Earnings Report /
Sri Lanka

Commercial Bank Of Ceylon: 2Q CY21 - Improved credit growth, higher NII, drove profitability

  • Strong NII supports bottom line in a semi-lockdown quarter

  • Loan growth comes ahead of estimates, and we increase CY21E forecast

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

Asia Securities
16 August 2021
Published byAsia Securities

We maintain our TP for COMB at LKR 105.00/share (+25.6% upside; +34.0% TSR) and for COMBX at LKR 87.00/share (+14.8% upside; +24.0% TSR) and rate both classes BUY. Strong credit growth (4.8% QoQ) and deposit repricing drove a 52.9% YoY growth in net profit in 2Q, while normalised trading/FX gains vs. 1Q, led to a 18.3% sequential drop in PAT. We maintain our thesis that COMB would see 1) better loan growth, 2) NIM expansion and 3) moderating impairments leading to stronger ROE in CY21E. However, we expect any improvement from this point onwards to come in 4Q. The current spread of the Delta-variant makes us more cautious of 3Q. The current valuations (both classes trading at 0.6x CY21E BV with an ROE of 14.5%) have over-discounted the sector risks (ISB holdings, moratorium extensions and economic impact) in our view.

Strong NII supports bottom line in a semi-lockdown quarter

Net profit in 2Q CY21 was up 52.9% YoY (-18.3% QoQ), driven by robust Net interest income (NII) performance and beat our estimates on better-than-expected loan growth. Sequential dip in profits was due to the exceptional trading/FX gains seen in 1Q moderating. NII grew 57.1% YoY (+1.3% QoQ) continued to be backed by strong deposit repricing and a robust CASA base which came as expected. We continue to expect NIMs to improve through CY21E with 1) better loan growth and 2) lending rates gradually picking up. The strong 2Q result prompts us to increase our NIM estimate for CY21E, albeit we expect this to be realised in 4Q while 3Q would see rates flatlining.

Loan growth comes ahead of estimates, and we increase CY21E forecast

Gross loans grew 4.8% QoQ in 2Q CY21 (+9.8% YoY) driven mainly by Long-term loans (+5.6% QoQ) and Trade finance (+26.5% QoQ). This leads us to increase our CY21E loan growth estimate to 10.0% (vs. 8.0% previously). We continue to maintain our growth thesis for CY21E. However, we expect 3Q growth to take a slight setback with the ongoing Delta-variant spread but expect a pickup in 4Q once activity starts to stabilise, similar to the growth witnessed in 1Q CY21.

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

Both COMB and COMBX trade at 0.6x BV CY21E with an ROE of 14.5%, and we highlight that the current valuations remain attractive. We maintain our expectation that a recovery in credit growth and asset quality will start in CY21E (back-end loaded for current year). We retain our TP for COMB at LKR 105.00/share (+25.6% upside; +34.0% TSR) and for COMBX at LKR 87.00/share (+14.8% upside; +24.0% TSR) and rating for both classes at BUY.