gross Loans 30% 25% 20% 15% 10% 5% 0% SAMP PABC HNB SEYB UBC NDB COMB 3.6% 3.2% 24.9%
Figure 68: World market gold prices

USD/Oz 1900 1800 1700
16.4% 15.8% 13.1% 11.2%
1600 1500 1400 1300 1200 Apr-12 May-12 Dec-12 Mar-13 Aug-12 Nov-12 Sep-12 Feb-13 Apr-13 Oct-12 Jun-12 Jan-13 Jul-12
Declining gold prices reduces the collateral value of gold loans, but the impact is not reflected in the income statement or balance sheet immediately. Giving out c.80-85% (LTV) of the gold value through pawning loans has provided a buffer for banks. However, HNB indicates that a further 10% reduction from current gold prices (c.USD1400/Oz) may reduce the collateral value below loan values. The sensitivity analysis in the SAMP annual report indicates that gold prices at current levels (USD1400/Oz) will lead to a mark-to-market loss of LKR6.4bn on its pawning portfolio.
However, an impact on the income statement will only occur when the collateral on defaulted loans are sold at auction at a lower price. Sentimental value for jewelry may reduce customer default rates on pawning loans as they arent generally refinanced even when gold prices collapse. However, banks may increase their impairment provisioning in 2Q2013 if the downward trend in gold prices continue.
54
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IV. CALs Banking Basket
55
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Commercial Bank 1 yr. total return of +18%: BUY TP LKR133

Consolidation phase for industry leader
Commercial Bank (COMB V LKR 119, NV LKR 98; Market Cap USD748mn): COMB is the largest private sector commercial bank in SL with a loan book of LKR373bn (+19 YOY) and a c.29% private bank market share. CAL forecasts COMBs loan book to grow in line with industry loan growth at 17% for 2013E. COMBs larger CASA base (c.42% for 2013E), low cost IFC loans and foreign deposits may enable COMB to maintain NIMs at 2012 levels (c.5.4%) despite lower yields from higher liquid assets. COMB borrowed USD75mn via a subordinated loan from IFC in 2012 consequent to raising USD65mn in 2012. Benefits from recent branch additions (2010-12) and consolidation of bank branches will enable COMBs cost-to-income ratios to improve to 48% in 2013E from 51% in 2012. CAL expects COMBs core profitability to grow 26% to LKR 16.1bn in 2013E. COMB also provides an attractive dividend yield of 5.6% for the voting and 6.9% for the non voting share. COMBs size and higher than avg. liquidity (+2.3x) makes it investible for foreign investors. COMB has one of the highest ROEs in the sector which stands at 19% for 2013E. Larger dominant banks in regional peer countries trade at a 47% premium to their smaller counterparts which may justify a c.40% premium for COMB. CALs 2013E target price for COMB is LKR133 (+12%) and LKR112(10%) for the non-voting share. COMB currently trades at a PER of 7.8x on 2013E and PBV of 1.4x.
FY11 Net interest margin Cost-to-income Average ROE Average ROA Loan Growth 5.10% 52% 20.2% 1.95% 26.5% FY12 5.39% 51% 20.8% 2.11% 18.6% FY13E 5.34% 48% 18.6% 1.87% 18.2% FY14E 5.36% 44% 20.2% 1.95% 18.0%
Market Cap (USD): 748mn 1 Year Avg. Daily T/O (USD): 604k 1 Year Price H/L (LKR): 119.5/96.8 Free Float: 85% Current Price (LKR): 118.50
125 120 115 110 105 100 95 90 85 May-12
COMB.N Jul-12 Sep-12 Nov-12

FY11 18,678 10,479 7,932 9.2 52.0 12.9 2.3 10.5 1.9 5.8
ASPI Jan-13
FY12 22,852
COMB.X Mar-13
FY13E 26,821 FY14E 32,147
FYE Mar - LKR mn Net interest income
Net interest income growth

Core Profit*
22%
12,882
17%
16,172
20%
20,702
Core Profit growth

Profit attributable to equity holders
23%
10,080
26%
10,504
28%
12,890
Profit growth
EPS (LKR) NAVPS PER (x) (Voting) P/BV (x) (Voting) PER (x) (Non Voting) P/BV (x) (Non Voting) DPS (LKR)
27%
13.4 62.4 8.8 1.9 7.2 1.6 6.4
4%
12.4 70.4 9.6 1.7 7.8 1.4 6.7
23%
15.2 80.2 7.8 1.5 6.4 1.2 8.2
Dividend Yield % (Voting) Dividend Yield % (Non Voting)
4.9% 6.0%
5.4% 6.6%
5.6% 6.9%
56
6.9% 8.5%
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Hatton National Bank1 yr. total return of +17%: BUY TP LKR190

