1

SL BANKING SECTOR
Two bulls weather the storm
See page 87 for important disclaimer
UDEESHAN JONAS
CHRISTEEN SILVA
CAL RESEARCH
MAY 2014
Bank
Current
Price
Recommen
dation
Target
Price
Price
upside
2014E
ROE
2014E
ROA
Core
profit
growth
2014E
Net
profit
growth
2014E
PBV
2014E
(x)
PER
2014E
(x)
Dividend
yield
2014E
Total
Return
Nations Trust Bank 66.9 BUY 80 19.6% 18.85% 1.60% 18.6% 12.1% 1.1 6.3 3.7% 23.3%
Sampath Bank 192.8 BUY 221 14.6% 16.98% 1.38% 20.0% 56.3% 0.9 5.4 6.9% 21.5%
Hatton National Bank - Non
Voting
126.8 HOLD 131 3.3% 14.37% 1.57% 9% 13.1% 0.8 5.5 7.5% 10.8%
Hatton National Bank - Voting 157.9 HOLD 160 1.3% 14.37% 1.57% 9% 13.1% 1.0 7.0 6.0% 7.3%
Commercial Bank- Non Voting 97 HOLD 104 7.2% 17.17% 1.76% 12.7% 6.3% 1.2 7.5 6.9% 14.2%
National Development Bank 194.5 HOLD 171 -12.1% 12.96% 1.50% 26.1% 26.9% 1.1 8.8 5.7% -6.38%
Commercial Bank- Voting 127.4 SELL 123 -3.8% 17.17% 1.76% 12.7% 6.3% 1.6 9.8 5.3% 1.4%
CALs top picks among the banking sector stocks are
NTB & SAMP (avg. 22.4% 1-yr total return)
2
Source: CAL Research
SL BANKING SECTOR Two bulls weather the storm
I. 2014E banking sector loan growth to remain flat at 15%

II. NIMs are likely to fall to 4.2% in 2014 due to lower interest rates (-
20bps lower)

III. Individual banks may need to emphasize on ROE improvement (2013
avg. 14% vs. 2014E 16%)

IV. 2014E bottom-line growth may stem from lower impairment charges
& improving CIRs (profit growth 2013 -22% vs. 18% in 2014E)

V. CALs Top picks in the Banking sector are SAMP (TP LKR 221, +14.6%)
and NTB (TP LKR 80, +19.6%)

VI. Appendices
3
4


20


34



49


58


68








Pg
I. 2014E banking sector loan growth to
remain flat at 15%
4
I. 2014E banking sector loan growth to remain flat at
15%
SL private sector credit to GDP still one of the lowest among the lower-middle income countries (31% vs. avg. 41%)
SL private sector credit has grown at an avg. 2.7x of GDP over 1997-2013
CAL expects medium term private credit to grow at a 15% Cagr through 2018E (2.5x GDP)
However in 2013, private sector credit grew a marginal 7.2% YoY despite an easing monetary stance (-430bps YoY
AWPLR)
Loan growth of local private commercial banks (+15.3% YoY) outperformed private credit growth (7.2% YoY)
as govt. banks drastically lost market share (-270bps to 48%)
Loans to external trade was lackluster in 2013; may turnaround on improving global trade in 2014 (+15% YoY)
A slowdown in the pawning book also had an adverse impact on private credit growth (c.20% of pvt. credit growth
2010-12)
Further, the housing market did not pick up despite the dip in rates (+9% YoY)
and the leasing sector slowed down during 2013 as vehicle registrations dipped (-18% YoY)
However, construction and tourism have been growing contributors to loan book growth in 2013 (37% in 2013 vs.
19% in 2012)
Agriculture loans (12% of the sector loans) may see a further slowdown in 2014 with the prevailing drought
CAL believes corporate debt issuances of LKR 11bn had a minimal negative impact on private sector credit growth
CAL expects 2014E private sector credit to grow 8% YoY and listed private commercial banks loan book to grow
15% YoY

5
SL private sector credit to GDP still one of the lowest among
the lower-middle income countries (31% vs. avg. 41%)
6
Figure 1: Private sector credit to GDP % (Lower middle
income countries) - 2012
Source: World Bank & CAL Research
31.1%
35.0%
38.8%
47.5%
49.4%
51.5%
0%
10%
20%
30%
40%
50%
60%
Figure 2: Private sector credit growth vs. GDP growth
of peer Asian countries (2009-12 Cagr)
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0% 2% 4% 6% 8% 10% 12%
P
r
i
v
a
t
e

s
e
c
t
o
r

c
r
e
d
i
t

g
r
o
w
t
h

Singapore
Bangladesh
India
Malaysia
USA
Nepal
China
Vietnam
Indonesia Brazil
Sri Lanka
Philippines
South Africa
Bhutan
Turkey
Cambodia
Real GDP growth
Regional comparison of GDP growth vs. private credit growth
may indicate that a 7% GDP growth may lead to a c.14%
private credit growth (2x GDP)
Lower middle income country avg. 41%
SLs private sector credit to GDP declined
to 29% due to lower credit growth in 2013
-2%
0%
2%
4%
6%
8%
10%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Private sector credit growth Real GDP growth
(LHS) (RHS)
SL private sector credit has grown at an avg. 2.7x of GDP
over 1997-2013
7
230
2,534
1,068
732
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1996 2013
Real GDP (LKR mn) Credit to Private sector (LKR mn)
Figure 3: Private sector credit growth vs. GDP growth Figure 4: Private sector credit growth vs. GDP growth
Absolute correlation = +0.98
Correlation on differentials = +0.84
Source: CBSL & CAL Research
CAL expects medium term private credit to grow at a
15% Cagr through 2018E (2.5x GDP)
8
Figure 5: Real GDP growth 2011-13 & 2014-16E Figure 6: SL private sector credit
8.2%
6.3%
7.3%
7.0%
6.0% 6.0% 6.0% 6.0%
2011 2012 2013 2014E 2015E 2016E 2017E 2018E
2.5
5.1
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
2013 2018E
L
K
R

t
n

Source: CBSL & CAL Research
CAL expects a 6% Cagr GDP growth through 2018E which may lead to private sector
credit growing at a 15% Cagr, (2.5x GDP growth)
However, if SL were to reach the lower middle income country avg. private sector credit
to GDP of 41% by 2018E, SL private sector credit should grow at a 20% Cagr.
However in 2013, private sector credit grew a marginal 7.2%
YoY despite an easing monetary stance (-430bps YoY AWPLR)
9
Figure 7: Private sector credit growth YoY (2013-present)
15.5%
13.3%
10.9%
10.2%
9.3%
8.9%
8.4%
7.9%
7.6%
7.4%
7.3%
7.5%
5.6%
14.3% 14.4%
13.8%
13.5%
12.8%
12.1%
11.8% 11.8%
11.9%
11.3%
10.5%
9.9%
9.7%
4%
6%
8%
10%
12%
14%
16%
18%
Credit growth YoY Interest rates
Source: CBSL & CAL Research
CBSL cut policy rates by 50bps in May 2013 and 50bps in Oct 2013

CBSL also cut SRR by 200bps in July 2013 in order to boost liquidity

Drastic reduction in pawning advances and a decline in consumer spending
were the key reasons for lower private sector credit during 2013

- AWPLR
Loan growth of local private commercial banks (+15.3%
YoY) outperformed private credit growth (7.2% YoY)
10
Figure 8: Local private sector commercial banks loan growth - 2013
Source: Company data & CAL Research
26.5%
18.6%
17.4%
16.9%
11.6%
10.3%
8.4%
4.5%
0%
5%
10%
15%
20%
25%
30%
SAMP NDB UBC HNB NTB COMB SEYB PABC
Avg loan growth 15.3%
Local private commercial banks include the 8 listed commercial banks
while overall private sector credit includes government and foreign
commercial banks as well.
26.5%
25.4%
24.5%
22.9%
13.8%
14.1%
11.5%
12.2%
8.0%
9.1%
4.4% 4.7%
4.6% 4.6%
2.8% 2.8%
1.6%
1.5%
0.8%
0.8%
1.6%
1.8%
2012 2013
BOC PB COMB HNB SAMP NDB
SEYB NTB PABC UBC DFCC
as govt. banks drastically lost market share (-270bps
to 48%)
11
Source: Company data & CAL Research
Figure 10: Loan growth of state banks (2010-2013) Figure 9: Commercial banks market share 2012 & 2013*
382
553
715
755
406
508
661
681
35%
30%
4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
200
400
600
800
1000
1200
1400
1600
2010 2011 2012 2013
L
K
R

b
n

BOC People's Bank Loan growth
*Market share calculation includes the pawning portfolio of banks and excludes foreign banks
Peoples Bank & BOCs loan book slowed down in 2013 as
pawning and loans to the govt took a hit which accounted for
62% of the total loan book in 2012.
51% 48%
Excluding the pawning portfolio, the govt banks market share
declined from 46% in 2012 to 44% in 2013
Loans to external trade was lackluster in 2013; may
turnaround on improving global trade in 2014 (+15% YoY)
12
-12.6%
21.8% 22.4%
-7.4%
6.3%
-27.6%
31.8%
50.7%
-5.3% -6.2%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
2009 2010 2011 2012 2013
Exports Imports
Source: Company data & CBSL
Figure 12: Banks lending exposure to trading
Figure 11: SL external trade growth YoY (2009-13)
IMF expects US GDP to grow
2.8% and EU GDP to grow 1.6%
in 2014E (vs. 1.9% & 0.2% in
2013) which together account
for c.55% of SL exports

However, recovery in import
growth might depend on how
fast SL consumer spending
picks up in 2014
23.0%
19.2%
15.4%
16.0% 16.0%
14.4%
9.3%
27.3%
22.4%
21.6%
18.4%
15.5%
14.3%
11.2%
UBC SAMP SEYB HNB PABC COMB NDB
2012 2013
A slowdown in the pawning book also had an adverse impact
on private credit growth (c.20% of pvt. credit growth 2010-12)
Figure 14: Pawning advances of banks
Source: Company data & CAL Research
Figure 13: Components of credit growth 2009-13
-
10
20
30
40
50
60
SAMP HNB SEYB COMB PABC NTB NDB
L
K
R

b
n

2012 2013
The two state banks: Peoples Banks pawning portfolio
declined LKR 54bn to LKR 197bn in 2013 while BOCs
portfolio declined LKR 15bn to LKR 132bn
13
21%
9%
17%
-10%
13%
7%
17%
32%
5%
10%
7%
30%
9%
10%
1%
18%
22% 17%
-27%
35% 36%
38%
67%
2010 2011 2012 2013
Agriculture and Fishing Construction (includes housing)
Wholesale and Retail Trade Textile & apparel
Tourism Financial and Business Services
Pawning Others
Further, the housing market did not pick up despite the
dip in rates (+9% YoY)
14
112.8
136.1
133.4
160.1
174.6
17.4%
14.8%
13.4%
16.0%
15.2%
12%
13%
14%
15%
16%
17%
18%
0
20
40
60
80
100
120
140
160
180
200
2009 2010 2011 2012 2013
L
K
R

b
n

Housing AWLR
+9% YoY
(LHS) (RHS)
Figure 15: Private sector housing loan exposure vs.
AWLR
Source: CBSL & CAL Research
Figure 16: Loan book exposure to housing loans
Despite the decline in interest rates, housing loan rates have only declined 150bps YoY
as banks are unwilling to lock-in yields at current levels
6.6%
7.4%
4.7%
6.8%
4.2%
1.9%
0.3%
7.3%
6.9%
4.4%
6.0%
3.4%
1.7%
0.5%
0
5
10
15
20
25
30
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
COMB HNB SAMP PABC SEYB NDB NTB
2012-RHS 2013-RHS 2012 Exposure-LHS 2013 Exposure-LHS
L
K
R

