SEYLAN BANK [SEYB] INTERIM RESULTS

Net earnings up 54% YoY to LKR1,051.7 mn in 2Q15. SEYB reported a 53.7% YoY earnings growth in 2Q15 largely on account of the growth in the core banking operations of SEYB (NII up 7% YoY and fee & commission income up 16% YoY), manageable operating cost increases (up 9% YoY). 2Q15 earnings are broadly in-line with our forecast.

Net interest income (NII) up 7% YoY in 2Q15. SEYB’s NII rose 7.2% YoY to LKR3,037.4 mn during 2Q2015 largely due to 4.7% YoY reduction in interest cost to LKR2,970.4 mn. Despite 10.2% YoY (2.9% QoQ) deposit growth bank has been able to reduce interest costs largely due to timely re-pricing of its liabilities. Further during the quarter CASA mix improved 280 bps YoY to 38.2%. In a subdued credit environment SEYB managed to increase the loan book by 22.2% YoY (4.8% QoQ) in 2Q15. However given the excess liquidity and competition in the industry bank had to reduce interest rates in order to capture the volumes. This saw interest income inclined 1.0% YoY to LKR6,007.8 mn in 2Q15. However SEYB’s NIMs dropped by 12 bps YoY to 4.6% and we believe the bank would be able to maintain NIMs at 4.5% in the medium term.

Non-interest income rose by 24% YoY to LKR1,283 mn in 2Q15. Net fee & commission income has grown 16.4% YoY to LKR628.1 mn and recorded a net gain of LKR36.5 mn in financial investments during 2Q15 compared to a gain of LKR232.8 mn in 2Q14. Further bank also recorded 91.1% YoY growth in net exchange income to LKR194.4 mn, plus 3.0x YoY growth in other operating income to LKR189.1 mn and 98.9% YoY increase in trading income to LKR234.9 mn during the quarter.

Gross NPL improved to 6.5% in 2Q15. Despite the lower gold prices and its impact on the pawning portfolio, the bank was able to improve its asset quality through effective recovery and rehabilitating efforts. Bank’s gross NPL ratio improved to 6.5% (10.9% in 2Q14) while Net NPL ratio also improved to 4.4% (8.3% in 2Q14). Meanwhile gross NPL’s declined 210 bps QoQ whilst net NPLs also reduce 200 bps QoQ.

Voting share trading at 1.3x PBV. The voting share is trading on 1.3x 2015E net earnings whilst 1.2x 2016E net earnings. In terms of PER the voting is trading 9.6x 2015E earnings and 7.9x 2016E earnings. BUY

Non-Voting share offers good value. The non-voting share, which is trading near 29% discount to the voting, offers value on just 1.0x PBV. The stock is trading on 6.8x 2015E net earnings and 5.6x 2016E net profit. BUY