New branch additions to start contributing to profitability
Hatton National Bank (HNB V LKR 171, NV LKR 126; Market Cap USD432mn): HNB is the second largest private commercial bank with a loan book of LKR 304bn (+18%YoY) and a c.23% private bank market share. Despite witnessing the highest improvement in NIMs in 2012 to 5.83%, HNB may continue to maintain NIMs at current(5.83%) levels supported by their relatively larger CASA base (39%) and repricing of assets. Higher deposit growth compared to loan growth may put marginal pressure on NIMs if current interest rate regime continues. CAL estimates HNBs loan growth to remain at c.18% for 2013E and fee based income to grow c.25% during the year with the initiation of new products which may lead to net income growing 15% to LKR 32bn in 2013E. The bank will also witness improvements in its cost-to-income ratios as branches added during the last 2 years start contributing to profitability. HNB targets to improve cost-to income ratios to 60% by 2013E. CAL anticipates HNBs earnings to grow 14% to LKR9.3bn in 2013E which may translate into a PER of 7.2x and PBV of 1.2x at current prices. HNB may maintain a dividend payout close to 42% which may provide a dividend yield of 5.7% at current prices for the voting share and 7.7% yield for the nonvoting share. CALs target price for HNB Voting is LKR and LKR149 for the non-voting share. CAL Recommends a BUY
150 140 130 120 110 100 90 80
Market Cap (USD): 432mn 1 Year Avg. Daily T/O (USD): 282k 1 Year Price H/L (LKR): 176/130 Free Float: 67% Current Price (LKR): 171
HNB.N
ASPI
HNB.X
FY11 16,920 6,207 6,819 9.1 104.6 18.9 1.6 13.9 1.2 7.3
FY12 22,444
FY13E 26,362
FY14E 27,848

Core Profit*
33%
9,699
17%
12,577
6%
13,093
Core Profit growth

56%
8,111
30%
9,240
4%
10,079
Profit growth
EPS (LKR) NAVPS PER (x) (Voting) P/BV (x) (Voting) PER (x) (Non Voting) P/BV (x) (Non Voting) DPS (LKR)
19%
29.3 129.9 5.8 1.3 4.3 1.0 8.5
14%
23.6 143.9 7.2 1.2 5.4 0.9 9.8
9%
25.7 160.5 6.6 1.1 4.9 0.8 10.6
Dividend Yield % (Voting) Dividend Yield % (Non Voting)
4.3% 5.8%
5.0% 6.7%
5.7% 7.7%
57
6.2% 8.4%
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Sampath Bank 1 yr. total return of +18%: BUY TP LKR 254

Foreign funding to improve NIMS
Sampath Bank (SAMP LKR 226; Market Cap USD300mn): SAMP is the third largest private commercial bank in Sri Lanka with a loan book of LKR 224bn (25% YoY) and a c.16% private bank market share. In 2013E, SAMP is likely to maintain loan book growth at c.23%. SAMPs net interest margins are likely to marginally improve from 4.89% in 2012 to 5.00% in 2013E on the back of higher low-cost foreign borrowings raised during the year and above average CASA base (c.33% for 2013E vs. industry avg. of 27% for 2012). SAMP raised USD100mn in 2013 which may reduce the average cost of funding by 6bps as hedging costs are partly reduced due to assets in Bangladesh.
146 136 126 116 106 96 SAMP.N ASPI
Market Cap (USD): 300mn 1 Year Avg. Daily T/O (USD): 277k 1 Year Price H/L (LKR): 242/148.50 Free Float: 85% Current Price (LKR): 231.10
86 The cost-to-income ratio of the bank is also likely to improve on consolidation of the branch network as the extensive branch expansion (+80 branches from 2009) slows down. SAMPs higher exposure to the pawning segment (c.25%) may require a higher impairment charge for possible loan losses if the fall in gold prices continue. CAL expects SAMPs recurring earnings to decline 5% in 2013E to LKR5055mn which translates into a 6.5x PER and 1.2x PBV on 2013E. However, FYE Mar - LKR mn the LKR2bn foreign translation gain resulting from the 15% LKR depreciation is Net interest income likely to reverse in 2013E which may bring down net profitability by 5%. Net interest income growth
FY11 9,288 2,975 3,683 22.8 140.1 9.9 1.6 8.8
FY12 12,039
FY13E 15,189
FY14E 17,997
30%
4,622
26%
6,981
18%
8,927
CALs target price for SAMP is LKR254 (+13%) with a dividend yield of 5.4% for Core Profit growth 2013E.
Core Profit*
55%
5,343
51%
5,626
28%
7,007
Profit growth
EPS (LKR) NAVPS PER (x) P/BV (x) DPS (LKR)
45%
32.8 167.1 6.9 1.3 12.0
5%
34.6 192.0 6.5 1.2 12.1
25%
43.1 222.0 5.2 1.0 15.9
Dividend Yield %
3.9%
5.3%
5.4%
58
7.1%
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Nations Trust Bank 1 yr. total return of +18%: BUY - TP LKR 79

Reverting to aggressive growth
Nations Trust Bank (NTB V LKR 64; Market Cap USD118mn): NTB is one of the smaller listed private banks with a loan book of LKR 73bn (20% YoY) representing a market share of c.6%. NTBs deposit base stood at LKR86bn (+37% YoY) representing a market share of c.6.2% among private sector banks. CAL expects NTBs loans to grow 21% in 2013E and NTBs higher fee based income from its growing credit card business and bond trading to supplement relatively stable NIMs for 2013E (5.7%). However, NTBs cost-to-income ratios are anticipated to remain higher (c.61%) as NTB initiates its branch expansion program to improve its CASA base which currently stands at c.20%. NTB intends to open 10 branches during the year. For 2012, NTBs earnings were LKR1.95bn (+21% YoY) and CAL expects earnings to reach LKR2378mn for 2013E which translates into a PER of 6.2x and PBV of 1.2x at current prices. CALs 2013E target price for NTB is LKR79, +23% from current prices and we expect a dividend yield of 4.2%.
147 137 127 117 107 97 87 May-12 NTB.N Jul-12 Sep-12 Nov-12
FY11 4,404 2,093 1,607 7.0 37.4 9.2 1.7 2.0
Market Cap (USD): 117.50mn 1 Year Avg. Daily T/O (USD): 89k 1 Year Price H/L (LKR): 65.5/43.5 Free Float: 80% Current Price (LKR): 64
ASPI Jan-13 Mar-13