b
n

and the leasing sector slowed down during 2013 as
vehicle registrations dipped (-18% YoY)
15
Figure 17: New vehicle registrations 2010 present
76%
46%
-24%
-18%
0%
-40%
-20%
0%
20%
40%
60%
80%
100%
-
100k
200k
300k
400k
500k
600k
2010 2011 2012 2013 Jan-Mar 2014
Y
o
Y

g
r
o
w
t
h

N
e
w

v
e
h
i
c
l
e

r
e
g
i
s
t
r
a
t
i
o
n
s

New vehicle registrations Growth
53%
110%
23%
2%
0%
20%
40%
60%
80%
100%
120%
0
50
100
150
2010 2011 2012 2013
Y
o
Y

g
r
o
w
t
h

L
K
R

b
n

Leasing & HP agreements Tractors & Motor vehicles Growth
Figure 18: Loans to leasing & hire purchase agreements and motor vehicles 2010-2013
Source: CBSL & Department of Motor Traffic
6.0%
3.2%
3.6%
1.8%
2.3%
1.4%
1.0%
5.9%
4.9%
3.8%
2.4%
2.0%
1.9%
1.8%
HNB SAMP COMB NDB SEYB UBC PABC
2012 2013
However, construction and tourism have been growing contributors to
loan book growth in 2013 (37% in 2013 vs. 19% in 2012)
16
Figure 22: Bank exposure to the tourism sector Figure 21: Bank exposure to the construction sector
Figure 20:Private sector loans to tourism &
contribution to loan growth
Figure 19:Private sector loans to construction &
contribution to loan growth
1%
3%
2%
5%
0%
1%
2%
3%
4%
5%
6%
25
35
45
55
65
2010 2011 2012 2013
Tourism Contribution to loan growth
L
K
R

b
n

%

e
x
p
o
s
u
r
e

13%
7%
17%
32%
0%
5%
10%
15%
20%
25%
30%
35%
200
250
300
350
400
2010 2011 2012 2013
Construction Contribution to loan growth
L
K
R

b
n

%

e
x
p
o
s
u
r
e

Source: CBSL & Company data
17.1%
12.6%
12.0%
9.5%
8.6% 8.6%
1.0%
16.3%
14.1%
11.5%
9.6%
9.4%
8.2%
1.7%
SEYB HNB UBC SAMP COMB NDB PABC
2012 2013
Agriculture loans (12% of the sector loans) may see a
further slowdown in 2014 with the prevailing drought
17
Source: Company data & CBSL
Figure 24: Banks lending exposure to agriculture
Figure 23: Commercial banks exposure to agriculture loans
12.7%
14.4%
13.0%
13.6%
12.0%
11%
12%
13%
14%
15%
100
150
200
250
300
350
2009 2010 2011 2012 2013
Agriculture loans Exposure to Agriculture
L
K
R

b
n

E
x
p
o
s
u
r
e

%

-5% YoY
Banks with heavy exposure to
agriculture may also see NPLs
rising with the drought
conditions in the country
14.8%
10.7%
10.0%
11.0%
9.4%
10.1%
6.2%
16.9%
12.6%
10.0% 10.0%
9.2%
8.7%
6.7%
NDB SAMP PABC COMB UBC HNB SEYB
2012 2013
CAL believes corporate debt issuances of LKR 11bn had a
minimal negative impact on private sector credit growth
Figure 25:Total debentures issued 2012-2013
18
18
Source: CBSL
Out of the LKR 68.3bn
debentures, only LKR 11bn was
issued by non finance
companies. Hence debentures
were not a major reason for
lower private credit growth
644
11000
0.18%
6.43%
0%
1%
2%
3%
4%
5%
6%
7%
-1000
1000
3000
5000
7000
9000
11000
13000
15000
2012 2013
Debentures As a % of Private credit growth
L
K
R

m
n

%

o
f

p
r
i
v
a
t
e

c
r
e
d
i
t

CAL expects 2014E private sector credit to grow 8% YoY and
listed private commercial banks loan book to grow 15% YoY
19
Figure 26: 2014E private sector credit growth &
listed banks loan book growth
Figure 27: Loan growth estimates for CALs banking
universe
18% 18%
16%
13%
12%
SAMP NDB HNB COMB NTB
Source: Company data & CAL Research
CAL expects the state banks to continue to lose market share in 2014E as growth remains slow in the pawning book which may
result in a 8% YoY growth in private sector credit. The foreign banks may also see their loan books shrinking as they curtail their
exposure to retail banking.

However, listed private commercial banks may see loan book growing 15% YoY in 2014E (vs. 15% in 2013) with growth stemming
from construction, renewable energy, external trade, tourism & infrastructure development projects.
1,465
1,684
2,534
1,053
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
2013 2014E
L
K
R

b
n

Private commercial banks' loan book Private sector credit
+8%
+15%
II. NIMs are likely to fall to 4.2% in 2014
due to lower interest rates (-20bps lower)
20
II. NIMs are likely to fall to 4.2% in 2014E due to lower
interest rates (c.-20bps lower)
SL banks NIMs averaged 4.4% in 2013 down from 4.7% in 2012
Banks with a larger CASA base may see pressure on NIMs with the reduction in interest rates (-380bps YoY)
Margins may shrink for banks with heavy corporate loan exposure as competition intensifies
2013 deposits grew 17% YoY, despite a fall in interest rates as consumer spending slowed down
outpacing loan book growth (17% YoY vs.15% YoY)
Banks have cut deposit rates faster than NBFIs (-500bps vs. 345bps) due to excess liquidity
Govt banks have been losing CASA share to private banks
Banks may cut deposit rates further if excess liquidity continues to prevail & private credit remains lackluster
Overall interest rates may remain on the low side for 2014E (<10% AWPLR)
Supported by low inflation and reduced govt borrowings
However, rates may rise over the medium term when private credit picks up
CAL expects an uptick in private sector credit growth during 2H2014
21
SL banks NIMs averaged 4.4% in 2013 down from 4.7%
in 2012
22
Figure 28: Bank Net Interest Margins
Source: Company data & CAL Research
5.1%
5.3%
5.1%
4.8%
4.2%
3.8%
4.8%
4.7%
5.8%
5.1%
4.9%
4.5%
4.3%
3.7%
3.8%
3.5%
NTB HNB SEYB COMB SAMP NDB UBC PABC
2012 2013
Avg. 4.4%

Banks with a larger CASA base may see pressure on
NIMs with the reduction in interest rates (-380bps YoY)

23
Figure 29: Bank CASA base
Figure 30: Bps changes in NIMs in 2013
80
-1 -4 -22
-27 -27
-80
-128 -150
-100
-50
0
50
100
NTB SAMP NDB HNB COMB SEYB UBC PABC
Source: Company data & CAL Research
NTBs NIMs improved 80bps due to
c.40% of NTBs loan book being fixed at
higher rates, an improvement in the
CASA base and reclassification of swap
costs under trading costs.
44%
38%
33%
33%
25% 24%
19% 18%
15%
20%
25%
30%
35%
40%
45%
50%
COMB HNB SAMP SEYB NTB NDB PABC UBC
2012 2013
Avg. 29%
Savings deposits rates remain unadjusted irrespective of
the movement in interest rates

Hence, when lending rates decline, the margins on
savings and demand deposits decline
LKR 196bn 148bn 100bn 55bn 2bn 31bn 10bn 5bn
Margins may shrink for banks with heavy corporate
loan exposure as competition intensifies
24
55%
42%
36%
34%
34%
22%
21%
0%
10%
20%
30%
40%
50%
60%
NDB HNB COMB SAMP PABC SEYB NTB
Figure 33: Bank corporate loan book exposure Figure 34: AWPLR Vs. AWLR 2009-present
10.9%
9.3%
10.8%
14.4%
10.1%
8.8%
17.4%
14.8%
13.4%
16.0%
15.2%
14.7%
8%
10%
12%
14%
16%
18%
2009 2010 2011 2012 2013 Mar-14
AWPLR AWLR
Source: Company data & CBSL
Banks are lending at close to AWPLR to the corporates with the AWPLR declining
560bps since 2012 vs. a 130bps reduction in AWLR
2013 deposits grew 17% YoY, despite a fall in interest
rates as consumer spending slowed down
25
23.6% 22.7%
21.5%
20.5%
15.5%
14.1%
13.0%
12.4%
11.3%
11.0%
0%
5%
10%
15%
20%
25%
SAMP UBC BOC NDB COMB SEYB HNB PABC PBC NTB
Avg. deposit growth 17%
Figure 35: 2013 Banks Deposits growth
Source: Company data & CBSL
Figure 36: SL private consumption expenditure Figure 37: Domestic savings as a % of GDP
11.0%
18.4%
7.9%
3.0%
17.2%
25.1%
15.5%
9.9%
2010 2011 2012 2013
Total private consumption expenditure growth (nominal)
Total private consumption expenditure growth (real)
* Real consumption growth is after deducing inflation rates
19.3%
15.4%
16.9%
20.0%
2010 2011 2012 2013
outpacing loan book growth (17% YoY vs. 15% YoY)
26
Figure 38: Loan book growth vs. deposit growth Figure 39: Bank Loan to Deposit ratio- 2012-13
Source: Company data, CBSL & CAL Research
23.6%
20.5%
22.7%
13.0%
11.0%
15.5%
14.1%
12.4%
26.5%
18.6%
17.4%
16.9%
11.6%
10.3%
8.4%
4.5%
SAMP NDB UBC HNB NTB COMB SEYB PABC
Deposit growth Loan growth
Loan growth 15% YoY
Deposit growth 17% YoY
106%
93%
92%
89%
86% 86%
83%
82%
NDB COMB HNB SAMP NTB UBC PABC SEYB
2012 2013
13.0%
13.5% 13.5% 13.5% 13.5% 13.5%
14.0% 14.0%
15.0%
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
NDB HNB COMB SAMP DFCC NTB PABC SEYB UBC
Avg. 1-yr FD rates for banks - 13.7%
7
5
b
p
s

Maximum cap for 1-yr deposit rates for NBFCs - 14.45%
Banks have cut deposit rates faster than NBFIs (-500bps
vs. 345bps) due to excess liquidity
27
8.0%
7.5%
7.8%
8.3%
8.0%
7.5%
8.0%
8.5% 8.5%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
NDB COMB NTB DFCC HNB SAMP SEY UBC PABC
Avg. 1-Yr FD rate for Banks- 8%
Maximum cap for 1-yr deposit rates for NBFCs - 11%
3
0
0
b
p
s

