Sampath Bank (SAMP) - BUY

1Q2016
Results Review

17 May 2016

SAMP reported a net profit of LKR 1.8bn in 1Q16, up c. 17% YoY. The
bank showed a competitive loan growth of 5% QoQ, in line with ECC
estimates, to LKR 407bn at the end of 1Q16 (2015: LKR 386.3bn). Asset
quality slightly deteriorated to 1.67% at end 1Q16 (2015: 1.64%).
Provisions for the quarter rose sharply to LKR 234.5m in 1Q16 (LKR
43.2m). The bank mitigated the loss on its available-for-sale (AFS) assets
to LKR 142.6m in the quarter. We view this as a positive and see healthy
growth of 10% YoY in 2016E NAV per share. We revise down our net
profit (attributable to shareholders) forecast by 1.4% YoY to LKR 7.5bn on
the back of a VAT rate hike and a tightening lending environment.
NII grows by 14% YoY to LKR 5.0bn (1Q15: LKR 4.3bn). While
interest income grew by c.28% YoY to LKR 11.7bn, interest expenses
grew at a faster pace by c.40% YoY to 6.7bn during the quarter. Net
interest margin (NIM) declined QoQ to 3.5% in 1Q16 from 3.6% in 2015,
indicating the banks vulnerability to industry conditions. We revise down
our net interest income estimate by c.4.5% YoY to LKR 22.3bn on the
back of a tightening lending environment and higher interest expenses.
Pre-provision operating profit increases by 21% YoY to LKR 3.5bn
(1Q15: LKR 2.9bn). Shrinking NIMs tend to be compensated by
commission and fee-based income, which rose by 21% YoY to LKR 1.5bn
in 1Q16. Net trading loss decreased by 43% YoY to LKR 139.7m.
Personnel expenses, the banks biggest cost component, grew by 14%
YoY to LKR 1.7bn. The cost-to-income ratio continues to be on the high
side at 51% in 1Q16 (4Q15: 59% and 1Q15: 52%).
Trading at a steep discount to peers unwarranted. SAMP trades at a
P/B of 1.0x on its 1Q16 BVPS, a steep discount of 31% compared to a
peer average of 1.5x. We believe a deep discount is unjustified. Despite
low capital adequacy, SAMP presents a healthy loan growth and a peer
competitive TTM ROE of c.17.4%. The share price has remained stagnant
since our last recommendation. We maintain a P/B of 1.1x and revise our
target price upwards to LKR 274.60 from LKR 259.70 on better than
expected performance in the AFS portfolio, providing an upside of c.18%.
We proceed to changing our recommendation from ADD to BUY.

Company update
12-mth TP (LKR)

274.6 (+18%)

1M

3M

283.0

1.7
-3.0

5.7
-1.5

Market cap (US$ m)

Bloomberg
Sector

52Wk High/Low (LKR)

Shares o/s (m)
Daily volume (US$ m)
Free float (%)

SAMP
Rel. to CSEALL

1Y
-11.5
-4.3

SAMP:SL
Banking & Finance

Shareholding pattern (%) - as at 31 Mar 16

Vallibel One PLC
15.0
Mr. Y.S.H.I Silva
10.0
Employees Provident Fund
10.0
272.5/204.5
177.0
0.8
52.4

Financial summary (LKR m)

Y/E 31st Dec
2014
Net Interest Income (LKR m) 16,781
Net profit (LKR m)
5,263
EPS (LKR)
31.4
Growth (YoY %)
44.7
PER (x) - voting share
6.8
BVPS(LKR)
200.3
P/B (x) voting share
1.2
ROA (%)
1.3
ROE (%)
15.9
DY - voting share (%)
3.4

Stock performance

Shares
Volume (LHS)
('000)
20,000
15,000
10,000
8.72/7.05
5,000
1,071.2
017.1

2015
18,545
6,624
38.9
24.2
6.0
227.0
1.0
1.3
18.0
2.6

Price (RHS)

100
0

100.0

2016E
22,342
7,491
43.5
11.6
5.4
249.6
0.9
1.3
18.2
2.6

2017E
25,867
8,512
49.4
13.6
4.7
293.0
0.8
1.2
18.2
2.6

(LKR)
300
200

2018E
29,359
9,818
57.0
15.3
4.1
344.0
0.7
1.3
17.9
2.6

Source: Company, ECC Research. Prices as at 16 May 2016

ENTERPRISE CEYL ON CAPITAL (PRIVATE) LIMITED (Trading member of Colombo Stock Exchange)
Level 27, East Tower, World Trade Centre, Colombo 01, Sri Lanka