FY13E 5,755 6,741
May-13
FY14E 8,080
FY12

Core Profit*
31%
3,118
17%
3,723
20%
4,619
Core Profit growth

49%
1,951
19%
2,378
24%
2,993
Profit growth
21%
8.5 43.8 7.6 1.5 2.1
22%
10.3 51.4 6.2 1.2 2.7
26%
13.0 61.0 4.9 1.1 3.4
Dividend Yield %
3.1%
3.3%
4.2%
59
5.3%
www.randora.lk
National Development Bank 1 yr. total return of +9%: HOLD TP LKR 184
USD250mn loan- the next game changer
National Development Bank (NDB V LKR 178; Market Cap USD232mn): NDB is the 5th largest private sector bank with a loan book of LKR 121bn (+19% YoY) and a c.8.4% private bank market share. The bank commenced operations as a development bank and now functions as a fully fledged commercial bank. NDB was able to grow its assets by 17% in 2012. CAL expects NDBs loan book to grow c.15% in 2012 due to subdued economic conditions and low take up of loans in the SME sector. In 2013E, net interest margins for NDB may improve to 4.53% from 4.11% on the backdrop of low cost foreign funding and LKR 5.9bn capital gain from the Aviva-NDB transaction. The dependence on higher cost deposit funding is likely to reduce further as NDB borrows USD 250mn from foreign sources as provided in the govt budget. The forex risk on loan of the amount will be borne by the govt. CAL expects core profit to grow 54% in 2013E driven by improving net interest margins, despite higher cost-to-income ratios resulting from rapid branch expansion. The LKR4.3bn currently sitting on the books of NDB gives the opportunity to lookout for lucrative business opportunities. With NDBs share price rising 45% (2012-13), NDB currently trades at a forward PER of 7.9x on 2013E earnings and 1.1x PBV. CALs target price is 184/share. NDB may also provide a dividend yield of 5.2%.
160
150 140 130 120 110 100
Market Cap (USD): 232mn 1 Year Avg. Daily T/O (USD):126k 1 Year Price H/L (LKR): 181/96 Free Float: 96.12% Current Price (LKR): 178
90
80 May-12 Jul-12 Sep-12
NDB.N Nov-12
ASPI Jan-13 Mar-13 May-13
FYE Dec - LKR mn Net interest income
FY11 4,909 2,845 2,527 16.8 103.1 10.6 1.7 7.5
FY12 5,896
FY13E 8,164
FY14E 10,269

Core Profit*
20%
3,043
38%
4,677
26%
6,175
Core Profit growth

7%
8,854
54%
3,641
32%
4,592
Profit growth
250%
54.4 151.5 3.3 1.2 15.0
-59%
22.6 167.4 7.9 1.1 9.3
26%
28.5 187.2 6.2 1.0 11.7
Dividend Yield %
4.2%
8.4%
5.2% 60
6.6%
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IV. Appendices
61
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Appendix 1: Summary of DuPont analysis for banks 2012

DuPont Analysis - 2012 Average Return on Equity Average Return on Assets Leverage Average Return on Equity Average Return on Assets Core profit margin Impairment multiplier Tax multiplier Average Return on Assets Core Profit Margin Net interest margins Avg interest earning assets % Net interest margin as a % of avg assets Non-interest income as a % of Avg assets VAT expense % Operating expense % Non interest expense as a % of avg assets) Core profit margin % HNB 17.42% 1.94% 8.96 17.42% 1.94% 2.78% 0.90 0.77 1.94% 2.78% 6.11% 0.86 5.28% 1.68% 0.29% 3.88% 4.18% 2.78% COMB 20.75% 1.62% 9.82 15.91% 1.62% 3.17% 0.79 0.65 1.62% 3.17% 5.39% 0.89 4.79% 1.64% 0.42% 2.84% 3.26% 3.17% SAMP 14.13% 1.25% 11.30 14.16% 1.25% 2.05% 0.99 0.62 1.25% 2.05% 4.89% 0.87 4.26% 1.60% 0.41% 3.40% 3.81% 2.05% NDB 13.92% 1.91% 7.27 13.92% 1.91% 2.48% 1.10 0.70 1.91% 2.48% 4.11% 0.91 3.72% 1.98% 0.39% 2.84% 3.23% 2.48% NTB 20.84% 1.74% 11.99 20.84% 1.74% 2.85% 0.86 0.71 1.74% 2.85% 5.80% 0.88 5.13% 2.35% 0.39% 4.24% 4.63% 2.85% SEYB 10.43% 1.18% 8.84 10.43% 1.18% 2.01% 0.91 0.65 1.18% 2.01% 5.97% 0.86 5.12% 1.41% 0.38% 4.14% 4.52% 2.01% PABC 21.74% 1.67% 13.03 21.74% 1.67% 2.32% 0.96 0.75 1.67% 2.32% 5.43% 0.86 4.67% 1.91% 0.41% 3.86% 4.26% 2.32% UBC 9.82% 1.67% 5.86 9.82% 1.67% 1.80% 0.86 1.08 1.67% 1.80% 5.70% 0.85 4.84% 1.75% 0.34% 4.45% 4.79% 1.80%
Positive factors
Negative factors
* The analysis is after excluding Non-recurring items
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Appendix 2: DuPont analysis for banks - 2012

