High leverage to the Sri Lankan growth story

Merton Tue Jul 15, 2014 10:54 am

HNB is the fourth-largest commercial bank in Sri Lanka, having an asset base of LKR537bn and a market capitalization of LKR50bn. 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. HNB is well placed to benefit from such a macroeconomic upturn and should, in our view, be able to leverage its robust retail franchise to derive above-industry-average earnings growth. We look beyond the slowdown in 1H14 and expect loan growth in the mid-teens to sustain EPS growth at a 14% CAGR over 2014E-2016E. Our P/B- and P/E-based valuation analysis suggests a valuation range of LKR142-179.

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