233.0 Price performance (%)

CMP (LKR)

May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16

Profits up by c.17% YoY in 1Q16; limited AFS loss a

key positive

Priyan Tudawe | Balakrishnan Nirmalan

Tel + 94 112 147 147

Sampath Bank

Results snapshot
Financial highlights (LKR
m)
Income statement
Net interest income
Non-interest income
Total operating income
Impairment charges
Operating expenses
Profit before tax
VAT on financial services
Corporate tax
Net profit (excl. minority)

Limited AFS portfolio loss puts SAMP ahead of peers

1Q16

1Q15

YoY
(%)

1Q16

4Q15

QoQ
(%)

4,952
2,156
7,107
234
3,622
3,251
551
858
1,841

4,330
1,707
6,037
43
3,156
2,838
497
761
1,578

14.4
26.3
17.7
443.2
14.8
14.6
10.9
12.6
16.7

4,952
2,156
7,107
234
3,622
3,251
551
858
1,841

4,695
2,241
6,936
174
4,064
2,696
396
763
1,535

5.5
(3.8)
2.5
34.5
(10.9)
20.6
39.0
12.4
19.9

103,846
407,038
571,065
435,618
77,187
531,303
39,667

98,135
386,278
538,647
407,164
77,252
499,444
39,109

5.8
5.4
6.0
7.0
(0.1)
6.4
1.4

571,065

538,647

6.0

Balance sheet
Investments
Loans & receivables
Total assets
Deposits
Borrowings
Total liabilities
Shareholder's equity
Total equity and
liabilities

SAMP performance stood out in the quarter, reporting only a LKR

142.6m loss on its available-for-sale (AFS) assets, accounting for only
0.3% of its AFS portfolio. This can be explained by the limited exposure
in government bonds and the shorter tenure in assets held under AFS.
This in turn curtailed the negative impact on equity, resulting in an
increase of 1.4% QoQ in the banks book value per share of LKR 230.21
at the end of 1Q16.
SAMP mitigates AFS portfolio loss in 1Q16
AFS loss as a % of AFS portfolio
6%
5%
4%
3%
2%
1%
0%
SAMP

Ratios (%)*
Net interest margin
ROA
ROE
Gross NPL
Core capital to risk assets
Total capital to risk assets
Statutory liquid assets
Cost-to-income (ECC calc.)
CASA (ECC calc.)

3.47
1.90
19.78
1.67
7.36
11.46
20.77
50.96

Source: Company data, *reported figures unless stated otherwise

3.64
1.90
18.42
1.64
7.90
12.26
21.84
58.59

bps
(0.17)
0.00
1.36
0.03
(0.54)
(0.80)
(1.07)
(7.62)

COMB

HNB

SEYB

Source: Company data

SAMP reports healthy growth in loan portfolio

SAMP posted a loan growth of c. 5% QoQ, expanding its loan book to
LKR 407bn in 1Q16 from LKR 386.3bn at the end of 2015. The banks
results indicate that measures undertaken by the Central Bank to
tighten lending conditions are yet to reflect in the banking sector.
SAMPs loan portfolio is primarily composed of term loans and
overdrafts which account for c. 41% (2015: 39%) and 16.6% (2015:
16.8%) of the total portfolio, respectively. Significant growth (c.21%
QoQ) was witnessed in the bills of exchange lending category followed

ENTERPRISE CEYL ON CAPITAL (PRIVATE) LIMITED (Trading member of Colombo Stock Exchange)
Level 27, East Tower, World Trade Centre, Colombo 01, Sri Lanka

NDB

Sampath Bank
by term loans, which grew by c.11% QoQ in 1Q16. Notable is SAMPs
overall loan growth which came in the absence of an expansion in its
branch network. According to CBSL, domestic credit growth grew by
26.5% YoY in February 2016 and by 25.7% YoY in January 2016. With
interest rates on an upward trajectory, the domestic lending
environment is likely to tighten, curtailing credit growth. We expect
SAMPs loan book to grow by 20% YoY (2015: 25% YoY) to LKR
463.8bn in 2016E.
Term loans account for majority of SAMPs loan book at end 1Q16

