NDB- Softlogic Stockborkers Interim Results Update

Net earnings dipped 27% YoY to LKR869.3 mn. NDB reported a 27% YoY earnings dip in 1Q15 largely on account of 15% YoY dip in non-interest income, 9% increase in operating cost and 42% YoY rise in taxation and 60 bps YoY reduction in NIMs. However bank managed to grow NII by 7% YoY and reduce impairments by c.1.5x.

Net interest income (NII) up 7% YoY in 1Q15. NDB’s NII was up 6.5% YoY to LKR1,983.8 largely due to 1.1% YoY increase in interest income to LKR5,161.7 mn. Despite 20.3% YoY (7.2% QoQ) deposit growth bank has been able to reduce interest costs by 1.9% YoY to LKR3,177.9 mn, largely due to timely re-pricing of its liabilities. In a subdued credit environment NDB managed to increase the loan book by 21.0% YoY (0.1% QoQ) in 1Q15.  However given the excess liquidity and competition in the industry bank had to reduce interest rates in order to capture the volumes. NDB’s NIMs declined by 60 bps YoY and 40 bps QoQ to 2.9% and we believe the bank would be able to maintain NIMs at 3.5% in the medium term.  

Impairment charges reduced 151% YoY in 1Q15 to LKR63.5 mn. Collective impairment saw a recovery of LKR183.1 mn in 1Q15 as against a provision of LKR33.4 mn in 1Q14. However individual impairments increased 30% YoY to LKR119.6 mn during the quarter.

MoU between NDB and DFCC on amalgamation terminated. The board of directors of NDB bank and DFCC bank today jointly agreed to terminate the Memorandum of Understanding (MoU) entered by the on 24th March 2014 regarding the merger plans. This would give the chance for both banks pursue their respective business expansion strategies. If they are to merge in the future they enter in to a new MoU once the policy and the stance of the government becomes clear.

Impact of one off super gain tax. As per the interim budget 2015, an additional one-off tax of 25% has been imposed on the profits of the groups which have earned in excess of LKR2,000 Mn for the year of assessment 2013/2014. The estimated tax liability, based on the current understanding for the NDB Group on its Group taxable income would amount to c.LKR846.0 mn.

Forecast 2015E net profit revised down 4.0% to LKR4,769.7 mn (excluding one off super gains tax). given the lower than expected performance in 1Q15 we revise down 2015E and 2016E earnings down 4.0% to LKR4,769.7 mn (up 15.4% YoY) and LKR5,603.7 mn (up 17.5% YoY).

Share trades on 9.2X forecast 2015E net profit. The voting share is trading on 9.2X forecast 2015E net profit and 7.8X forecast  2016E net profit whilst trading on 1.5X PBV. For the past 1 year the stock has gained c.34% and since our last recommendation the stock is up c.6%, given this we believe stock has reached a higher valuation plane and we revise one notch down to a Trading BUY.