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Commercial Bank Of Ceylon: 1Q CY21 - Strong deposit repricing drives bottom line growth

  • NII continues to benefit from deposit repricing; NIMs to pick up in CY21E
  • Loan growth picks up in 1Q but expect a slowdown in 2Q; better 2H outlook
  • Maintain TP for COMB at LKR 105.00/share and COMBX at LKR 87.00/share

We maintain our TP for COMB at LKR 105.00/share (+24.4% upside; +32.7% TSR) and for COMBX at LKR 87.00/share (+15.7% upside; +25.0% TSR) and rate both classes BUY. PAT in 1Q CY21 marked a 79.3% YoY growth (+14.9% QoQ) which came on the back of a strong NII growth and robust credit growth (2.6% QoQ). We note that 1Q is a testament to the speed of recovery the bank could expect once economic activity resumes after the third wave concerns subside. While we cut our loan growth forecast for CY21E to 8.0% (from 10.0% previously) this is largely due to the slowdown expected in 2Q and we expect both growth and asset quality to improve in 2H CY20. Long-term BUY rating on both classes on extremely weak valuations (both classes trading at 0.6x CY21E BV with an ROE of 13.3%).

NII continues to benefit from deposit repricing; NIMs to pick up in CY21E

Net profit in 1Q CY21 was up 79.3% YoY (+14.9% QoQ), backed by a strong Net interest income (NII) performance and trading and FX gains. NII grew 21.1% YoY (+10.0% QoQ) continued to be driven by strong deposit repricing and a robust CASA base. We note that the deposit book is largely repriced now, and 2Q will see further improvement in cost of funds. We continue to expect NIMs to improve through CY21E with 1) loan growth and 2) lending rates gradually picking up. While we cut our loan growth estimates slightly on third wave concerns, we expect the NIM improvement to drive overall bottom line.

Loan growth picks up in 1Q but expect a slowdown in 2Q; better 2H outlook

Gross loans grew 2.6% QoQ in 1Q CY21 (+2.7% YoY), and management noted that corporate business was picking up before the third-wave concerns hit. We expect 2Q growth will take a slight setback due to this and cut our loan growth forecast to 8.0% for CY21E (vs. 10.0% earlier). However, we stress that 1Q is a testament to how fast pent-up demand could drive growth once economic conditions start to stabilise. Accordingly, we maintain our growth thesis for CY21E and expect Corporates to lead credit growth for COMB.

Maintain TP for COMB at LKR 105.00/share and COMBX at LKR 87.00/share

We maintain our expectation that CY21E will see a recovery in credit growth and asset quality, albeit back-end loaded. Both COMB and COMBX trades at 0.6x BV CY21E with an ROE of 13.3%, and we highlight that the current valuations are attractive for a long-term play. We maintain our TP for COMB at LKR 105.00/share (+24.4% upside; +32.7% TSR) and for COMBX at LKR 87.00/share (+15.7% upside; +25.0% TSR) and rate both classes BUY.


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