11%
Term loans

3%

Customer deposit growth of 7% outpaces loan growth

SAMP reported a deposit base of LKR 435.6bn at end 1Q16 compared to
LKR 407.2bn at end 2015. The banks CASA ratio showed a slight dip to
45.1% during the quarter from 47.5% in 2015. The gap between
savings and deposit rates is widening and more customers are likely to
shift towards fixed deposits, which currently offer rates between 9%
and 10% relative to those between 6% and 7% at the beginning of the
year. Demand and savings deposits stood at LKR 32.2bn (2015: LKR
32.7bn) and 164.4bn (LKR 160.7bn), respectively while fixed deposits
were at LKR 223.9bn (LKR 198.6bn).
SAMPs deposit base composition at end 1Q16

Overdrafts

4%

41%

5%

Demand
7%

Import loans

Other
4%

Leasing
Housing loans

7%
Export loans
Pawning

12%

Savings
38%

Fixed deposits
51%

Others

17%
Source: Company data

During the quarter, SAMPs provisions for loan losses increased

significantly. Individual impairment rose to LKR 87.8m in 1Q16
compared to LKR 21.1m in 1Q15 while collective impairment spiked to
LKR 146.7m from LKR 22m in 1Q15. The asset quality deterioration is
also reflected in the banks gross non-performing loan ratio, which rose
to 1.67% in 1Q16 from 1.64% at the end of 2015.

Source: Company data

The bank tends to mobilize its deposits well, with a loan-to-deposit

(LDR) ratio of 93.4% at the end of 1Q16, slightly down from 94.9% in
4Q15. With healthy loan growth expected, SAMP may need to
compensate any slack in deposit growth through additional borrowings,
which may increase the companys risk profile. We expect a LDR of
93.2% for 2016E.

ENTERPRISE CEYL ON CAPITAL (PRIVATE) LIMITED (Trading member of Colombo Stock Exchange)
Level 27, East Tower, World Trade Centre, Colombo 01, Sri Lanka

Sampath Bank
Continued weakness in capital adequacy remains a concern

Valuation

A surge in credit growth during 2015 has compressed capital adequacy

ratios in the banking industry. While SAMPs loan growth remains
positive, this growth tends to increase the banks risk-weighted assets,
which coupled with inadequate growth in capital reserves tends to
squeeze its capital adequacy. According to central bank data, the capital
adequacy ratio of licensed commercial banks decreased to 14.2% at the
of 2015 from 17% at the beginning of the year. The core-capital ratio
also showed a similar trend in the industry, falling to 11.7% at the end
of 2015 from 14.1% at end 2014.

SAMP, based on its 1Q16 book value per share, trades at a P/B multiple
of 1.0x, which presents a steep discount of 31% to a peer average of
1.5x (excluding non-voting shares). On a trailing 12-month EPS, SAMP
trades at a P/E of 5.8x, which is also at a deep discount of 29% to a
peer average of 8.2x. SAMP has been trading at a forward P/B range
between the 0.6x and 1.3x. We believe SAMPs deep discount to peers
is unjustified given the banks healthy loan growth and peer competitive
TTM ROE of c.17.4%. We maintain our P/B at 1.1x and with a 2016E
BVPS of LKR 249.64, we revise upwards our target price to LKR 274.60
from LKR 259.70 which provides an upside of 17.9%. BUY

SAMPs both Tier I and Tier II ratios reported for the first quarter
depicted further weakness in the banks capital position. The Tier I or
core capital ratio decreased to 7.4% at the end of 1Q16 from 7.9% at
the end of 2015, however, still compliant and above the minimum
requirement of 5%. The Tier II or total capital ratio was reported at
11.5%, above the minimum threshold of 10% but a decrease compared
to 12.3% at the end of 2015. Weakness in capital adequacy ratios
(CAR) is also witnessed through SAMPs high equity multiplier of 14.1x
(4Q15: 13.4x). SAMPs recent scrip issuance of LKR 1.1bn is likely to
help recapitalize its reserves, alleviating pressure on CAR.
SAMPs core capital and total capital adequacy levels decline
Core capital

Bank

CMP

SAMP
COMB
HNB
SEYB
Peer avg.