Figure 31: Deposit rate gap in Apr 2013
Figure 32: Deposit rate gap in Apr 2014
Source: Company data, CBSL & CAL Research
Govt banks have been losing CASA share to private
banks
28
44.4%
42.4%
41.7%
44.0%
10.8% 9.9%
2.6% 2.9%
2010 2013
Others
Licensed Finance Co's
NSB
Private commercial banks
Govt commercial banks
Figure 40: Market share breakdown of savings
deposits
Figure 41: Market share breakdown of demand
deposits
Source: CBSL & company data
56%
43%
44%
57%
2010 2013
Private commercial banks
Govt commercial banks
Banks may cut deposit rates further if excess liquidity
continues to prevail & private credit remains lackluster
29
25.4%
21.5%
21.5% 22.0%
25.9%
21.0%
21.8%
21.6%
33.7%
27.2%
26.7%
26.2%
25.3%
23.8%
22.9%
22.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
COMB SAMP SEYB NDB NTB PABC HNB UBC
2012 2013
Figure 42: Bank statutory liquid ratio 2012 & 2013
Source: Company data
Overall interest rates may remain on the low side for
2014E (<10% AWPLR)
30
-115
-95
-75
-55
-35
-15
5
Figure 45: Net Injection/absorption (LKR bn)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
J
a
n
-
1
2
M
a
r
-
1
2
M
a
y
-
1
2
J
u
l
-
1
2
S
e
p
-
1
2
N
o
v
-
1
2
J
a
n
-
1
3
M
a
r
-
1
3
M
a
y
-
1
3
J
u
l
-
1
3
S
e
p
-
1
3
N
o
v
-
1
3
J
a
n
-
1
4
M
a
r
-
1
4
Real interest rates have declined by
c.200bps since Jan 2012
Figure 43: Treasury bill Vs Inflation rates Figure 44: Real interest rates (2012-present)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
J
a
n
-
1
2
M
a
r
-
1
2
M
a
y
-
1
2
J
u
l
-
1
2
S
e
p
-
1
2
N
o
v
-
1
2
J
a
n
-
1
3
M
a
r
-
1
3
M
a
y
-
1
3
J
u
l
-
1
3
S
e
p
-
1
3
N
o
v
-
1
3
J
a
n
-
1
4
M
a
r
-
1
4
1 yr t-bill rates Inflation rate
Source: CBSL
Liquidity in the treasury
market has been on the rise,
which may keep treasury
rates at current levels.
6
8
10
12
14
16
J
a
n
-
1
3
F
e
b
-
1
3
M
a
r
-
1
3
A
p
r
-
1
3
M
a
y
-
1
3
J
u
n
-
1
3
J
u
l
-
1
3
A
u
g
-
1
3
S
e
p
-
1
3
O
c
t
-
1
3
N
o
v
-
1
3
D
e
c
-
1
3
J
a
n
-
1
4
F
e
b
-
1
4
M
a
r
-
1
4
A
p
r
-
1
4
%

1-yr t-bill yield AWPLR
Figure 46: Treasury bill Vs AWPLR
Supported by low inflation and reduced govt
borrowings
31
572
429
543
867
793
400
600
800
1000
2009 2010 2011 2012 2013
L
K
R

b
n

Figure 47: Incremental government borrowings 2009-2013
Figure 48: Inflation rates 2009- present
Source: CBSL
The loss reduction in CEB & CPC
post-price revisions. However risk
of higher government borrowings
remain due to higher thermal
power generation.
3.5%
6.2%
6.7%
7.6%
6.9%
4.2%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2009 2010 2011 2012 2013 Mar-14
However, rates may rise over the medium term when
private credit picks up
32
6%
7%
8%
9%
10%
11%
12%
13%
2009 2010 2011 2012 2013
Tbill Tbond
T
r
e
a
s
u
r
y

r
a
t
e
s
%

4%
6%
8%
10%
12%
14%
16%
2009 2010 2011 2012 2013
AWDR AWPLR
Figure 49: 3mos avg. T-bill yield (1977-present)
Figure 50: Average deposit rates and Average prime lending rates 2009-2013
Source: CBSL
6.58
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
23.0
25.0
Simple Avg 1977-present = 12.9%
Current = 6.58%
%
3 month treasury
bills rates are at one
of the lowest point
in history
CAL expects an uptick in private sector credit growth
during 2H2014
33
Figure 51: GDP rates 2009-2013
3.5%
8.0%
8.2%
6.3%
7.3%
2009 2010 2011 2012 2013
Figure 52: Perceived Economic Opportunity Index (PEOI)
Figure 53: LMD-Nielson Business Confidence Index Figure 54: Private sector credit growth YoY
108
121
122
135
134
139
158
140
147
140
131
125
111
129
119
130
138
130
139
124
140
100
110
120
130
140
150
160
170
1.64
1.58
1.69
1.57
1.61
1.57
1.67
1.6
1.7
1.6
1.71
1.68
1.71
1.56
1.58
1.6
1.62
1.64
1.66
1.68
1.7
1.72
Mar-13 Apr-13 Jun-13 Aug-13 Sep-13 Nov-13 Jan-14 Feb-14 Apr-14
Source: CBSL & LMD
15.5%
13.3%
10.9%
10.2%
9.3%
8.9%
8.4%
7.9%
7.6%
7.4% 7.3%
7.5%
5.6%
4.4%
III. Individual banks may need to emphasize on
ROE improvement (2013 avg. 14% vs. 2014E
16%)
34
III. Individual banks may need to emphasize on ROE
improvement (2013 avg. 14% vs. 2014E 16%)
SL banks ROAs and ROEs have been trending downwards (-400bps YoY ROE)...
and have been unable to compensate for higher COEs compared to regional peers
Sri Lanka bank NIMs (avg 4.4% vs. regional avg 3.1%) have not been the reason for lower ROEs
Regional banks hold a higher fee & non-interest income component relative to SL banks
Banks are now increasingly focusing on improving fee income to compensate for possible
declines in NIMs
CIRs* of SL banks on the higher side electronic banking should be emphasized more
Larger banks CIR may improve further in 2014 as branch networks are consolidated
However, smaller banks may see pressure on CIR due to aggressive branch additions
SL banks credit cost ratio may revert to historical 0.5% vs. 1.1% in 2013 once impairment on
pawning subsides
SL banks may need to leverage further to improve ROEs (avg 10.6x Vs. regional avg. 16x)
as capital adequacy stands well above minimum requirement of 10% (avg 17%)
and ROAs remain sufficient (1.7% for 2014E)
CAL expects banking sector ROEs to average 16% in 2014E


35
* Cost to Income Ratio
SL banks ROAs and ROEs have been trending
downwards (-400bps YoY ROE)...
36
Figure 55: ROA & ROE of the commercial banking sector* Figure 56: Avg ROAEs of listed private
commercial banks
Source: Company data, CBSL & CAL Research
Figure 57: Average ROEs of listed banks 2012-13
*Figures include state & foreign banks
16.9%
18.0%
14.1%
2011 2012 2013
20.8% 20.7%
17.4%
21.3%
14.5%
10.4%
21.7%
9.8%
19.7%
18.2%
14.0%
12.2%
10.6% 10.5%
2.8%
1.9%
NTB COMB HNB SAMP NDB SEYB PABC UBC
2012 2013
1.1
1
1.8
1.7 1.7
1.3
13.4
11.8
22
19.8
20.3
16
0
5
10
15
20
25
0
1
2
3
4
5
2008 2009 2010 2011 2012 2013
Return on Assets-LHS Return on Equity-RHS
and have been unable to compensate for higher COEs
compared to regional peers
37
Figure 58: Regional Banking sector ROAE
Source: CAL Research & Maybank-Kimeng
Figure 59: 2013 COE vs. ROE gap
19.4%
20.0%
16.4%
15.1%
11.9%
14.7%
11.3%
14.1%
18.8%
17.0%
15.4% 15.3%
13.9%
13.2%
10.3%
16.0%
Indonesia China Thailand Malaysia Hong Kong Philippine Singapore Sri Lanka
2013 2014E
10 yr govt. bond rates have been taken as RFR and a
6% risk premium has been applied to calculate banking
sector COEs of countries.

2014E figures have been used for SL instead of 2013
due to the one-off impairment charges which diluted
the ROEs in 2013
14.0%
10.3%
9.5%
10.1%
8.2%
9.5%
8.5%
16.0%
5.4%
9.7%
6.9%
5.0%
3.7%
5.2%
2.8%
0.0%
COE Excess over COE
Sri Lanka bank NIMs (avg 4.4% Vs. regional avg 3.1%)
have not been the reason for lower ROEs
38
Figure 60: Regional banking sector NIMs
Source: CAL Research & Maybank-Kimeng
5.7%
4.4%
3.0%
2.7%
2.4%
1.7%
0%
1%
2%
3%
4%
5%
6%
Indonesia Sri Lanka Thailand China Malaysia Singapore
Regional avg. 3.1%
Regional banks hold a higher fee & non-interest
income component relative to SL banks
39
Figure 61: Regional fee income as a % of Gross
income
21%
20%
14%
12%
10%
7%
Thailand Singapore Malaysia Philippines Indonesia Sri Lanka
Avg. 14%
Source: Maybank-Kimeng & CAL Research
SL banks may need to focus more on wealth management products,
internet & mobile banking, investment banking, guarantees and
treasury products to grow their fee income and hence improve ROEs
Figure 62: Regional Non-Interest income as a % of
Gross income
41%
38%
37%
28%
20%
14%
Philippines Thailand Singapore Malaysia Indonesia Sri Lanka
Avg. 30%
Banks are now increasingly focusing on improving fee
income to compensate for possible declines in NIMs
40
25%
21%
17%
16%
13%
12%
12%
10%
0%
5%
10%
15%
20%
25%
30%
NTB NDB PABC SEYB SAMP HNB COMB UBC
2012 2013
Figure 63: Banks fee income as a % of operating income
Source: Company data & CAL Research
CIRs of SL banks on the higher side electronic banking
should be emphasized more
41
Figure 64: Regional banks cost-to-income ratio
Source: Company data, Maybank-Kimeng & CAL Research
51% 51%
46%
43%
43%
39%
0%
10%
20%
30%
40%
50%
60%
Sri Lanka Indonesia Malaysia Singapore Thailand China
Avg. 46%
CIR Old method-Operating expenses/Operating income

CAL uses the conventional cost-to-income ratio to compare cost-efficiency on a likely to like basis.