Calculation methodology
Net interest Margin- Net interest income/Average interest earning Assets
Net interest incomeNet Interest income/ Average Assets
Dupont Analysis
ROAA- Net Profit/Average Assets ROAE - Net Profit/Average Equity Leverage - Average Assets/Average Equity
Core Profit Margin- Core Profit/Average Assets
Non interest incomeNon interest income/Average Assets
Assets MultiplierAverage interest earning Asset/Average Assets
Impairment Ratio- Profit before Tax/ Core Profit
Non interest expensesNon interest Expenses/ Average Assets
Tax Ratio- Net Profit/Profit before Tax
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Dupont Analysis COMMERCIAL BANK Net interest Margin- 5.39% Assets Multiplier0.89x
Net interest income- 4.79% Core Profit Margin-3.17% ROAA- 1.62% ROAE -20.75% Leverage 9.82x Tax Ratio- 0.65x Impairment Ratio- 0.8x Non interest income- 1.64% Non interest expenses 3.26%
COMB
Dupont Analysis HATTON NATIONAL BANK Net interest Margin- 6.11% Asset Multiplier0.86x
Net interest income- 5.28% Core Profit Margin-2.78% ROAA- 1.94% ROAE -17.42% Leverage - 9x Tax Ratio- 0.77x Impairment Ratio- 0.9x Non interest income- 1.68%
HNB
Non interest expenses 4.18%
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Dupont Analysis SAMPATH BANK Net interest Margin- 4.89% Asset Multiplier0.87x
Net interest income- 4.26%

Core Profit Margin-2.05% ROAA- 1.25% ROAE -14.13% Leverage 11.3x Tax Ratio- 0.62x Impairment Ratio- 0.99x Non interest income- 1.60% Non interest expenses 3.18%
SAMP
Dupont Analysis NATIONAL DEVELOPMENT BANK Net interest Margin- 4.11% Asset Multiplier0.91x
Net interest income- 3.72% Core Profit Margin-2.48% ROAA- 1.91% ROAE -13.92% Leverage 7.27x Tax Ratio- 0.70x Impairment Ratio- 1.09x Non interest income- 2.4% Non interest expenses 3.57%
NDB
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Dupont Analysis SEYLAN BANK Net interest Margin- 5.97% Asset Multiplier-86x

Core Profit Margin-2.01% ROAA- 1.18% ROAE - 10.43% Leverage - 8.8x Dupont Analysis NATIONS TRUST BANK Tax Ratio- 0.65x Impairment Ratio- 0.91x Non interest income- 1.41% Non interest expenses 4.52%
SEYB
Net interest Margin- 5.80% Net interest income- 5.13% Asset Multiplier0.88x Core Profit Margin-2.85% Impairment Ratio- 0.87x Non interest income- 2.35% Non interest expenses - 4.63%
NTB
ROAA- 1.74% ROAE -20.84% Leverage - 12x
Tax Ratio- 0.71x
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Dupont Analysis PANASIA BANK Net interest Margin- 5.44% Asset Multiplier0.86x
Net interest income- 4.67% Core Profit Margin-2.32% ROAA- 1.67% ROAE - 21.7% Leverage - 13x Tax Ratio- 0.75x Impairment Ratio- 0.96x Non interest income- 1.91% Non interest expenses 4.3%
PABC
Dupont Analysis UNION BANK OF COLOMBO

Net interest Margin- 5.70%

Asset Multiplier0.85x Core Profit Margin-1.80% Impairment Ratio- 0.86x Non interest income- 1.75% Non interest expenses - 4.79%
UBC
ROAA- 1.67% ROAE - 9.82% Leverage - 5.9x
Tax Ratio- 1.08x
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Appendix 3: Bank fixed deposit market share

Figure 67: Fixed deposit market share of banks - 2012
120%
100% 10% 2% 4% 7% 5% 9% 60% 17% 17% 10% 2% 4% 7% 5%
80%
9%
40%
23%
22%
20% 23% 0% Fixed deposit market share - 2011 COMB HNB SAMP NDB DFCC NTB Fixed deposit market share - 2012 PABC UBC SEYB 23%
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Appendix 4: Bank cost management

Figure 68: Personnel cost per employee -2012 Figure 69: General & OH cost per branch - 2012
Personnel cost/employee (LKR 000)
45,000 1800 1600 1400 1200 1000 800 600 400 200 0 PABC UBC NTB DFCC SAMP HNB NDB SEYB COMB 775 1028 1029 1032 1,253 1,518 General & OH cost/branch (LKR '000) 1612.5 1,641 1,703 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 DFCC PABC UBC COMB SAMP NDB SEYB HNB 14,980 11,105 21,662 23,486 25,307 31,346 37,521 38,100
41,595
NTB
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Appendix 5: Bank loan-to-deposit rates

Figure 70: Loan-to-deposit rates of banks
140% 120% 103%
100%
LDR 80% 60% 40% 20% 0%
96%
92%
90%
89%
88%
85%
85%
NDB
COMB
SAMP
PABC
2011 2012
HNB
UBC
NTB
SEYB
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Appendix 6: Change in AWPLR (Jan April 2013)

Figure 71: Bank AWPLR (April 2013)
20 18 AWPLR % 16 14 12 13.9 13.9 13.9 14.1 15.0
17.7
16.0 16.5
17.9
10
8
Figure 72: Change in AWPLR from Jan April 2013

0 -3 -50 Change in bps -100 -150 -200 -250 -171 -200 -200 -224 -26 -49 -69 -94
71
Source: CBSL
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Appendix 7: Summary Financial Statements
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Commercial Bank - Income Statement

