We cut our TP for COMB to LKR 64.50/share (-41.4% to old; +15.0% upside; +23.9% TSR) while valuing COMBX at a TP of LKR 54.50/share (-41.5% to old; +8.8% upside; +18.8% TSR). We maintain BUY for both on extremely weak valuations. PAT in 1Q CY20 grew 20.3% YoY largely backed by FX gains and the removal of NBT and DRL. While we expect the operating results to weaken during the year on 1) slow loan growth, 2) higher impairments and 3) narrowing NIM, we believe that the risks are well priced in at the current levels. With a relatively strong buffer against regulatory minimum, we do not see major capital pressure in CY20E as well. However, the bank (and the sector) would resort to full scrip dividends given the CBSL restrictions.
FX gains, NBT/DRL removal support earnings; operating results to soften
Reported net profit for 1Q CY20 of LKR 3.8bn (+20.3% YoY; -35.8% QoQ) came on the back of an LKR 6.5bn FX gain (3.9% LKR depreciation) and LKR 778mn tax benefit. The operating result was relatively soft, as the bank booked higher impairment charges. With slow loan growth, lower interest rate environment and weak credit quality, we expect the operating result to be weak this year, but overall, the tax savings should cushion this impact to some extent.
Robust loan growth in early 2020; to weaken through the rest of the year
Gross loans saw a 7.6% YoY and 3.2% QoQ growth largely driven by business loans. A notable increase was seen in overdrafts and trade finance loans which we believe were used for working capital financing with the lockdowns coming into effect. Given the impact on the real economy, coupled with the bank’s caution for risky lending, we expect loan growth of 3.5% for CY20E for COMB. Retail loan growth would remain subdued, while corporate demand will be focused mostly on working capital management, which drives our view.
NPL ratio ticks up, while impairments rise on economic adjustments
As expected, the outlook for expected credit losses have worsened, which drove up the impairment charges for the quarter. Management believes that ~30.0%-35.0% of the book has been directly impacted by COVID-19 and would require borrower assistance. While there is relaxed treatment for taking impairments in the current environment, we believe the bank would take sufficient prudential impairments as a buffer against credit weakness which could prevail after the moratoriums are lifted. Accordingly, we raise our credit cost estimate to 130bps for CY20E (from 95bps earlier; 110bps in CY19).
We cut our TP for COMB to LKR 64.50/share and COMBX to LKR 54.50/share
Both classes of shares trade at 0.4x BV CY20E, but the prices have edged slightly higher since markets opened on 11th May. Similar to the peers, we expect the current year’s earnings to be under pressure (-20.0% YoY on our estimates) with a ROE of 10.1%. However, at the current levels, the market seems to be assuming almost distressed valuation for the bank, which we believe is unjustified. Our fundamental floor value range is LKR 50-55/share. We value COMB at 0.5x BV CY20E with a 12-month TP of LKR 64.50/share (-41.4% to old; +15.0% upside; +23.9% TSR) while valuing COMBX at a TP of LKR 54.50/share (-41.5% to old; +8.8% upside; +18.8% TSR). Both classes BUY.