However, CAL uses the new CIR ratio [Operating costs/ (NII + Fee income)] for company comparisons
to exclude the impact from extra-ordinary items (e.g. forex gains)
Larger banks CIR may improve further in 2014 as
branch networks are consolidated
42
51%
60%
63%
60%
67% 67%
68%
82%
49%
57%
58%
59%
61%
62%
83%
106%
0%
20%
40%
60%
80%
100%
120%
COMB NTB HNB NDB SEYB SAMP PABC UBC
2012 2013
Avg. 67%
Figure 65: Bankscost-to-income ratio*
CIR = Operating costs/ (NII + Fee income)
See appendix 4 for comparison of operational
efficiencies of banks
Source: Company data & CAL Research
Large banks (COMB, HNB & SAMP) which rapidly expanded their
branch network during the last 3 years are now consolidating
their branch network and will see CIRs improving as new
branch additions start breaking-even.
However, smaller banks may see pressure on CIR due to
aggressive branch additions
43
250
236
212
151
77
78
72
58
0
50
100
150
200
250
0
10
20
30
40
50
60
70
80
HNB COMB SAMP SEYB PABC NDB NTB UBC
2009-2012 Branch additions 2013 branch additions Current branch network - RHS - LHS - LHS
Figure 66: Bank branch additions 2009-2012 & branch additions in 2013
Source: Company data & CAL Research
Smaller banks late in growing their
branch additions have started to increase
branch additions in recent times
SL banks credit cost ratio may revert to its historical 0.5%
vs. 1.1% in 2013 once impairment on pawning subsides
44
Figure 67: Regional banks credit cost ratio 2013*
Source: Maybank-Kimeng & CAL Research
Impact on ROE from higher impairment
charges may correct during 2014E when
impairment on pawning advances reduce
*Credit cost ratio = impairment charge/ Gross Loans
1.2%
1.1%
0.8%
0.4%
0.3%
0.2%
Indonesia Sri Lanka Thailand Philippines malaysia Singapore
Avg. 0.67%
SL banks may need to leverage further to improve ROEs
(avg 10.6x s. regional avg. 16x)
45
7.5x
8.4x
9.1x
9.6x
9.9x
12.1x
12.4x
16.0x
0
2
4
6
8
10
12
14
16
18
UBC NDB HNB SEYB COMB NTB SAMP PABC
Leverage Ratio as at 31st Dec 2012
Leverage Ratio as at 31st Dec 2013
Avg. Leverage 10.6x
Figure 69: Leverage of SL banks (x)
Source: McKinsey Research & CAL Research
Figure 68: Leverage Ratio* of regional banks
SL banks should be able to increase leverage to
12-14x vs avg. 10.6x in 2013
*Leverage ratio = Assets/Equity
as capital adequacy stands well above minimum
requirement of 10% (avg 17%)
46
Figure 70: 2013 Tier 1 capital Figure 71: 2013 Tier 2 capital
10.1%
10.3%
13.3% 13.3%
14.8%
15.0%
15.2%
18.1%
SAMP PABC COMB HNB NTB SEYB NDB UBC
Avg. 14%
Minimum requirement = 5%
21.0%
20.0%
17.0% 16.9% 16.9%
16.1%
14.1%
11.9%
NDB NTB UBC COMB HNB SEYB SAMP PABC
Source: Company data & CAL Research
Avg. 17%
Minimum requirement = 10%
and ROAs remain sufficient (1.7% for 2014E)
47
1.9%
2.1%
1.9%
1.7%
1.9%
1.2%
1.7% 1.7%
1.6%
1.9%
1.0%
1.6%
1.4%
1.2%
0.2%
0.3%
HNB COMB SAMP NTB NDB SEYB PABC UBC
2012 2013
Figure 72 : Average ROAs for listed banks 2012-13
Source: Company data & CAL Research
Figure 73 : Average ROAs for regional banks
2.4%
1.8%
1.3%
1.2%
1.8%
1.2%
2.5%
1.7%
1.5%
1.2%
1.2%
1.0%
Indonesia Phillipines Thailand Malaysia Sri Lanka Singapore
2012 2013
SL banks 2014E ROAs may avg. 1.7%
when impairment on pawning advances
subside
CAL expects banking sector ROEs to average 16% in
2014E
48
16.9%
18.0%
14.1%
16.0%
2011 2012 2013 2014E
Figure 74: ROEs of listed private commercial banks
Source: Company data & CAL Research
Figure 75: 2014E ROEs for CAL coverage banks
18.8%
17.2%
17.0%
14.4%
13.0%
NTB COMB SAMP HNB NDB
IV. 2014E bottom-line growth may stem from lower
impairment charges & improving CIRs (profit growth
2013 -22% vs. 18% in 2014E)
49
IV. 2014E bottom-line growth may stem from lower impairment
charges & improving CIRs (profit growth 2013 -22% vs. 18% in 2014E)
Local private commercial banks earnings declined 22% YoY in 2013 on the back of
higher impairment charges (+158% YoY)
Declining gold prices led to the recognition of large impairment charges on pawning
advances
Growing NPLs were also a contributor to higher impairment charges (+110bps YoY)
Nevertheless, core profit growth has been robust for NTB (42% YoY) & SAMP (39%
YoY)
We expect our banking coverage universe to provide a 23% YoY earnings growth
NPLs may edge down once pawning portfolio stabilizes amidst stress
Banks may be able to withstand impairment charges on pawning advances up to a
15% YoY reduction in gold prices (USD 1044/Oz )
50
Local private commercial banks earnings declined 22% YoY
in 2013 on the back of higher impairment charges (+158%
YoY)
51
Figure 76: Banks 2013 net profit growth
Source: Company data & CAL Research
13%
10%
3%
-4%
-11%
-33%
-80%
-87%
SEYB NTB COMB HNB NDB SAMP UBC PABC
SAMP provided LKR 3bn as
impairment charge for pawning
advances which resulted in bottom-
line declining 33% YoY
LKR 2bn was provided as impairment
for pawning as well as for a large
ticker Maldivian hotelier
NDBs earnings were down 11% YoY
mainly due to a c. LKR 700mn one-
off impairment charge on a single
borrower
Declining gold prices led to the recognition of large
impairment charges on pawning advances
52
Figure 77: 2013 vs. 2012 impairment charges
Source: Company data & CAL Research
3,574
3,305
1,362
-743
451
4,600
1,261
292
20.2%
12.9%
10.5%
6.7%
2.9%
1.7% 1.6%
-1%
4%
9%
14%
19%
24%
-2000
-1000
0
1000
2000
3000
4000
5000
SAMP HNB SEYB PABC NTB COMB NDB UBC
L
K
R

m
n

Impairment Charges 2012 Impairment Charges 2013 Exposure to Gold
Growing NPLs (net of impairment) were also a contributor
to higher impairment charges (+110bps YoY)
53
Figure 78: Banking sector gross NPLs 2013
Source: Company data & CAL Research
384
281
230
156
117
69
61
51
-2
-241
-300
-200
-100
0
100
200
300
400
500
PABC UBC PBC BOC NDB NTB SAMP COMB HNB SEYB
Figure 79: Growth in NPLs 2013 (bps)
9.96%
5.90%
7.25%
3.62% 3.50% 3.15%
2.15% 2.31%
SEYB UBC PABC COMB HNB NTB SAMP NDB
NPLs Net of pawning Gross NPL
10.58
8.24%
8.01%
3.88% 3.64% 3.52%
3.68%
2.48%
Nevertheless, core profit growth has been robust for
NTB (42% YoY) & SAMP (39% YoY)
54
42%
39%
29%
26%
18%
13%
-53%
-134%
NTB SAMP SEYB NDB COMB HNB PABC UBC
Figure 80: Banks core profit growth 2013
Source: Company data
We expect our banking coverage universe to provide a
23% YoY earnings growth
55
Source: Company data & CAL Research
26%
20%
19%
13%
9%
NDB SAMP NTB COMB HNB
Even amidst strong core profit growth,
CAL does not recommend a BUY on
NDB due to inadequate ROEs (12%)
Figure 82: 2014E core profit growth Figure 81: 2014E earnings profit growth
56%
27%
13%
12%
6%
SAMP NDB HNB NTB COMB
SAMP may see the highest growth as
impairments from gold loans reduce
NPLs may edge down once pawning portfolio stabilizes
amidst stress
56
6.3%
8.5%
5.4%
3.8%
3.7%
5.6%
4.5%
3.4%
5.0%
3.0%
2.1%
2.2%
3.8%
2.9%
2008 2009 2010 2011 2012 2013 2014E
Gross NPLs Net NPLs
Source: CBSL & CAL Research
Figure 83: Gross & Net NPLs of banks 2013 & 2014E
NPLs on the pawning
portfolio was 12% in 2013
Banks may be able to withstand impairment charges on pawning
advances up to a 15% YoY reduction in gold prices (USD 1044/Oz )
57
Figure 84: 2014E impairment charge sensitivity to different gold price assumptions
1050
1200
1292 1300
Goldman Sachs CAL's estimate HSBC UBS
Figure 85: 2014 gold price estimates Figure 86: Global gold prices 2011-present (USD/Oz)
Source: Bloomberg and CAL research
1000
1400
1800
2200
Column1 COMB HNB SAMP NTB NDB
-10%
0 0 0 0 0
-15%
32 - 214 - 250 - 11 - 10 -
-20%
128 - 844 - 983 - 44 - 41 -
-25%
223 - 1,473 - 1,717 - 77 - 71 -
-30%
318 - 2,102 - 2,450 - 110 - 102 - G
o
l
d

p
r
i
c
e

r
e
d
u
c
t
i
o
n
IS Impairment charge (LKR mn)
CAL assumes that banks lent pawning
advances at a 65% LTV post May 2013 (vs.
80% before) and assumes a 20% default rate.

CAL believes that banks may need not
provide any further large impairment charges
on pawning advances unless there is a 15%+
reduction in gold prices (USD 1044/Oz)
V. CALs Top picks in the Banking sector are
SAMP (TP LKR 221, +14.6%) and NTB (TP LKR 80,
+19.6%)
58
Banks trade on avg. 2013 PER of 8.8x and PBV of 1.3x
59
Source: Company data & CAL Research
0.6x
0.9x
0.9x
1.0x
1.1x
1.2x
1.2x 1.2x
1.3x
1.3x
1.7x
5.4x
6.4x
8.8x
8.4x
7.9x
41.2x
6.7x
11.2x
55.7x
7.8x
9.6x
0
10
20
30
40
50
60
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
SEYB.X HNB.X SEYB SAMP HNB PABC NTB NDB UBC COMB.X COMB
PBV PER
- RHS - LHS
Figure 87: Private commercial banks 2013 PER & PBV (x)
and provided an avg. 5% dividend yield for 2013
60
Source: Company data & CAL Research
Figure 88: Dividend yield for banks - 2013
7.6%
6.9%
6.5%
6.1%
5.3%
5.3%
3.6%
HNB.X COMB.X SAMP HNB NDB COMB.N NTB
HNB.N
Figure 89: 2014E dividend yield for CALs coverage
7%
7%
6% 6% 6%
6%
4%
3%
3%
2%
0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Avg. 4.8%
CALs top picks among the banking sector stocks are
NTB & SAMP (avg. 22.4% 1-yr total return)
Bank
Current
Price
Recommen
dation
Target
Price
Price
upside
2014E
ROE
2014E
ROA
Core
profit
growth
2014E
Net
profit
growth
2014E
PBV
2014E
(x)
PER
2014E
(x)
Dividend
yield
2014E
Total
Return
Nations Trust Bank 66.9 BUY 80 19.6% 18.85% 1.60% 18.6% 12.1% 1.1 6.3 3.7% 23.3%
Sampath Bank 192.8 BUY 221 14.6% 16.98% 1.38% 20.0% 56.3% 0.9 5.4 6.9% 21.5%
Hatton National Bank - Non
Voting
126.8 HOLD 131 3.3% 14.37% 1.57% 9% 13.1% 0.8 5.5 7.5% 10.8%
Hatton National Bank - Voting 157.9 HOLD 160 1.3% 14.37% 1.57% 9% 13.1% 1.0 7.0 6.0% 7.3%
Commercial Bank- Non Voting 97 HOLD 104 7.2% 17.17% 1.76% 12.7% 6.3% 1.2 7.5 6.9% 14.2%
National Development Bank 194.5 HOLD 171 -12.1% 12.96% 1.50% 26.1% 26.9% 1.1 8.8 5.7% -6.38%
Commercial Bank- Voting 127.4 SELL 123 -3.8% 17.17% 1.76% 12.7% 6.3% 1.6 9.8 5.3% 1.4%
61
Source: CAL Research

Sampath Bank [SAMP.N0000] to deliver 1-year total
return of +21.5%-BUY

Sampath Bank PLC (SAMP LKR 192.8; Market Cap USD 245mn): is the third
largest commercial bank in Sri Lanka. SAMPs 2013 net interest income
grew 25% YoY to LKR 15.1bn on the back of a 26% YoY net loan growth
(vs. CALs 23% YoY). CAL expects lower private sector credit growth in
2014 to keep SAMPs loan growth at 18% YoY and NIMs to contract 25bps
as the banks CASA (33% in 2013) does not reprice to the decline in interest
rates which may result in NII growing 12% YoY to LKR 17bn in 2014E.

Fee income growth (+19% YoY) primarily stemming from the card business
aided the NII growth and led to core profits growing 39% YoY to LKR 6.6bn
in 2013. Cost-to-income ratio of the bank improved from 67% in 2012 to
62% in 2013 as the bank benefited from recent branch additions breaking-
even. CAL expects SAMPs core profits to grow 20% YoY to LKR 8bn in
2014E.

With SAMP reducing LTVs on new pawning advances to c.65%, CAL
expects no major impairment provisioning for pawning advances during
2014. Pawning advances lent at an avg. price of USD 1300/Oz may provide
a cushion down to a gold price of USD 997/Oz (-22% fall from current level
of USD 1283/ Oz). The banks NPLs may remain flat at 2.7% (vs. 2.1% in
2012) for 2014E.