As at 31 December Income Interest income Less: Interest expenses 2011 45,839 38,314 19,635 2012 63,374 52,663 29,811 2013E 70,949 64,175 37,354 2014E 84,778 76,964 44,817
Net interest income

Fee and commission income Less: Fee and commission expenses Net fee and commission income
18,678
3,765 440 3,325
22,852
4,147 549 3,598
26,821
4,769 620 4,149
32,147
5,484 713 4,771
Net interest, fee and commission income

Net loss from trading Net gain from financial investments Other operating income
22,004
462 38 4,184
26,450
2,494 32 4,038
30,970
2,005
36,919
2,330
Commercial Bank
Total Operating income

Less: Impairment charge/(reversal) for loans and other losses Less: Impairment gain / ( loss) on financial investments Net operating income Personnel expenses Other operating expenses Operating profit before value added tax (VAT) Less: Value added tax (VAT) on financial services Operating profit after value added tax (VAT) Share of profit/(loss) of Associates (net of income tax) PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT FOR THE YEAR Profit attributable to Equity holders of the bank Non-controlling interest PROFIT FOR THE YEAR
25,764
1,747 24,017 6,346 5,178 11,525 12,492 1,523 10,969 11 10,980 3,048 7,932 7,932 0 7,932
33,014
3,158 29,856 7,837 5,731 13,568 16,288 1,987 14,301 12 14,313 4,232 10,081 10,080 1 10,081
32,975
1,544 31,431 8,597 6,201 14,797 16,634 2,044 14,590 14 14,590 4,085 10,505 10,504 1 10,505
39,249
2,708 36,541 9,533 6,684 16,217 20,324 2,418 17,905 16 17,905 5,013 12,892 12,890 2 12,892
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Commercial Bank - Statement of Financial Position As at 31 December ASSETS Cash and cash equivalents Balances with Central Banks Placements with banks Derivative financial instruments Other financial assets held for trading Loans and receivables to banks Loans and receivables to other customers Financial investments - Available-for-sale Investments in associates Property, plant & equipment Intangible assets 12,935 17,343 11,674 40 6,418 580 314,327 61,415 120 8,503 475 113 364 7,290 441,598 11,574 435 323,698 49,455 1,307 1,640 1 8,214 1,106 397,429 16,474 2,890 2,588 22,187 44,139 30 44,169 441,598 19,752 18,168 16,163 1,351 6,041 629 372,857 57,963 94 8,947 506 112 458 9,179 512,221 4,764 84 390,569 47,566 2,822 1,890 2 10,417 1,106 459,220 18,009 3,433 4,173 27,353 52,968 32 53,001 512,221 4,933 28,647 17,779 6,172 7,035 629 440,858 84,420 104 8,158 464 110 458 10,787 610,554 65 100 468,998 64,210 2,043 1,890 2 12,344 1,109 550,761 19,920 3,999 4,698 31,143 59,760 34 59,793 610,554 5,308 34,131 19,557 7,283 8,301 629 520,213 99,615 114 7,357 420 109 458 10,787 714,282 65 118 553,418 72,542 2,507 1,890 2 14,566 1,109 646,217 22,253 4,683 5,343 35,751 68,030 35 68,065 714,282 2011 2012 2013E 2014E
Commercial Bank
Leasehold property Deferred tax assets Other assets Total assets LIABILITIES Due to banks Derivative financial instruments Due to other customers Other borrowings Current tax liabilities Deferred tax liabilities Other provisions Other liabilities Subordinated term debts Total liabilities EQUITY Stated capital Statutory reserves Retained earnings Other reserves Total equity to equity owners of the Bank Non-Controlling Interest Total equity
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Hatton National Bank - Income Statement As at 31 December Income Interest income Less: Interest expenses 2011 40,123 33,547 16,626 2012 55,160 47,940 25,496 2013E 57,430 58,542 32,179 2014E 61,342 68,762 40,915
Net interest income

Fee and commission income
16,920
2,987 56
22,444
3,833 64
26,362
4,792 86
27,848
5,750 104
Hatton National Bank
Less: Fee and commission expenses
Net fee and commission income

Net interest, fee and commission income Net loss from trading Net gain from financial investments Other operating income
2,931
19,852 -426 391 3,624
3,769
26,213 -1,624 114 4,897
4,705
31,068 -1,701 0 4,666
5,647
33,494 -1,936 0 6,088