233.00
133.10
211.00
95.00

No of Mkt cap TTM PER (x)

MRQ PBV (x) TTM ROE (%)
shares USD m 2015 1Q16 2015 1Q16 2015 1Q16
177.0
283.0
6.1
5.8
1.4
1.0
18.4
17.4
832.5
760.5
9.9
9.3
0.7
1.8
16.9
19.2
329.9
477.7
8.1
7.0
0.9
1.2
16.8
16.2
176.0
114.7
8.5
8.5
0.6
1.4
15.6
16.4
8.2
1.5
17.2

Source: Company data, ECC Research, Prices as at 16 May 2016

SAMP forward P/B trend over the last 5 years

600

Total capital

16%
14%
12%
10%
8%
6%
4%
2%
0%

500

1.7x

400

1.5x

300

1.3x
1.1x

200

0.6x

100

4Q14

1Q15

2Q15

3Q15

4Q15

Source: Company data

1Q16

0
Jan-11

Nov-12

Sep-13

Aug-14

Jun-15

May-16

Source: Company data

ENTERPRISE CEYL ON CAPITAL (PRIVATE) LIMITED (Trading member of Colombo Stock Exchange)
Level 27, East Tower, World Trade Centre, Colombo 01, Sri Lanka

Dec-11

Sampath Bank

Financial summary
Income statement summary (LKR m)
(LKR m)
Net interest income
Non interest income
Total operating income
Total operating expenses
Pre provision operating profit
Provisions/(reversals) for loan losses
Profit before tax
VAT on financial services
Corporate tax
Profit after tax
Minority interest
Net profit

2014
16,781
7,363
24,143
12,854
11,290
2,444
8,845
1,598
1,979
5,268
4
5,263

2015
18,545
8,197
26,742
13,962
12,780
993
11,788
1,998
3,161
6,629
5
6,624

2016E
22,342
9,291
31,633
15,715
15,918
1,790
14,128
2,728
3,903
7,497
7
7,491

2017E
25,867
10,220
36,087
17,357
18,730
2,407
16,323
3,232
4,570
8,521
9
8,512

2018E
29,359
11,242
40,601
19,272
21,329
2,532
18,797
3,705
5,263
9,828
10
9,818

2014
4.3
3.8
10.2
6.5

2015
4.1
3.8
8.7
4.9

2016E
4.1
4.0
9.3
5.2

2017E
4.1
4.1
9.3
5.3

2018E
4.1
4.0
9.3
5.3

43.9
53.2
40.4
18.1
22.4
25.5
1.3

44.2
52.2
43.8
16.9
26.8
15.4
1.3

41.6
49.7
46.9
19.3
27.6
13.8
1.3

39.5
48.1
47.8
19.8
28.0
12.1
1.2

38.3
47.5
47.7
19.7
28.0
10.5
1.3

12.7
15.9

13.3
18.0

14.3
18.2

14.6
18.2

14.2
17.9

Source: Company, ECC Research

Profitability ratios
(%)
Net interest margin
Interest spread
Income on avg. int. yielding assets
Expenses on avg. int. bearing
liabilities
Non-interest income margin
Cost : income ratio (excl. prov.)
Effective tax rate
- Financial VAT
- Corporate tax
Dividend payout
ROA
Equity multiplier (x)
ROE

Balance sheet summary (LKR m)

(LKR m)
Net loans and advances
Other interest earning assets
Total interest earning assets
Cash in hand & balances with central
banks
Fixed assets
Other assets
Total assets
Customer deposits
Borrowings
Total interest bearing liabilities
Non-interest bearing liabilities
Total liabilities
Total shareholders equity
Total liabilities & equity