CAL expects SAMPs 2014E earnings to reach LKR 5.7bn (includes a LKR
1.5bn impairment provision) as impairment on gold loans subsides during
2014. SAMP currently trades on a 5.4x PER and 0.9x PBV on 2014E
financials vs. BFI sector PER of 9.3x and PBV of 1.2x and may provide a
17% ROE for 2014E. CAL maintains a BUY on SAMP based on a justified
PBV based target price of LKR 221 (vs. its previous LKR 219). The counter
may provide an LKR 12.5 DPS for 2014E which may translate into a
dividend yield of 6.9% (may include scrip dividends). BUY
62
70
80
90
100
110
120
SAMP ASPI (Source- www.cse.lk)

Market Cap (USD): 245mn
6 mos Avg. Daily T/O (USD): 199k
6mos H/L LKR 195/163
Free Float : 85%
Current Price (LKR): 192.9

YEAR END DEC (LKR mn) 2012
CAL's
2013E
Actual
2013
Revised
2014E
Revised
2015E
Net interest income 12,039 15,773 15,095 16,931 19,900
Net interest income growth 31% 25% 12% 18%
Core Profit 4,770 7,405 6,647 7,980 10,442
Core Profit growth 55% 39% 20% 31%
Profit attributable to equity holders 5,440 3,726 3,638 5,687 6,991
Profit growth -32% -33% 56% 23%
EPS (LKR) 32.4 22.2 21.7 33.9 41.6
NAVPS (LKR) 165.4 177.3 188.8 209.9 236.1
DPS (LKR) 12.0 8.2 8.0 12.5 15.4
PER (x) 6.0 8.7 8.9 5.4 4.4
P/BV (x) 1.2 1.1 1.0 0.9 0.8
Dividend Yield % 6.2% 4.3% 4.1% 6.9% 8.5%

Nations Trust Bank[NTB.N0000] to deliver 1-year total
return of +23%-BUY

Nations Trust Bank PLC (NTB LKR 66.9; Market Cap USD 116mn):
NTB is one of the fastest growing banks in SL with a loan book of
LKR 82bn (+12% YoY) and a deposit base of LKR 95bn (+11% YoY)
representing a market share of c.6% among private sector banks.

NTBs net interest margins expanded from 5.1% in 2012 to 5.8% in
2013 as NTBs CASA base improved to 25% (vs. 22% in 2012). NTBs
exposure to high yield fixed products such as leasing and credit
cards may continue to benefit from declining interest rates enabling
NIMs to remain stable at current levels (5.7% for 2014E). CAL
expects NTBs loan book to grow 12% YoY in 2014E and NII to grow
12% to LKR 8.6bn.

A 21% YoY growth in fee based income originating from the card
business (+31% YoY) and an improving cost-to-income ratio (57% in
2013 vs. 60% in 2012) led to 2013 core profits growing 42% YoY to
LKR 4.4bn. CAL expects NTBs 2014E fee income to grow 20% YoY
and core profits to reach LKR 5.2bn (+19% YoY). The bank may
continue its aggressive branch expansion program adding another
15 branches in 2014E. CAL expects credit costs to be c.0.6% of
gross loans which may result in an LKR 530mn impairment charge
for 2014E while bottom-line is expected to grow 12% YoY to LKR
2.4bn.

On 2014E financials, NTB trades on a 6.3x PER & 1.1x PBV vs. BFI
sector PER of 9.3x & PBV of 1.2x. CAL maintains a BUY on NTB
based on higher ROEs (19% in 2014E vs. sector avg. 15%), stable
NIMs, moderate growth in core profits (+19% YoY) and a 1-year
target price of LKR 80 (+19.6%) which may provide a total return of
23.3% including dividends. NTB may declare an LKR 2.4 DPS for
2014E which may translate into a 3.7% dividend yield. BUY
63
90
95
100
105
110
115
NTB ASPI
(Source- www.cse.lk)

Market Cap (USD): 116mn
6 mos Avg. Daily T/O (USD): 65k
6mos H/L (LKR): 69/59.5
Free Float: 80%
Current Price (LKR): 66.9

YEAR END DEC (LKR mn) 2012
CAL's
2013E
Actual
2013
Revised
2014E
Revised
2015E
Net interest income 5,755 7,150 7,675 8,621 9,711
Net interest income growth 24% 33% 12% 13%
Core Profits 3,102 4,139 4,400 5,217 6,112
Core Profit growth 33% 42% 19% 17%
Profit attributable to equity holders 1,935 2,116 2,136 2,394 2,875
Profit growth 9% 10% 12% 20%
EPS (LKR) 8.4 9.2 9.3 10.4 12.5
NAVPS (LKR) 43.2 50.6 50.9 59.3 68.9
DPS (LKR) 2.1 2.4 2.1 2.4 2.9
PER (x) 7.7 7.1 7.0 6.3 5.2
P/BV (x) 1.5 1.3 1.3 1.1 0.9
Dividend Yield % 3.2% 3.7% 3.2% 3.7% 4.4%

Hatton National Bank[HNB.X0000] to deliver 1-year total
return of +10.8%-HOLD

Hatton National Bank PLC (HNB V/NV LKR 157.9/126.8; Market Cap USD
382mn). HNB is the second largest private commercial bank, with a loan
book of LKR 353bn (+16% YoY) and a c.24% private bank market share.

HNBs net loan book grew 16% YoY in 2013 to LKR 353bn with growth
mainly stemming from the corporate loan portfolio (c.40% of the loan
book). A larger CASA base (38%) not re-pricing for the reduction in interest
rates and corporate lending rates being squeezed by stiff competition may
lead to HNBs NIMs shrinking by c.25bps to 4.8% in 2014E. CAL expects
HNBs loan book to grow 16% YoY to LKR 409bn whilst NII to grow 9% YoY
to LKR 27bn.

The banks 2013 fee based income grew 15% YoY to LKR 4bn with strong
growth being witnessed in fee commissions from cards and guarantees.
Cost-to income ratio of the bank reduced from 63% in 2012 to 58% in 2013
(63% recurring CIR) as personnel costs declined 17% YoY. CAL expects
recurring CIR to remain flat at 63% for 2014E due to slower income growth
while core profits are anticipated to grow 9% YoY to LKR 11.7bn.

HNBs 2013 earnings declined 4% YoY to LKR 7.7bn as the bank provided
LKR 1.2bn as impairment provisioning for pawning advances. With the
banks exposure to pawning advances now reduced to 11% from 15% in
2012 and LTVs on new gold loans reducing to c.60%, CAL expects HNBs
earnings to grow 13% YoY to LKR 8.7bn as impairment charges decline.

On CALs 2014E financials, HNB.X trades on a 5.9x PER and 0.8x PBV (vs.
BFI sector PER of 9.3x & PBV of 1.2x). CAL maintains a HOLD on HNB.X at
a 1-year target price of LKR 131/share (vs. its previous LKR 148), narrowing
discounts to the voting share (18% current vs. avg. 30% in 2012-13)
attractive valuation multiples (5.5x PER & 0.8x PBV) and a dividend yield of
7.5% for 2014E. HOLD

64
80
90
100
110
120
HNB V HNB NV ASPI (Source- www.cse.lk)

Market Cap (USD): 382mn
6 mos Avg. Daily T/O V & NV (USD): 218K/37k
6mos H/L (LKR) -V: 162/141
6mos H/L (LKR) -NV: 109.9/128.4
Free Float V & NV: 67%/99%
Current Price V/NV (LKR): 157.9/126.8

YEAR END DEC (LKR mn) 2012 CAL's 2013E Actual 2013
Revised
2014E
Revised
2015E
Net interest income 22,424 26,094 25,050 27,193 31,117
Net interest income growth 16% 12% 9% 14%
Core profit 9,802 11,680 10,739 11,746 14,277
Core Profit growth 19% 10% 9% 22%
Profit attributable to equity holders 7,942 8,836 7,650 8,654 10,408
Profit growth 11% -4% 13% 20%
EPS (LKR) 19.9 22.1 19.1 21.6 26.0
NAVPS (LKR) 130.1 142.6 143.9 157.2 173.2
DPS (LKR) 8.5 9.8 8.5 9.5 11.4
PER (x) - Voting/ Non-voting 8 / 6.4 7.1 / 5.7 8.3 / 6.6 7.3 / 5.9 6.1 / 4.9
P/BV (x)- Voting/ Non-voting 1.2 / 1 1.1 / 0.9 1.1 / 0.9 1 / 0.8 0.9 / 0.7
Dividend Yield % - Voting/ Non-voting 5.4%/6.7% 6.2%/7.7% 5.4%/6.7% 6%/7.5% 7.3%/9.0%
90
100
110
120
ASPI COMB.X0000 COMB.N0000

Commercial Bank [COMB.X] to deliver 1-year total return
of +14.2%-HOLD

Commercial Bank of Ceylon PLC (COMB V/NV LKR 127.4/97; Market
Cap USD 777mn): COMB is the largest private commercial bank in
SL with a loan book of LKR 379bn (+10% YoY) and a c.26% private
bank market share. Growth in the loan portfolio primarily stemmed
from the corporate book (c.40% exposure). CAL expects 2014E NIMs
to avg. 4.4% (vs. 4.5% in 2013) as the banks CASA base (44%)
remains unadjusted to the decline in interest rates and expects loan
book to grow 13% YoY to LKR 429bn which may result in NII
growing marginally by 10% YoY to LKR 27.9bn.

The banks 2013 fee income rose 18% YoY supported by strong
growth in the card business (+28% YoY). CAL expects 2014E fee
income to grow by 15% YoY and CIR to be 48%, which may lead to
core profits growing 13% YoY to LKR 17.1bn. COMBs 2013 net
earnings rose 5% YoY to LKR 10.6bn despite core profits growing
18% YoY. COMB recorded a trading loss of LKR 1.6bn vs. a gain of
LKR 2.5bn in 2012 as the bank swapped USD 140mn for currency
exchange rate risk. CAL expects 2014E earnings to grow marginally
by 6% YoY to LKR 11.2bn as one-off gains (forex revaluation gain)
subside.

COMB.X trades at a 7.8x PER and 1.2x PBV (vs. BFI PER of 9.2x and
1.2x PBV). CAL downgrades COMB.X to a HOLD based on a 1-year
target price of LKR 104 (+7.2%) factoring in a reversion to 2013 avg.
discount of 18% to the voting share (vs. current 24%) and a
reasonable dividend yield (6.9%). HOLD COMB.X; SELL COMB.N
65
Market Cap (USD): 777mn
6 mos Avg. Daily T/O (USD) V/NV: 439k/44k
6mos Price H/L V (LKR): 131.5/ 112
6mos Price H/L NV (LKR): 99/ 87.9
Free Float V/NV: 85%/100%
Current Price V/NV (LKR): 127.4/97

YEAR END DEC (LKR mn) 2012
CAL's
2013E
Actual
2013
Revised
2014E
Revised
2015E
Net interest income 22,852 24,964 25,322 27,905 30,781
Net interest income growth 9% 11% 10% 10%
Core Profits* 12,882 14,635 15,211 17,140 18,858
Core Profit growth 14% 18% 13% 10%
Profit attributable to equity holders 10,080 9,798 10,563 11,229 12,243
Profit growth -3% 5% 6% 9%
EPS (LKR) 12.1 11.5 12.4 13.0 13.9
NAVPS (LKR) 63.6 69.9 72.4 80.3 88.7
DPS (LKR) 6.5 6.2 6.5 6.7 7.0
PER (x) - Voting/ Non-voting 10.5 / 8 11.1 / 8.4 10.2 / 7.8 9.8 / 7.5 9.1 / 7
P/BV (x)- Voting/ Non-voting 2 / 1.5 1.8 / 1.4 1.8 / 1.3 1.6 / 1.2 1.4 / 1.1
Dividend Yield % - Voting/ Non-voting 5.6%/7.2% 6.5%/8.3% 5.1%/6.7% 5.3%/6.9% 5.5%/7.2%
National Development Bank[NDB.N0000]-HOLD
National development Bank (NDB LKR 194.5; Market Cap USD 242mn):
Despite NDBs loan book only growing 6% Jan-Sep 2013, aggressive
lending during 4Q2013 resulted in the loan book closing at LKR 137bn
(+18% YoY vs. industrys 15% YoY). Higher growth came from loans to
renewable energy, export financing, agriculture and infrastructure lending
segments. In addition, the banks NIMs remained almost flat (3.7% in 2013
vs. 3.8% in 2012) as the bank enacted minimum lending rates and benefited
from declining deposit rates.