Less: Impairment charge/(reversal) for loans and other losses Net operating income OPERATING EXPENSES Personnel expenses Premises, equipment and establishment expenses Other overhead expenses Operating profit before value added tax (VAT) Less: Value added tax (VAT) on financial services Operating profit after value added tax (VAT) Share of profit/(loss) of Associates (net of income tax) PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT FOR THE YEAR Profit attributable to Equity holders of the Bank Profit attributable to Non-controlling interests PROFIT FOR THE YEAR
23,440
501 23,941 5,526 2,956 5,163 13,645 10,296 1,224 9,072 -16 9,056 2,156 6,900 6,819 81 6,900
29,600
-1,162 28,438 7,104 3,481 5,929 16,514 11,924 1,248 10,676 17 10,693 2,421 8,271 8,111 160 8,271
34,033
-1,567 32,466 7,861 3,968 6,662 18,490 13,976 1,485 12,491 17 12,508 3,127 9,381 9,240 141 9,381
37,645
-1,993 35,653 8,671 4,382 7,348 20,401 15,252 1,627 13,625 18 13,644 3,411 10,233 10,079 153 10,233
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Hatton National Bank - Statement of Financial Position As at 31 December ASSETS Cash and cash equivalents Balances with central banks Placements with banks Derivative financial instruments Other financial assets held for trading Non-current assets held for sale Loans and receivables to other customers Financial investments - Available-for-sale Financial investments - Held-to-maturity Financial investments - Loans and receivables Investments in Associates Investment properties Property, plant and equipment Intangible assets Deferred tax assets Other assets Total assets 2011 7,576 18,698 8,244 497 2,408 3 257,435 51,435 1,698 15,362 384 169 15,416 671 319 10,982 391,297 2012 8,849 19,950 11,667 345 1,078 3 303,922 58,929 1,644 20,904 386 165 17,815 690 372 12,680 459,399 2013E 11,967 24,448 12,834 358 1,994 3 358,433 69,789 1,994 23,928 404 160 18,285 710 372 14,755 540,434 39,184 2,551 398,792 272 7,886 150 1,876 1,431 8,813 4,170 1,018 1,556 5,377 9,045 482,120 12,579 4,715 8,371 31,538 57,204 1,110 58,314 540,434 2014E 14,381 28,731 14,118 419 2,333 3 418,937 81,653 2,333 27,995 422 155 18,881 731 372 17,264 628,727 48,609 3,319 466,586 296 9,217 150 2,047 1,431 8,813 4,796 1,069 1,556 6,284 9,497 563,670 12,579 4,917 12,201 34,096 63,794 1,264 65,057 628,727
Hatton National Bank
LIABILITIES Due to banks 19,885 30,401 Derivative financial instruments 618 1,436 Due to other customers 290,912 340,848 Dividends payable 170 223 Other borrowings 8,876 6,747 Debt securities issued 150 Current tax liabilities 1,094 1,840 Bills payable 1,404 1,431 Subordinated debentures 4,989 4,563 Insurance provision - Life 3,021 3,626 Insurance provision - General 944 969 Deferred tax liabilities 1,225 1,556 Other provisions 5,877 4,400 Other liabilities 9,924 8,614 Total Liabilities 348,940 406,805 EQUITY Stated capital 11,451 12,579 Statutory reserves 2,778 4,531 Retained earnings 3,504 5,322 Other reserves 23,841 29,193 Total equity attributable to equity holders of 41,575 the Bank 51,624 Non-controlling interests 782 969 Total Equity 42,357 52,594 Total Liabilities and Equity 391,297 459,399
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Sampath Bank - Income Statement As at 31 December Income Interest income Less: Interest expenses 2011 28,268 21,565 12,278 2012 39,725 32,712 20,673 2013E 46,495 40,444 25,255 2014E 55,385 48,510 30,513
Net interest income

Fee and commission income Less: Fee and commission expenses Net fee and commission income
9,288
2,796 862 1,934
12,039
2,877 675 2,202
15,189
3,107 699 2,408
17,997
3,355 738 2,617
Net interest, fee and commission income

Net loss from trading Other operating income
11,222
314 3,592
14,241
6 4,130
17,597
0 2,944
20,614
0 3,520
15,128
-399 -189 14,540 3,699 551 40 3,957 8,247 6,293 918 5,376 1,670 3,705 3,683 22 3,705
18,377
-152 72 18,297 4,329 588 47 4,654 9,619 8,678 1,161 7,517 2,172 5,346 5,343 3 5,346
20,541
-857 0 19,684 4,777 615 56 5,168 10,616 9,068 1,246 7,822 2,190 5,632 5,626 6 5,632
24,134
-1,221 0 22,913 5,256 629 64 5,739 11,688 11,226 1,483 9,742 2,728 7,014 7,007 7 7,014
Sampath Bank
Less: Impairment charge/(reversal) for loans and other losses Less: Impairment gain / ( loss) on financial investments Net operating income OPERATING EXPENSES Personnel expenses Depreciation of property & equipment Amortisation of intangible assets Other operating expenses Other Operating Expenses Operating profit before value added tax (VAT) Less: Value added tax (VAT) on financial services PROFIT BEFORE INCOME TAX Less: Income tax expense PROFIT FOR THE YEAR Profit attributable to Equity holders of the Bank Profit attributable to Non-controlling interests PROFIT FOR THE YEAR
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Sampath Bank - Statement of Financial Position As at 31 December ASSETS Cash and cash equivalents Balances with Central Bank of Sri Lanka Placements with Banks Reverse repurchase agreements Derivative financial instruments Financial investments held -for- trading Financial assets held-for-trading pledged as collaterals Loans and receivables from banks Loans and receivables from other customers Other loans & receivables Financial investments- available- for- sale Financial investments- held - to- maturity Property and equipment Intangible assets Deferred tax asset Other assets Total assets LIABILITIES Due to banks Securities sold under re-purchase agreements Derivative financial instruments Due to other customers Debt issued and other borrowed funds Unclaimed dividend Current tax liabilities Deferred tax liabilities Provisions Other liabilities Total Liabilities EQUITY Stated capital Statutory / risk reserve funds Revaluation reserve Available-for-sale reserve Revenue reserves Total equity attributable to equity holders of the Bank Non-controlling interests Total Equity Total Liabilities and Equity 2,744 858 2,879 1,798 14,529 22,807 60 22,867 250,995 3,564 1,199 2,876 1,465 18,110 27,214 61 27,275 314,326 3,674 1,480 2,876 1,465 21,767 31,262 67 31,329 377,256 3,797 1,831 2,876 1,465 26,182 36,151 74 36,225 451,045 1,176 4,101 311 195,094 21,490 37 1,881 396 138 3,503 228,128 668 2,751 382 243,088 32,218 49 3,036 431 180 4,247 287,051 875 3,670 646 291,706 40,839 49 2,628 431 199 4,884 345,927 1,050 4,466 646 350,047 49,007 65 3,273 431 219 5,617 414,820 10,747 13,232 5,337 4,606 204 23,053 4,003 442 171,977 5,736 2,025 19 6,691 73 2 2,847 250,995 10,442 17,201 8,788 3,300 279 35,181 2,856 816 212,480 10,224 1,924 10 6,764 316 12 3,731 314,326 14,596 19,403 9,843 4,084 262 36,698 4,376 729 262,129 12,252 2,097 15 6,397 261 12 4,104 377,256 13,534 23,103 11,024 4,901 319 44,657 5,251 875 318,979 14,702 2,552 18 6,114 490 12 4,514 451,045 2011 2012 2013E 2014E
Sampath Bank
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Nations Trusts Bank
Income Statement As at 31 December

