SANASA DEVELOPMENT BANK PLC [SDB] INTERIM RESULTS 12 AUGUST 2015

SANASA Development Bank (SDB) is a licensed specialized bank in Sri Lanka with a competitive advantage of lending to high risk, yet high return - informal and ‘non-bankable’ sectors through their unique wholesale lending franchise. SDB lends to the SANASA Societies which ultimately lends / distribute the funds to the end customers, thereby reducing the overall risk exposure and allowing SDB to maintain NPLs below 3.5% with high NIMs. Accounting for a total asset base of LKR51.0 bn (USD381.3 mn) and a branch network of 83, SDB primarily caters to a separate niche market, the rural micro and SME sectors of the country. Currently, the bank is well capitalized with a Tier I CAR at 12.6% and Tier II CAR 13.1% along with a healthy loan book growth.

Net earnings up c.36% YoY to LKR208.4 mn in 2Q15. SDB’s net earnings for 2Q15 grew by 35.8% YoY backed by the strong performance in core banking operations, where NII increased c.51% YoY whilst net fee & commission income grew by 63.3% YoY to LKR61.5 mn. Moreover, despite the increase in total impairments by c.219% YoY to LKR34.0 mn (mainly from the Leasing portfolio) and total operating expenses by 22.2% to LKR482.1 mn, the bank’s cost to income ratio (excluding provisions) improved to 53.6% YoY from 61.7% in 2Q14. Meanwhile, for 1H15 SDB’s aggregate net earnings stood at LKR413.8 mn (up c.97% YoY) with NII at LKR1.6 bn (up c.54% YoY) and net fee & commission income at LKR127.5 mn (up c.59% YoY).

Net Interest Income (NII) growth of 50.9% YoY to LKR834.3 mn was backed by the interest income rising c.40% YoY to LKR1.6 bn as SDB’s net loan book grew 27.3% from 4Q14 to LKR40.8 bn. Also a 299.9% YTD increase to LKR1.2 bn was recorded from investments in Treasury bills for 1H15. However, SDB’s interest expense also witnessed an increase of c.30% YoY to LKR800.1 mn in 2Q15 contributed by the bank’s deposit growth of 25.9% from 4Q14 and other borrowings (mainly through money market borrowings) from LKR4.6 bn in 4Q14 to LKR6.4 bn in 2Q15.

Non-interest income grew c.63% YoY to LKR61.1 mn backed by the c.62% YoY increase in fee & commission income to LKR61.5 mn mainly due to the growth in SDB’s core banking operations and a dip in the fee & commission expenses by c.9% YoY to LKR0.4 mn.

Gross NPLs improved to 3.2% in 2Q15 from 3.8% in 4Q14 backed by SDB’s unique wholesale lending franchise through the SANASA societies, lower exposure to pawning and efficient credit disbursement processes. Further net NPLs of the bank also improved to 0.5% in 2Q15 from 1.7% in 4Q14.

Share is currently trading on 1.3x PBV and 10.0x four quarter trailing PE (both at a discount to the banking sector by c.15% to the PBV of 1.5x and c.7% to the PE of 10.7x). Moreover in our secondary coverage initiation report released on the 06th 0f July 2015, we initially rated the stock a Buy at LKR141.0 and since then, the stock has gained c.25% to close at the 52 week high price of LKR176.0 today. Therefore, using an implied PBV multiple of 1.35x on the CY15E book value, we arrive at a fair value of LKR184.0 which is a further 4.5% price upside. Hence, we revise down our recommendation to a Trading Buy.
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