The bank witnessed a 40% YoY robust growth in fee income primarily
materializing from wealth management, bank assurance, guarantees and
charges for loans and deposits which supported the growth in NII. Further,
the cost-to-income ratio of the bank improved from 60% in 2012 to 59% in
2013 even amidst the bank adding 9 branches during the year and
operating costs rising 24% YoY. NDBs 2013 net earnings were down 15%
YoY to LKR 2.6bn mainly due to impairment charges rising from LKR 51mn
in 2012 to LKR 1.3bn in 2013. However, c.LKR 800mn out of the LKR 1.2bn
impairment charge was one-off and was provided for a single corporate
client. Nevertheless, the banks NPLs rose from 1.3% in 2012 to 2.5% in
2013 and CAL expects 2014E NPLs to be close to 3% as the agri segment
may be impacted by the drought.

NDB currently trades on a 2014E PER of 8.8x & PBV of 1.1x vs. banking
sector avg. PER of 9.3x and PBV of 1.2x. If the proposed merger with DFCC
goes ahead, the combined entity may have LKR 378bn in assets, LKR
243bn in loans, LKR 63bn in equity and c.210 branches, making the
combined entity the fourth largest among the private sector commercial
banks. CAL maintains a HOLD on NDB due to lower ROEs (13% for 2014E)
being insufficient to compensate for a higher COE (c.16%). CALs target
price for NDB is LKR 171 (-12.1% YoY) and may provide an LKR 10 DPS
which may translate into a dividend yield of 5.7%. HOLD.
66
Market Cap (USD): 242mn
6 mos Avg. Daily T/O (USD) : 207k
6mos Price H/L (LKR): 188/145
Free Free Float :76%
Current Price : 194.5

70
80
90
100
110
120
NDB.N0000 ASPI
YEAR END DEC (LKR mn) 2012
CAL's
2013E
Actual
2013
Revised
2014E
Revised
2015E
Net interest income 5,819 7,251 7,012 8,405 10,174
Net interest income growth 25% 20% 20% 21%
Core Profits 3,043 3,881 3,859 4,881 6,196
Core Profit growth 28% 27% 26% 27%
Profit attributable to equity holders 3,103 3,249 2,642 3,353 4,086
Profit growth 5% -15% 27% 22%
EPS (LKR) 18.8 19.7 16.0 20.3 24.8
NAVPS (LKR) 150.9 153.4 148.7 165.2 185.1
DPS (LKR) 15.0 7.9 10.0 10.2 12.4
PER (x) 10.3 9.9 12.1 8.8 7.2
P/BV (x) 1.3 1.3 1.3 1.1 1.0
Dividend Yield % 7.7% 4.1% 5.1% 5.7% 7.0%
Key ratios for CALs banking universe
67
SAMP NTB HNB COMB NDB
2012 2013 2014E 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E
Yield Ratios
Net interest margins 4.9% 4.8% 4.6% 5.8% 6.4% 6.3% 6.1% 5.8% 5.5% 5.4% 5.0% 4.8% 4.2% 4.0% 4.0%
Yield on avg. earning assets 4.2% 4.3% 4.1% 5.1% 5.8% 5.8% 5.3% 5.1% 4.8% 4.8% 4.5% 4.4% 3.8% 3.7% 3.8%
Average cost of funding 8.3% 8.7% 7.4% 9.6% 8.9% 6.9% 7.2% 7.6% 6.4% 7.2% 7.6% 6.4% 9.0% 8.6% 6.8%
Fee Income as a % of NII 18.3% 17.3% 18.3% 35.5% 32.6% 35.1% 15.6% 16.1% 17.2% 18% 19% 20% 29.6% 34.4% 34.3%
Core profit margin 14.6% 15.7% 18.1% 20.5% 24.6% 29.7% 19.8% 21.6% 20.3% 25.5% 25.5% 28.2% 17.7% 18.6% 22.9%
Liquidity & Balance Sheet composition
Liquid assets/Customer deposits 23.1% 21.1% 15.9% 36.3% 46.2% 43.0% 27.5% 26.9% 26.8% 19.0% 28.3% 26.0% 21.4% 19.1% 20.6%
Avg. customer deposits/Avg. total
funding 77% 77% 79% 69% 69% 68% 74% 74% 74% 75% 75% 75% 59.8% 62.2% 63.0%
CASA Ratio 34% 33% 35% 22% 25% 26% 39% 38% 40% 45% 44% 44% 24% 24% 27%
Loan-to-deposit ratio 88% 89% 89% 85% 86% 86% 89% 92% 91% 96% 93% 93% 109% 106% 106%
Leverage Ratio 11.3 12.3 12.2 12.3 12.1 11.5 8.7 9.0 9.4 9.7 9.9 9.7 6.8 8.2 8.6
Efficiency Ratios
Cost-to-income ratio (Old)* 52% 54% 53% 56% 58% 58% 56% 52% 56% 41% 40% 43% 30% 48% 49%
Cost-to-income ratio (New) 67% 62% 60% 60% 57% 55% 63% 58% 63% 51% 49% 48% 60% 59% 57%
Personnel cost/ total op. expenses 44% 42% 43% 45% 43% 44% 44% 36% 41% 58% 58% 58% 52% 48% 47%
Operating cost/branch 45,312 52,198 56,324 82,411 80,257 73,928 36,981 43,105 46,539 55,605 58,390 63,035 31,355 37,226 38641
Asset Quality
Gross NPL ratio 2.1% 2.7% 2.5% 2.8% 3.1% 3.3% 3.7% 3.6% 3.8% 3.4% 3.9% 3.8% 1.3% 2.4% 2.7%
Credit cost ratio 0.04% 1.44% 0.44% 0.6% 0.6% 0.6% 0.4% 1.0% 0.4% 0.9% 1.1% 0.6% 0.0% 1.0% 0.5%
Loan loss provisions/ Gross Loans 3.2% 3.6% 0.0% 2.4% 2.1% 2.2% 2.4% 2.9% 2.9% 3.5% 3.6% 3.3% 2.5% 3.0% 3.0%
Growth rates (%)
Net interest income YoY 30% 25% 12% 54% 19% -2% 33% 12% 9% 22% 11% 10% 19% 20% 20%
Net loans book YoY 24% 26% 18% 20% 12% 12% 18% 16% 16% 19% 12% 13% 24% 17% 18%
Core profit YoY 34% 39% 20% 48% 42% 19% 53% 13% 9% 23% 18% 13% 223% -70% 26%
Net profit YoY 48% -33% 56% 14% 10% 12% 16% -4% 13% 27% 5% 6% 250% -70% 27%
Source: CAL Research
CIR Old method-Operating expenses/Operating income
CIR New method-Operating expenses/Net interest and fee income
VI. APPENDICES
68
Appendix 1 : DuPont analysis for banks - 2013
69
Dupont
Analysis
ROAE - Net Profit/Average
Equity
ROAA- Net Profit/Average
Assets
Operating profit margin-
Net Operating
Income/Average Assets
Core profits margin- Core
profits/ Average Assets
Net interest Margin- Net
interest income/Average
assets
Net fee and commission %-
Net fee and commission/
Average assets
(-) Operating expense %-
Operating expenses/
Average assets
Other operating income
margin- Other operating
income/ Average Assets
Net loss from trading %-Net
loss from trading/ Average
assets
(+) Net gain from financial
investments %-Net gain
from fin. inv/ Average
assets
(+) Other operating income
% (including translation
gains) %-Other operating
income/ Average assets
Impairment multiplier-
Profit before VAT & Income
tax/Net Operating Income
Tax multiplier-Net profit/
Profit before VAT and
income tax
Leverage - Average
Assets/Average Equity
Calculation methodology
Du Pont Analysis 2013 HNB COMB SAMP NTB NDB SEYB PABC UBC
Average Return on Equity 13.99% 18.22% 11.45% 19.68% 10.62% 10.50% 2.77% 1.90%
Average Return on Assets 1.59% 1.86% 1.03% 1.61% 1.42% 1.17% 0.19% 0.29%
Leverage 8.82 9.78 11.12 12.19 7.46 8.99 14.61 6.58
Average Return on Equity 13.99% 18.22% 11.45% 19.68% 10.62% 10.50% 2.77% 1.90%
Average Return on Assets 1.59% 1.86% 1.03% 1.61% 1.42% 1.17% 0.19% 0.29%
Operating profit margin 3.20% 3.77% 2.63% 3.12% 3.14% 2.78% 1.61% 1.29%
Impairment multiplier (impact from impairment) 79.02% 78.21% 61.54% 89.09% 78.94% 75.71% 23.51% 33.99%
Tax multiplier (impact from VAT & Income tax) 62.76% 63.16% 63.59% 58.04% 57.41% 55.41% 50.28% 65.80%
Average Return on Assets 1.59% 1.86% 1.03% 1.61% 1.42% 1.17% 0.19% 0.29%
Operating Profit margin 3.20% 3.77% 2.63% 3.12% 3.14% 2.78% 1.61% 1.29%
Core profits margin 2.49% 2.69% 1.88% 3.33% 2.03% 2.31% 0.73% -0.28%
Other operating income margin 0.71% 1.08% 0.75% -0.20% 1.12% 0.48% 0.87% 1.57%
Operating profit margin 3.20% 3.77% 2.63% 3.12% 3.14% 2.78% 1.61% 1.29%
Core Profit Margin 2.49% 2.69% 1.88% 3.33% 2.03% 2.31% 0.73% -0.28%
Net interest margins % 5.09% 4.52% 4.27% 5.80% 3.68% 4.90% 3.46% 3.76%
Net fee and commission % 0.82% 0.76% 0.74% 1.89% 1.27% 1.05% 0.89% 0.56%
(-) Operating expense % 3.42% 2.59% 3.13% 4.37% 2.92% 3.64% 3.62% 4.60%
Core profit margin 2.49% 2.69% 1.88% 3.33% 2.03% 2.31% 0.73% -0.28%
Tax multiplier 62.76% 63.16% 63.59% 58.04% 57.41% 55.41% 50.28% 65.80%
Income tax multiplier 71.57% 71.68% 75.96% 67.80% 70.21% 67.27% 92.70% 91.99%
VAT multiplier 87.69% 88.12% 83.72% 85.61% 81.77% 82.36% 54.24% 71.52%
Tax multiplier 62.76% 63.16% 63.59% 58.04% 57.41% 55.41% 50.28% 65.80%
Appendix 2: Summary of DuPont analysis for 2013
Source: CAL Research
- Positive factor
- Negative factor
71
Dupont Analysis COMMERCIAL BANK
Dupont Analysis SAMPATH BANK
SAMP
ROAE -11.45%
ROAA- 1.03%
Operating profit
margin- 2.63%
Core profits
margin- 1.88%
Net interest
Margin- 4.27%
Net fee and
commission %-
0.74%
(-) Operating
expense- 3.13%
Other operating
income margin-
0.75%
Net loss from
trading %-(0.02%)
(+) Other
operating income
%-0.77%
Impairment
multiplier-
61.54%
Tax multiplier-
63.59%
Leverage - 11.12
Dupont Analysis NATIONS TRUST BANK
NTB
ROAE -19.68%
ROAA- 1.61%
Operating profit
margin- 3.12%
Core profits
margin- 3.33%
Net interest Margin-
5.80%
Net fee and commission
%- 1.89%
(-) Operating expense
%- 4.37%
Other operating
income margin-
-0.20%
Net loss from trading %-
(0.36%)
(+) Net gain from
financial investments %-
0.00%
(+) Other operating
income % -0.16%
Impairment
multiplier-
89.09%
Tax multiplier-
58.04%
Leverage - 12.19
72
Dupont Analysis COMMERCIAL BANK
Dupont Analysis HATTON NATIONAL BANK
COMB
ROAE -18.22%
ROAA- 1.86%
Operating profit
margin- 3.77%
Core profits margin-
2.69%
Net interest Margin-
4.52%
Net fee and
commission %- 0.76%
(-) Operating expense
%-2.59%
Other operating
income margin- 1.08%
Net loss from trading
%-(0.29%)
(+) Net gain from
financial investments
%-0.24%
(+) Other operating
income % -1.13%
Impairment multiplier-
78.21%
Tax multiplier-63.16%
Leverage - 9.78
HNB
ROAE -13.99%%
ROAA- 1.59%
Operating profit margin-
3.20%
Core profits margin-
2.49%
Net interest Margin-
5.09%
Net fee and commission
%- 0.82%
(-) Operating expense %-
3.42%
Other operating income
margin- 0.71%
Net loss from trading %-
(0.36%)
(+) Net gain from
financial investments %-
0.06%
(+) Other operating
income % (including
translation gains) %-
1.01%
Impairment multiplier-
79.02%
Tax multiplier- 62.76%
Leverage - 8.82
73
Dupont Analysis NATIONAL DEVELOPMENT BANK
SEYB
ROAE -10.50%
ROAA- 1.17%
Operating
profit margin-
2.78%
Core profits
margin-
2.31%
Net interest
Margin- 4.90%
Net fee and
commission
%- 1.05%
(-) Operating
expense %-
3.64%
Other
Operating
income
margin-
0.48%
Net loss from
trading %-
0.35%
(+) Net gain from
financial
investments %-
0.09%
(+) Other
operating income
% -0.04%
Impairment
multiplier-
75.71%
Tax multiplier-
55.41%
Leverage - 8.99
Dupont Analysis SEYLAN BANK
NDB
ROAE -10.62%
ROAA- 1.42%
Operating profit
margin- 3.14%
Core profits
margin- 2.03%
Net interest
Margin- 3.68%
Net fee and
commission %-
1.27%
(-) Operating
expense %-
2.92%
Other operating
income margin-
1.12%
Net loss from
trading %-0.98%
(+) Other
operating income
% -0.14%
Impairment
multiplier-
78.94%
Tax multiplier-
57.41%
Leverage - 7.46
74
Dupont Analysis PANASIA BANK
PABC
ROAE -2.77%
ROAA- 0.19%
Operating profit
margin- 1.61%
Core profits
margin- 0.73%
Net interest
Margin- 3.46%
Net fee and
commission %-
0.89%
(-) Operating
expense %-3.62%
Other operating
income margin- -
0.87%
Net loss from
trading %-0.39%
(+) Other
operating income
% -0.48%
Impairment
multiplier-
23.51%
Tax multiplier-
50.28%
Leverage - 14.61
Dupont Analysis UNION BANK OF COLOMBO
UBC
ROAE -1.90%
ROAA- 0.29%
Operating profit
margin- 1.29%
Core profits
margin- (0.28%)
Net interest
Margin- 3.76%
Net fee and
commission %-
0.56%
(-) Operating
expense %-4.60%
Other operating
income margin-
1.57%
Net loss from
trading %-0.35%
(+) Other
operating
income % -1.22%
Impairment
multiplier-
33.99%
Tax multiplier-
65.80%
Leverage - 6.58
S
A
M
P
A
T
H