Income Interest Income Interest Expense 9,795 -5,391 15,113 -9,358 17,244 -10,502 20,425 -12,346 2011 2012 2013E 2014E
Net Interest Income
4,404
1,850 -144
5,755
2,285 -163
6,741
2,772 -208
8,080
3,325 -249
Nations Trust Bank
Fees and Commission Income Fees and Commission Expense
Net Fees and Commission Income

Net Trading Income Other Operating Income
1,706
72 312
2,122
288 228
2,564
291 270
3,076
327 323
Total Operating Income

Impairment Charge / (Reversal ) for Loans and Advances Net Operating Income Personnel Expenses Depreciation of Property, Plant and Equipment Amortization of Intangible Assets Other Operating Expenses Total Operating Expenses Operating Profit Before Value Added Tax (VAT) Value Added Tax (VAT) on Financial Services Profit Before Income Tax Income Tax Expense Profit for the Year
6,494
-235 6,728 1,901 230 95 1,791 4,017 2,712 376 2,336 729 1,607
8,392
432 7,960 2,097 267 113 2,283 4,759 3,202 435 2,766 815 1,951
9,866
453 9,413 2,607 289 130 2,557 5,583 3,831 528 3,303 925 2,378
11,806
455 11,351 3,206 326 141 2,863 6,536 4,815 658 4,157 1,164 2,993
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Nations Trusts Bank - Statement of Financial Position
Statement of Financial Position

As at 31 December Assets Cash and Cash Equivalents Balances with Central Bank of Sri Lanka Reverse Repurchase Agreements Derivative Financial Instruments Financial Assets - Held for Trading Financial Assets - Held to Maturity 3,694 4,284 6,614 255 6,550 11,818 2,898 61,188 2,280 1,891 600 102,073 1,277 14,480 316 67,633 5,409 235 3,859 236 93,444 Equity Attributable to Equity Holders of the Parent Stated Capital Statutory Reserve Fund Retained Earnings Other Reserves Total Liabilities and Equity 5,101 224 3,034 269 8,628 102,073 5,101 314 4,044 636 10,095 122,447 5,101 423 5,267 1,064 11,855 144,133 5,101 561 6,805 1,603 14,070 170,159 2,534 5,089 2,712 328 21,088 10,238 1,893 73,424 2,591 1,908 642 122,447 2,796 11,833 528 86,190 6,334 544 3,846 280 112,352 4,352 6,619 3,103 399 20,686 12,411 2,069 88,773 3,196 2,013 513 144,133 3,076 14,204 592 103,428 6,168 607 3,923 280 132,278 2,730 7,943 3,723 479 24,823 14,894 2,482 106,527 3,835 2,121 601 170,159 3,445 17,044 663 124,114 5,798 744 4,001 280 156,089 2011 2012 2013E 2014E
Nations Trust Bank
Other Financial Assets Loans and Advances to Customers Other Assets Property, Plant and Equipment Intangible Assets Total Assets Liabilities Due to Banks Repurchase Agreements Derivative Financial Instruments Due to Customers Debt Issued and Other Borrowed Funds Current Tax Liabilities Other Liabilities Deferred Tax Liabilities
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National Development Bank
Income Statement
As at 31 December Interest income Interest expense 2011 11,655 -6,745 2012 17,150 -11,254 2013E 21,811 -13,647 2014E 26,114 -15,845
Net interest income

Net fee and commission income Net trading income/(expense) Other operating income
4,909
1,916 448 648
5,896
1,644 1,272 6,127
8,164
1,975 950 501
10,269
2,284 1,064 561
Total operating income

