Sampath Bank - Result Review and Forecast

Significant recovery in loan growth and interest income in 9M14: SAMP was able to record 25% YoY growth in gross loans excluding pawning in 3Q14. The negative impact of the pawning portfolio is also receding as it is down to 11% of total loans. SAMP’s loan book now reflects better diversification and a lower risk profile with term loans, trade finance and overdrafts accounting for 71% of total loans. Reclassification of pawning related auction losses resulted in stronger reported interest income growth and net interest income rose 5.8% YoY in 9M14.

 NPA down to 2.4%, and lower impairment levels recorded: SAMP reported a gross NPA ratio of 2.4% in 3Q14, and even after assigning pawning related losses to collective impairment, total impairment for 9M14 declined to LKR2.2bn, down from LKR3.1bn in 9M13.

 Net income up 30% YoY to LKR1.1bn: SAMP reported LKR2.1bn operating profit (up 42% YoY) in 3Q14 while net income grew 30% YoY to LKR1.1bn.

 Valuation: We choose to remain watchful over the next quarter while maintaining our current valuation multiples of 1.0x-1.2x P/B, in line with peer valuations. Rolling over to 2015E BVPS and EPS values yields a valuation range of LKR216-LKR252. The SAMP share price has run up significantly along with the current market upswing. The BFI sector P/BV is at a two year high of 1.9x and the sector P/E has increased to 14x from 9x an year ago, rising ahead of the market P/E, which rose to 20x from 16x in January 2014.

Results review and forecasts

 Loan book excluding pawning records 25% YoY growth: Gross loans excluding pawning grew 25% YoY, driven by the YoY growth of 26% in term loans, 41% in trade finance loans and 14% in overdrafts (33%, 21% and 17% of total loans in 3Q14). Reported loan growth for the overall book was restricted to 8% YoY to LKR283bn, due to the 50% YoY contraction in the pawning portfolio. The pawning portfolio is down 45% YTD and now accounts for only 11% of total loans, down from 13% in 2Q14 and 19% in 2013.

 Deposit base grew 18% YoY, improving the CASA ratio to 40.9%: Total deposits grew 18% YoY (up 9% YTD) to LKR327bn driven by the 48% YoY increase in savings deposits. This off-set the slow growth in time deposits (up 5% YoY and down 3% YTD). As a result, SAMP reported a CASA ratio improvement to 40.9% (versus 38.3% in 2Q14 and 33.4% in 3Q13).

 Capital adequacy well above the minimum requirement: SAMP’s Tier I ratio and CAR stood at 9.4% and 12.6% respectively (versus 10.0% and 13.4% in 2Q14). SAMP issued listed, unsecured, fully paid, subordinated, redeemable debentures amounting to LKR7bn to further strengthen the Tier II capital.