B
A
N
K

I
N
C
O
M
E

S
T
A
T
E
M
E
N
T

75
SAMP - SLFRS INCOME STATEMENT (LKR mn) 2012 2013 2014E 2015E
Income 39,728 48,066 50,653 58,667
Interest income 32,712 42,320 44,196 51,224
Less: Interest expenses 20,673 27,226 27,266 31,324
Net interest income 12,039 15,095 16,931 19,900
Fee and commission income 2,877 3,099 3,694 4,341
Less: Fee and commission expenses 675 480 591 695
Net fee and commission income 2,202 2,619 3,103 3,646
Net interest, fee and commission income 14,241 17,713 20,033 23,546
Net trading income 6 70 - 56 - 57 -
Net gain from financial investments - - - -
Other operating income 4,133 2,716 2,763 3,102
Total Operating income 18,380 20,360 22,741 26,591
Less: Impairment charge/(reversal) for loans and other losses 152 - 3,850 - 1,337 - 2,065 -
Less: Impairment gain / ( loss) on financial investments 72 276 - -
Net operating income 18,299 16,786 21,403 24,526
Operating Expenses - - - -
Personnel expenses 4,181 4,672 5,162 5,702
Depreciation of property & equipment 588 563 596 603
Amortisation of intangible assets 47 53 55 58
Other operating expenses 4,654 5,778 6,240 6,740
9,470 11,066 12,053 13,104
Operating profit before value added tax (VAT) 8,829 5,720 9,350 11,422
Less: Value added tax (VAT) & NBT on financial services 1,176 931 1,451 1,712
Operating profit after value added tax (VAT) 7,653 4,789 7,899 9,710
Share of profit/(loss) of Associates (net of income tax) - - - -
Profit before income tax 7,653 4,789 7,899 9,710
Less: Income tax expense 2,213 1,151 2,212 2,719
Profit for the year 5,440 3,638 5,687 6,991
Profit attributable to Equity holders of the Bank 5,437 3,635 5,681 6,984
Profit attributable to Non-controlling interests 3 3 6 7
Appendix 3: Summary Financials
S
A
M
P
A
T
H

B
A
N
K

B
A
L
A
N
C
E

S
H
E
E
T

76
SLFRS STATEMENT OF FINANCIAL POSITIION (LKR mn) 2012 2013 2014E 2015E
ASSETS
Cash and cash equivalents 10,442 8,341 8,861 10,456
Balances with Central Bank of Sri Lanka 17,201 15,767 19,628 23,210
Placements with Banks 8,788 1,791 2,920 3,270
Derivative financial instruments 279 231 316 373
Loans and receivables from other customers 212,480 265,910 316,276 373,205
Financial Investments 54,312 85,542 70,961 79,521
Property and equipment 6,764 8,327 8,056 7,775
Intangible assets 316 313 318 319
Other assets 4,472 5,082 5,557 6,079
Total Assets 315,055 391,304 432,892 504,210
LIABILITIES
Due to banks 668 2,250 1,557 1,837
Derivative financial instruments 382 639 99 100
Securities sold under re-purchase agreements 2,751 3,055 3,479 4,105
Due to other customers 243,088 300,382 354,451 418,252
Debt issued and other borrowed funds 32,218 44,749 28,095 28,584
Other liabilities 8,128 8,470 9,851 11,564
Total Liabilities 287,236 359,544 397,532 464,443
EQUITY
Stated capital 3,564 4,460 4,476 4,476
Statutory reserves 2,760 3,770 5,215 6,935
Other reserves 18,237 20,139 21,277 22,675
Retained profit 3,197 3,301 4,297 5,580
Total equity attributable to equity holders of the Bank 27,758 31,671 35,266 39,665
Non-controlling interests 61 89 95 102
Total Equity 27,819 31,760 35,360 39,767
Total Liabilities and Equity 315,055 391,304 432,892 504,210
N
A
T
I
O
N
S

T
R
U
S
T

B
A
N
K

I
N
C
O
M
E

S
T
A
T
E
M
E
N
T

77
SLFRS INCOME STATEMENT (LKR mn) 2012 2013 2014E 2015E
Income - - - -
Interest Income 15,113 17,911 17,570 19,582
Interest Expense (9,358) (10,237) (8,950) (9,871)
Net Interest Income 5,755 7,675 8,621 9,711
Fees and Commission Income 2,220 2,719 3,288 3,971
Fees and Commission Expense (176) (215) (260) (314)
Net Fees and Commission Income 2,045 2,504 3,028 3,658
Net interest, fee and commission income 7,799 10,179 11,649 13,368
Net Trading Income 288 (478) (751) (775)
Other Operating Income 228 210 228 253
Total Operating Income 8,315 9,910 11,125 12,846
Impairment Charge / (Reversal ) for Loans and Advances 432 451 530 611
Net Operating Income 7,883 9,459 10,596 12,235
Personnel Expenses 2,113 2,495 2,853 3,243
Depreciation of Property, Plant and Equipment 267 258 277 299
Amortization of Intangible Assets 113 157 167 167
Other Operating Expenses 2,205 2,870 3,134 3,548
Total Operating Expenses 4,697 5,779 6,432 7,256
Operating Profit Before Value Added Tax (VAT) 3,186 3,681 4,164 4,979
VAT & NBT on Financial Services 435 530 744 871
Profit Before Income Tax 2,750 3,151 3,420 4,107
Income Tax Expense 815 1,015 1,026 1,232
Profit for the Year 1,935 2,136 2,394 2,875
N
A
T
I
O
N
S

T
R
U
S
T

B
A
N
K

B
A
L
A
N
C
E

S
H
E
E
T

78
Statement of Financial Position (LKR mn) 2012 2013 2014E 2015E
Assets
Cash and Cash Equivalents 2,534 3,020 3,217 3,602
Balances with Central Bank of Sri Lanka 5,089 4,032 4,683 5,308
Derivative Financial Instruments 328 121 138 155
Financial Investments 35,931 47,005 50,616 56,042
Loans and Advances to Customers 73,424 82,327 92,107 103,053
Other Assets 2,591 2,894 3,224 3,607
Property, Plant and Equipment 1,908 2,048 2,127 2,133
Intangible Assets 642 680 513 346
Total Assets 122,447 142,128 156,624 174,245
Liabilities - - - -
Due to Banks 2,796 1,401 1,514 1,635
Repurchase Agreements 11,833 18,068 18,421 20,611
Derivative Financial Instruments 528 634 710 816
Due to Customers 86,190 95,730 107,217 120,083
Debt Issued and Other Borrowed Funds 6,334 8,806 8,833 8,933
Current Tax Liabilities 544 383 646 407
Other Liabilities 3,846 5,027 5,279 5,542
Deferred Tax Liabilities 280 341 341 341
Total Liabilities 112,352 130,390 142,960 158,367
Equity Attributable to Equity Holders of the Parent
Stated Capital 5,101 5,101 5,101 5,101
Statutory Reserve Fund 314 419 539 683
Retained Earnings 3,919 5,067 6,312 7,724
Other Reserves 636 1,150 1,712 2,369
9,970 11,738 13,664 15,878
Total Liabilities and Equity 122,321 142,128 156,624 174,245
H
A
T
T
O
N

N
A
T
I
O
N
A
L

B
A
N
K

I
N
C
O
M
E

S
T
A
T
E
M
E
N
T

79
HNB SLFRS INCOME STATEMENT (LKR mn) 2012 2013 2014E 2015E
Income 55,212 64,638 67,243 77,017
Interest income 47,919 56,627 57,754 66,088
Less: Interest expenses 25,496 31,577 30,561 34,971
Net interest income 22,424 25,050 27,193 31,117
Fee and commission income 3,905 4,500 5,220 6,055
Less: Fee and commission expenses 412 470 548 636
Net fee and commission income 3,493 4,030 4,672 5,420
Net interest, fee and commission income 25,917 29,080 31,865 36,537
Net loss from trading 1,624 - 1,756 - 1,532 - 1,532 -
Net gain from financial investments 116 309 314 314
Other operating income 4,895 4,956 5,486 6,091
Total Operating income 29,304 32,590 36,133 41,410
Less: Impairment charge/(reversals) 1,142 - 3,305 - 1,697 - 1,970 -
Net operating income 28,162 29,285 34,436 39,440
Personnel expenses 7,273 6,061 8,344 9,457
Depreciation & Amortisation 1,159 1,286 1,402 1,469
Other overhead expenses 7,975 9,490 10,372 11,335
Total Operating expenses 16,407 16,837 20,119 22,260
Operating profit before VAT 11,755 12,448 14,317 17,180
Less: VAT on financial services 1,248 1,660 2,187 2,570
Operating profit after VAT 10,507 10,788 12,131 14,610
Share of profit/(loss) of Associates 17 128 134 141
Profit before income tax 10,523 10,916 12,265 14,750
Less: Income tax expense 2,421 3,103 3,434 4,130
Profit for the year 8,102 7,812 8,831 10,620
Profit attributable to Equity holders 7,942 7,650 8,654 10,408
Profit attributable to MI 160 162 177 212
H
A
T
T
O
N