Impairment charge/ (reversal) for loans and other losses Net operating income Less: Operating Expenses Personnel expenses Depreciation of property, plant & equipment Amortisation of intangible assets Other operating expenses Total operating expenses Operating profit before value added tax Value Added Tax (VAT) on financial services Operating profit after value added tax Share of associate companies profit Profit before tax Income tax expense Profit for the year Profit attributable to equity holders of the parent Profit attributable to minority interest Profit for the year
7,922
-88 8,010 2,118 199 51 1,613 3,981 4,030 -505 3,525 331 3,855 -1,093 2,763 2,527 235 2,763
14,938
51 14,887 2,333 205 96 1,862 4,496 10,391 -622 9,769 439 10,207 -1,275 8,932 8,854 78 8,932
11,590
311 11,280 2,862 228 112 2,260 5,463 5,817 -781 5,036 -15 5,021 -1,306 3,716 3,641 74 3,716
14,177
500 13,677 3,286 248 145 2,698 6,377 7,300 -953 6,347 -15 6,333 -1,647 4,686 4,592 94 4,686
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Statement of Financial Position
As at 31 December ASSETS Cash and cash equivalents Balances with Central Bank Placements with banks Securities purchased under resale agreements Financial assets held for trading Derivative financial instruments Other financial assets held for trading Loans and advances to banks Loans and advances to customers Lease rentals receivables Other financial assets classified as loans and receivable Financial assets - held to maturity Financial assets - available for sale Investments in associate companies Other assets Intangible assets Property, plant & equipment Investment properties Goodwill Total assets LIABILITIES Due to Banks Securities sold under repurchase agreements Derivative financial instruments Due to customers Debt securities issued and other borrowed funds Tax liabilities Other liabilities Subordinated term debts Deferred Tax Total liabilities Stated capital Statutory reserve fund Investment Fund Retained Earnings Non-controlling interests Total Equity Total liabilities and total equity EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF PARENT
2011 2,519 4,614 518 912 7,106 1,402 2,087 1,640 93,166 4,650 2,563 15,666 186 1,797 963 318 1,185 1,296 142,588 5,924 10,133 1,022 82,094 19,466 356 3,286 2,428 41 124,750 864 879 387 14,796 16,925 913 17,838 142,588
2012 3,635 6,075 3,559 3,325 983 1,706 10,412 1,183 109,649 6,390 3,764 19,223 174 33 1,155 319 1,223 1,296 174,103 2,320 12,516 1,737 107,394 17,802 634 3,657 2,255 79 148,394 864 879 924 22,216 24,883 826 25,709 174,103
2013E 4,161 7,354 4,040 9,794 6,121 2,449 11,142 6,121 126,779 8,480 4,407 24,486 612 19 1,347 356 1,338 1,296 220,304 2,719 13,946 1,902 122,429 43,582 653 4,311 2,303 79 191,923 864 879 1,335 24,402 27,480 901 28,381 220,304
2014E 2,992 8,423 4,646 8,448 5,632 2,816 9,979 7,040 146,684 10,338 4,928 26,751 704 19 1,549 421 1,533 1,296 244,197 3,145 16,135 2,200 140,793 42,182 823 4,987 2,111 79 212,457 864 879 1,843 27,160 30,745 994 31,740 244,197
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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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Sri Lanka Banking Sector Report - Pulling Through Macro Challenges - 09-May-2013

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Sri Lanka Banking Sector Report - Pulling Through Macro Challenges - 09-May-2013

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www.randora.

SRI LANKA BANKING SECTOR

Regional comparison of banking sector ROEs

Regional comparison of banking sector P/BVs

2.2x 2.0x 1.9x

1.8x 1.2x 1.2x

See page 83 for important disclaimer

Udeeshan Jonas Reshan Wediwardana CAL Research 1 May 2013

SRI LANKA BANKING SECTOR

All figures have been calculated under IFRS

Dividend yield 2013E

I. Macro variables to challenge banking

Macro variables to challenge banking industry in 2013

I. a) Local private commercial banks loans to grow at a 2014-16E cagr of 18%

Macro variables to challenge banking industry in 2013 (Continued)

I. b) Govt monetary easing to support a 17% LPCB loan growth in 2013E

while industry NPLs remain manageable despite macro challenges (c.3.6%)

I. a) Local private commercial banks loans to grow at a 2014-16E cagr of 18%

Figure 3: Real GDP growth vs. Nominal GDP growth

15% 13% 13% 13%

Real GDP growth

Nominal GDP growth

Figure 5: Private credit market share 2012

14% 7% 11% 12%

14% 7% 10% 11% 12% 21%

8.4% 9.6% 16.3%

2011 BOC COMB Other LCPBs PB HNB

2012 Foreign banks SAMP

* Calculated based on total assets

Figure 7: Local & foreign banks market share

Local banks' market share Foreign banks' market share

Figure 9: Perceived Economic Opportunity Index

Growth in export trade

Figure 10: LMD-Nielson Business Confidence Index

Figure 11: Industrial production index

Source: CBSL, LMD & FEF

Max. credit growth for banks borrowing abroad 24%

20% 18% 18% 18%

Average loan growth - 19%

0% PABC SAMP DFCC NTB COMB HNB UBC NDB SEYB

10 5 2012 2013 (announced to date)

Jan-Apr 13 Value of the issues No of issues

Source: Department of Motor Traffic & CAL Research

I. b) Govt monetary easing to support a 17% LPCB loan growth in 2013E

Figure 16: Net injection/ absorption (LKR bn)

Figure 18: Net credit to the government (M2b)

16.8% 16.3% 15.6% 14.7%

32% 32% 25% 17%

40% 30% 20% 10% 0%

Net Credit to the Government

Figure 20: Net foreign inflows (Jan-Mar 2013)

% -23% 3% -76% 19% 49% 300%

Figure 22: Deposit rate gap in Apr 2013

15.5% 15.0% 15.0%

14.0% 14.0% 14.0% 14.0%

13.5% 13.5% 13.5% 13.5% 13.5%

NDB COMB SAMP HNB DFCC NTB

SEYB PABC UBC

which may result in a continued reduction in AWLR during 2Q2013

T-Bill 364 days

Figure 25: Government foreign & local debt

5,000 4,000 3,000