2014
309,569
91,011
400,580

2015
386,278
103,648
489,926

2016E
463,777
112,274
576,050

2017E
541,494
120,170
661,664

2018E
621,678
128,044
749,722

29,253

35,055

42,269

47,797

52,615

8,389
4,568
442,790
339,679
58,620
398,299
9,888
408,186
34,604
442,790

8,697
4,969
538,647
407,164
77,252
484,416
15,028
499,444
39,203
538,647

9,491
9,697
637,508
497,732
80,471
578,203
16,193
594,396
43,111
637,508

10,060
12,398
731,920
571,046
88,607
659,654
21,668
681,321
50,598
731,920

10,664
18,087
831,088
649,084
99,084
748,168
23,527
771,695
59,393
831,088

2014
4.5
32.9
11.7
16.2
54.6
71.7
71.9
44.8
44.8
-37.5
14.8
13.1
17.1

2015
10.5
11.3
10.8
8.6
33.3
25.0
59.7
25.8
25.8
20.0
24.0
19.9
31.8

2016E
20.5
13.3
18.3
12.6
19.9
36.5
23.5
13.1
13.1
0.0
19.2
22.2
4.2

2017E
15.8
10.0
14.1
10.5
15.5
18.5
17.1
13.6
13.6
0.0
17.0
14.7
10.1

2018E
13.5
10.0
12.5
11.0
15.2
14.7
15.2
15.3
15.3
0.0
15.0
13.7
11.8

Source: Company, ECC Research

Source: Company data, ECC Research

Growth rate analysis

(%)
Net interest income
Non interest income
Total income
Operating expenses (excl. provisions)
PBT
Financial VAT
Corporate tax
PAT
Net profit after minority interest
Dividend
Loan growth (gross)
Deposits
Borrowings
Source: Company data, ECC Research

ENTERPRISE CEYL ON CAPITAL (PRIVATE) LIMITED (Trading member of Colombo Stock Exchange)
Level 27, East Tower, World Trade Centre, Colombo 01, Sri Lanka

Sampath Bank
Sales &Trading
Priyani Ratna-Gopal
+94 112 147 101
+94 772 333 666
priyani@ecc.lk

Research
Gordon Nadesan
+94 112 147 154
+94 777 782 102
gordon@ecc.lk

Saira Nanji
+94 112 147 150
+94 777 393 507
saira@ecc.lk

Balakrishnan Nirmalan
Priyan Tudawe
research@ecc.lk

Key to our recommendation structure

BUY - Absolute - Stock expected to provide a positive return of over 15% over a 1-year horizon.
SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon.
HOLD - Absolute - Stock expected to provide a return of >= -5%, but <= 10% over a 1-year horizon.
ADD Absolute - Stock expected to provide a return of >10%, but <= 15% over a 1-year horizon.
REDUCE Absolute - Stock expected to provide a return of <-5%, but >= -10% over a 1-year horizon.
Published in 2016. Enterprise Ceylon Capital (Private) Limited
This report is not intended for distribution to or use by any person or entity who/which is a citizen or resident of or located in any locality, state or other jurisdiction where such
distribution, publication or use would be contrary to law or regulation.
This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form.
This report is for the general information of ECCs clients, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.
We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not
guarantee its accuracy or completeness. Opinions expressed in this document are our current opinions as of the date appearing in the material and may be subject to change from time to
time, without notice. The views expressed in this report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the
analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. ECC prohibits the analyst(s) who prepared this research
from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for or view of a particular company.
However, the analyst(s) may receive compensation that is based on their coverage of company(ies) in the performance of their duties or the performance of their recommendations, and
the research personnel involved in the preparation of this report may also participate in the solicitation of business as described below.
ECC, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or may have positions in securities of the company(ies) covered in this
research report or any securities related thereto, and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, ECC or its affiliated
companies may deal in the securities mentioned herein as a broker or for any other transaction as a market maker, investment advisor, etc to the issuer company or its connected persons
or seek to perform significant investment banking or underwriting services for or relating to such company(ies) or any entity mentioned in this report. ECC generally prohibits its analysts
from having financial interest in the securities of any of the companies that the analysts cover. In addition, the company prohibits its employees from conducting F&O transactions or
holding any shares for a period of less than 30 days.
As on the date of this report, the analyst(s) who prepared this report do not own and do not have an interest in the securities in the company(ies) covered or recommended in this report.
ECC or any persons connected with it do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and take their own
professional advice before acting on this information.
ECC or any of its connected personsincluding its directors or affiliated companies or associates or employeesshall be in no way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained, or views and opinions expressed in this publication.

ENTERPRISE CEYL ON CAPITAL (PRIVATE) LIMITED (Trading member of Colombo Stock Exchange)
Level 27, East Tower, World Trade Centre, Colombo 01, Sri Lanka