Earnings Report /
Sri Lanka

Nations Trust Bank: 1Q CY20 - Valuation reflects current sector headwinds

  • Slow loan growth amidst collection focus; weak demand to remain in CY20E

  • NPL pickup eased; impairments trend up on economic factor adjustment

  • Soft operating result will be cushioned by the tax cuts in CY20E

Asia Securities
21 May 2020
Published byAsia Securities

We cut our TP for NTB to LKR 62.00/share (-25.7% to old; +5.4% upside; +9.0% TSR) and maintain HOLD. NTB’s 1Q CY20 results saw net profit of LKR 959mn and EPS of LKR 3.38 (+24.1% YoY; -18.1% QoQ). Loan growth was soft at 1.2% QoQ, while the NPL ratio only saw a modest increase. We believe this reflected the bank’s focus on improving collections. However, the weak economic conditions will likely dampen this further and lead to higher impairments which we factor into our model. Coupled with NIM moderation and soft fee income, we expect NTB’s bottom line taking a 24.9% YoY hit. While most banks in the sector would see a 15.0%-20.0% drop in earnings, NTB’s current valuation, at 0.5x BV CY20E largely reflects the impact on the fundamentals, which drives our HOLD.

Slow loan growth amidst collection focus; weak demand to remain in CY20E

Loan book saw a soft 1.2% QoQ growth (-1.5% YoY) largely given the focus on collections. Trade finance saw a notable growth (+4.4% QoQ), while leases – one of NTB’s strongholds – saw a 2.7% QoQ contraction. With import restrictions as well as the impact on personal income, we see the leasing portfolio flat YoY at best. With an overall drop in spending, we see soft growth for the credit cards business as well, despite a rise in e-commerce. Accordingly, similar to the peers, we expect tepid loan growth of 3.0% YoY for NTB in CY20E.

NPL pickup eased; impairments trend up on economic factor adjustment

NTB saw a sharp rise in NPLs in 2019 and containing this was the key priority in the past few quarters. In 1Q CY20, NPL ratio edged up modestly to 6.22% (+5bps), much better than the peers. However, given the weak macro conditions, we expect credit quality to weaken further through CY20E. Impairment charges saw a 45.6% YoY pick up mainly factoring in the economic factor adjustment and we see further increases through CY20E. Accordingly, we increase our cost of risk estimate to ~170bps (vs. 135bps in CY19E).

Soft operating result will be cushioned by the tax cuts in CY20E

The 1Q CY20 net profit of LKR 959mn (+24.1% YoY) came on the back of a ~50.0% reduction in the tax bill with the removal of the NBT and DRL. Operating profit before tax saw a 6.5% YoY drop driven by a soft top line. We believe this would be a recurring theme throughout CY20E. We expect NII to have a negative impact from slow credit growth coupled with soft loan yields and moratoriums. In addition, NTB generates ~40.0% income from net fee and commissions which are backed by its credit card and leasing book. We expect this revenue stream to see a contraction of 3.0% in CY20E.

We maintain our HOLD rating with a TP of LKR 62.00/share

The stock is trading at 0.5x CY20E BV along with a forecast ROE of 8.5% (peers @ 0.4x with a forecast ROE of 8.2%). We believe the drop in valuations (from 0.8x in early 2020) reflect the impact on profitability and the credit quality. Given the larger, more liquid counters such as COMB, HNB and SAMP trade at lower valuations, we believe that the alternatives provide better value in the current environment. We set our TP at LKR 62.00/share (-25.7% to old; +5.4% upside; +9.0% TSR) and maintain HOLD.