Earnings Report /
Sri Lanka

Commercial Bank Of Ceylon: 4Q CY19 – Soft operating result, but valuation is over-discounted

    Asia Securities
    26 February 2020
    Published byAsia Securities

    We lower our TP for COMB to LKR 110.00/share (-4.3% to old; +23.6% upside; +31.5% TSR) and for COMBX to LKR 93.00/share (-4.1% to old; +20.2% upside; +29.2% TSR) but maintain BUY for both classes. 

    COMB’s 4Q CY19 saw PAT of LKR 5.9bn (+1.1% YoY; +21.7 QoQ). Top line was soft (NII up 1.3% YoY) driven by a drop in NIM, while the loan book grew 3.4% QoQ. Loan growth is gradually improving but will remain soft until 2H CY20E. New NPL creation continues to slow down, which is encouraging. The current low growth environment reduces the pressure of immediate capital raising and we expect this to be done on a need-to basis. 

    The risk to our valuation is weak foreign investor sentiment, and a rise in global risks would delay a re-rating.

    Credit growth improves in 4Q; CY20E growth skewed towards 2H: Gross loans saw a robust pick up (+3.4% QoQ) following weak 9-months. CY19 loan growth was 3.6% YoY, with weak credit demand and cautious stance by management leading the slow momentum. Management indicated that 4Q CY19 growth came mainly from corporates while consumer business (pawning and personal loans) provided a tailwind. Credit demand has been slow to pick up given the pending elections and softening sentiment but should rebound in 2H CY20E. Accordingly, we expect CY20E loan growth at 10.0% YoY. 

    New NPL creation slows down, along with impairment charges: COMB’s new NPL creation slowed down further (NPL stock up 0.6% QoQ). We maintain our thesis that NPLs should stabilise in 1H CY20 and see a reduction in 2H CY20E. Downside risk to this comes from a worse-than-expected hit from COVID-19 impacting the corporate sentiment. Impairment charges moderated as well, with cost of risk (annualised) coming in at 120bps. While still high on a YoY basis (vs. 80bps in CY18), we expect this to taper down to 100bps in CY20E, supported with better economic conditions. 

    NIM drop due to lending caps; expect to further moderate in CY20E: The bank’s reported NIM dropped 8bps QoQ and ~16bps YoY in 4Q CY19, which was expected given the strong push to drive down lending rates. COMB’s AWPR has seen a ~55bps drop in 4Q CY19, with the lending caps taking effect. Looking ahead, we expect NIM to see a further drop in 1H CY20E, with loan rates trending further down. However, we expect the lending rates to stabilise after 2Q CY20E and see a marginal pick up with improving credit demand. 

    We cut our TP for COMB to LKR 110.00 and COMBX to LKR 93.00: The stock has taken a beating over the past few months, dropping ~15.0% in the last 12-months. However, we believe that sector fundamentals are set to improve in CY20E largely on tax cuts, higher credit demand and tapering down impairment charges. With this, we expect COMB’s ROE to improve to 13.9% in CY20E and 15.3% in CY21E. The current valuation, at 0.7x CY20E BV for COMB and 0.6x for COMBX is an attractive entry point in this regard. With the weak market momentum set to improve after the elections, we set our 12-month TP for COMB at LKR 110.00/share (-4.3% to old; +23.6% upside; +31.5% TSR) and for COMBX at LKR 93.00/share (-4.1% to old; +20.2% upside; +29.2% TSR). Maintain BUY. Downside risk: Global risks restricting funds into SL further