N
A
T
I
O
N
A
L

B
A
N
K

B
A
L
A
N
C
E

S
H
E
E
T

80
HNB SLFRS BALANCE SHEET (LKR mn) 2012 2013 2014E 2015E
ASSETS - - - -
Cash and cash equivalents 8,849 11,588 11,712 13,703
Balances with central banks 19,950 16,367 21,009 24,632
Placements with banks 11,667 3,084 12,480 14,096
Derivative financial instruments 345 175 409 475
Loans and receivables to other customers 303,271 352,846 409,302 474,791
Financial Investments 83,633 109,627 111,275 125,679
Property, plant and equipment 17,815 17,791 17,667 17,522
Intangible assets 690 1,121 1,108 1,071
Other assets 13,234 12,797 15,493 18,003
Total assets 459,453 525,395 600,454 689,971
LIABILITIES - - - -
Due to banks 24,443 35,361 38,118 41,154
Derivative financial instruments 1,436 749 749 749
Due to other customers 340,848 385,001 450,451 527,027
Dividends payable 223 428 457 550
Other borrowings 9,539 10,254 11,023 11,849
Debt securities issued 150 1,530 1,530 1,530
Other liabilities 22,067 21,625 22,480 24,852
Subordinated debentures 7,729 11,782 11,482 11,482
Total Liabilities 406,435 466,729 536,290 619,193
EQUITY - - - -
Stated capital 12,579 12,830 12,830 12,830
Statutory reserves 4,531 6,761 9,050 11,753
Retained earnings 5,322 5,210 6,513 8,129
Other reserves 29,616 32,760 34,490 36,572
Total equity attributable to equity holders of the Bank 52,048 57,562 62,884 69,285
Non-controlling interests 969 1,104 1,281 1,493
Total Equity 53,017 58,666 64,165 70,778
Total Liabilities and Equity 459,453 525,395 600,454 689,971
C
O
M
M
E
R
C
I
A
L

B
A
N
K

I
N
C
O
M
E

S
T
A
T
E
M
E
N
T

81
SLFRS INCOME STATEMENT (LKR mn) 2012 2013 2014E 2015E
Income 63,374 73,378 73,580 81,678
Interest income 52,663 62,177 63,460 70,368
Less: Interest expenses 29,811 36,855 35,556 39,587
Net interest income 22,852 25,322 27,905 30,781
Fee and commission income 4,147 4,880 5,593 6,429
Less: Fee and commission expenses 549 627 725 860
Net fee and commission income 3,598 4,253 4,868 5,569
Net interest, fee and commission income 26,450 29,575 32,773 36,350
Net loss from trading 2,494 1,626 - 1,125 - 1,125 -
Net gain from financial investments 32 1,350 30 30
Other operating income 4,038 6,320 4,527 4,881
Total Operating income 33,014 35,619 36,205 40,136
Less: Impairment charge/(reversal) for loans and other losses 3,158 4,600 2,571 2,957
Less: Impairment gain / ( loss) on financial investments - - - -
Net operating income 29,856 31,019 33,634 37,179
Operating Expenses
Personnel expenses 7,837 8,266 9,000 10,433
Other operating expenses 5,731 6,098 6,633 7,059
13,568 14,364 15,633 17,492
Operating profit before value added tax (VAT) 16,288 16,655 18,001 19,687
Less: Value added tax (VAT) & NBT on financial services 1,987 1,969 2,403 2,681
Operating profit after value added tax (VAT) 14,301 14,686 15,598 17,006
Share of profit/(loss) of Associates (net of income tax) 12 7 7 7
Profit before income tax 14,313 14,693 15,598 17,006
Less: Income tax expense 4,232 4,119 4,367 4,762
Profit for the year 10,081 10,573 11,231 12,244
Profit attributable to Equity holders of the bank 10,080 10,563 11,229 12,243
Non-controlling interest 1 10 1 2
C
O
M
M
E
R
C
I
A
L

B
A
N
K

B
A
L
A
N
C
E

S
H
E
E
T

82
COMMERCIAL BANK (LKR mn) - SLFRS BALANCE SHEET 2012 2013 2014E 2015E
ASSETS
Cash and cash equivalents 19,752 14,264 16,312 18,432
Balances with Central Banks 18,168 18,432 19,854 22,437
Placements with banks 16,163 4,132 12,041 12,565
Derivative financial instruments 1,351 838 765 864
Loans and receivables to other customers 372,857 418,944 472,544 538,998
Financial Investments 64,633 130,674 128,988 134,576
Investments in associates 94 94 96 98
Property, plant & equipment 8,947 9,175 8,987 8,757
Intangible assets 506 478 467 457
Other assets 9,749 10,162 10,161 10,159
Total assets 512,221 607,192 670,216 747,345
LIABILITIES - - - -
Due to banks 4,894 14,194 7,980 8,100
Derivative financial instruments 84 1,412 1,711 1,945
Due to other customers 390,569 451,099 509,742 576,008
Other borrowings 47,436 53,998 55,145 55,275
Other liabilities 15,132 13,948 15,016 16,805
Subordinated term debts 1,106 11,057 11,230 11,230
Total liabilities 459,220 545,707 600,823 669,363
EQUITY - - - -
Stated capital 18,009 19,587 21,332 23,084
Statutory reserves 3,433 4,035 4,636 5,288
Retained earnings 4,173 4,360 5,513 6,837
Other reserves 27,353 33,465 37,871 42,730
Total equity to equity owners of the Bank 52,968 61,446 69,352 77,940
Non-Controlling Interest 32 39 40 42
Total equity 53,001 61,485 69,393 77,982
512,221 607,192 670,216 747,345
N
A
T
I
O
N
A
L

D
E
V
E
L
O
P
M
E
N
T

B
A
N
K

I
N
C
O
M
E

S
T
A
T
E
M
E
N
T

83
NDB SLFRS INCOME STATEMENT (LKR mn) 2012 2013 2014E 2015E
Interest income 17,150 20,766 21,340 24,786
Interest expense 11,331 13,754 12,936 14,612
Net interest income 5,819 7,012 8,405 10,174
Net fee and commission income 1,720 2,411 2,887 3,472
Net trading income/(expense) 1,272 1,868 1,427 1,477
Other operating income 6,127 258 279 301
Total operating income 14,939 11,549 12,997 15,424
Impairment charge/ (reversal) 51 1,261 832 982
Net operating income 14,888 10,288 12,164 14,441
Less: Operating Expenses - - - -
Personnel expenses 2,333 2,660 3,010 3,412
Depreciation & Amortization 314 385 410 451
Other operating expenses 1,849 2,519 2,991 3,586
Total operating expenses 4,497 5,564 6,410 7,449
Operating profit before value added tax 10,391 4,724 5,754 6,992
VAT & NBT on financial services 622 - 911 - 920 - 1,092 -
Operating profit after value added tax 9,769 3,814 4,834 5,899
Share of associate companies profit 439 49 53 57
Profit before tax 10,207 3,863 4,887 5,957
Income tax expense 1,275 - 1,151 - 1,466 - 1,787 -
Profit for the year 8,932 2,712 3,421 4,170
Profit attributable to equity holders 8,854 2,642 3,353 4,086
Profit attributable to minority interest 78 70 68 83
N
A
T
I
O
N
A
L

D
E
V
E
L
O
P
M
E
N
T

B
A
N
K

B
A
L
A
N
C
E

S
H
E
E
T

84
NDB SLFRS BALANCE SHEET (LKR mn) 2012 2013 2014E 2015E
ASSETS
Cash and cash equivalents 3,635 2,668 3,818 4,505
Balances with Central Bank 6,075 5,339 7,239 8,650
Placements with banks 3,559 131 6,381 6,392
Derivative financial instruments 1,706 1,150 1,374 1,622
Loans and advances to customers 116,039 136,882 161,512 190,493
Financial Investments 39,064 56,256 56,062 56,300
Intangible assets 319 297 246 203
Property, plant & equipment 1,223 1,183 1,161 1,142
Investment properties 1,296 1,384 1,384 1,384
Other assets 1,188 1,524 1,785 2,092
Total assets 174,103 206,812 240,962 272,783
LIABILITIES - - - -
Due to Banks 2,320 10,453 8,952 10,560
Derivative financial instruments 1,737 817 2,423 2,857
Due to customers 107,394 129,422 152,718 180,207
Debt securities issued and other borrowed funds 30,318 24,391 30,817 28,917
Subordinated term debts 2,255 11,683 12,156 12,010
Other liabilities 4,370 4,685 5,781 6,782
Total liabilities 148,394 181,451 212,846 241,333
EQUITY
Stated capital 864 944 944 944
Statutory reserve fund 879 959 959 959
Investment Fund 924 1,707 2,408 3,240
Share based payment reserve - 22 22 22
Retained Earnings 22,216 20,882 22,894 25,346
24,883 24,514 27,226 30,511
Non-controlling interests 826 848 889 939
Total Equity 25,709 25,362 28,115 31,450
Total liabilities and total equity 174,103 206,812 240,962 272,783
5000
10000
15000
20000
25000
30000
35000
40000
NTB NDB COMB HNB SEYB SAMP PABC UBC
P
e
r
s
o
n
a
l

c
o
s
t
/
B
r
a
n
c
h

600
800
1000
1200
1400
1600
1800
2000
COMB NDB HNB SAMP SEYB NTB PABC UBC
P
e
r
s
o
n
a
l

c
o
s
t
/
E
m
p
l
o
y
e
e

20000
40000
60000
80000
100000
NTB HNB COMB SAMP SEYB NDB PABC UBC
O
p
e
r
a
t
i
n
g

C
o
s
t
/
B
r
a
n
c
h

Figure 92- Banks personal cost per branch
Figure 90- Banks personal cost per employee Figure 91- Banks personal cost per branch
85
Source: Company data & CAL Research
10
15
20
25
30
35
NTB NDB SEYB COMB HNB SAMP PABC UBC
E
m
p
l
o
y
e
e
/

B
r
a
n
c
h

Figure 93- Banks personal cost per branch
Appendix 4: Banks cost efficiency indicators
Contacts
86
Research Team
Tel No: +94 11 231 7777 (General)
E-mail: teamresearch@cal.lk

Head of Research
Purasisi Jinadasa Udeeshan Jonas
Tel No: +94 11 231 7786 Tel No: +94 11 231 7746
E-mail: purasisi@cal.lk E-mail: udeeshan@cal.lk

Thushani de Silva Devin Karunaratne
Tel No: +94 11 231 7777 (Ext: 7815) Tel No: +94 11 231 7777 (Ext: 7814)
E-mail: thushani@cal.lk E-mail: devin@cal.lk

Christeen Silva Teresh Amaratunga
E-mail: christeen@cal.lk E-mail: teresh@cal.lk



Definition of rating distribution for long-term investment opportunities
CAL Research uses the following rating system:

STRONG BUY Strong upside. Total return (incl. dividends) is expected to be above 20%
within the next 12 months.
BUY Good upside. Total return (incl. dividends) is expected to be between 15%
to 20% within the next 12 months.
HOLD For existing shareholders. Total return (incl. dividends) is expected to be
between 5% to 15% within the next 12 months.
SELL Strong downside. Total return (incl. dividends) is expected to be below 5%
within the next 12 months.

87
This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources,
believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions
and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not
intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own
independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments
mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its directors, officers, consultants, employees,
outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits,
damages, loss, costs, charges, expenses, outgoing or payments including attorneys fees which recipients of the reports suffers or incurs
directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access,
disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.
Disclaimer