Committed Efficiency - Commercial Bank of Sri Lanka

Merton Tue Jul 15, 2014 10:30 am

Near-term challenges appear to be clouding the positive structural themes of the Sri Lankan banking sector. We view the current weakness as an adjustment to previous over-lending and believe the stage is set for improving macroeconomic fundamentals, based on a solid underlying economic growth story in the medium to long term. Credit growth stimulation from the current low interest rate regime should gain momentum in 2H14, further supported by tailwinds from favorable policies (e.g., government guarantees for gold loans) and benign inflation. As the third-largest commercial bank in Sri Lanka, with an asset base of LKR649bn and a market capitalization of LKR113bn, COMB has consistently been an industry leader in terms of efficiency and profitability. We expect COMB to continue to post above-industry-average growth in both loans and earnings; loan growth in the mid-teens should sustain EPS growth at an 18% CAGR over 2014E-2016E. Our P/B- and P/E-based valuation analysis suggests a valuation range of LKR138-166.