We cut our TP to LKR 115.00/share (-40.1% to old; +11.3% upside; +22.0% TSR). While the significant stress on earnings will start from 2Q CY20 onwards, we believe the current valuations are attractive for a long-term investor. 1Q CY20 earnings saw a 26.8% YoY pick up mainly from the removal of NBT and DRL which pressured earnings in CY19. Loan growth was relatively strong at 4.4% QoQ, but we expect this to weaken in 2Q and 3Q with low economic activity, and the bank exercising caution. Overall, 1) slow loan growth, 2) narrowing NIM and 3) high impairments would lead to an earnings drop of 19.0% CY20E, while we note that the estimates are highly dependent on the rate of local and external activity picking up.
Tax windfall supports bottom line; operating result will continue to be soft
Net profit for 1Q CY20 was LKR 2.7bn (+26.8% YoY; -36.3% QoQ) which was mainly supported by the removal of NBT and DRL effective from January 2020. Sequentially, profit came down mainly due to weak top line (total income -3.6% QoQ) coupled with a >100% QoQ surge in impairment charges that came in at LKR 5.2bn. We believe operating income will continue to be soft in CY20E given the weak loan growth and continued high impairments.
Loan growth strong in 1Q, but will continue to moderate through CY20E
Loan book grew by 4.4% QoQ, recording an improvement from the previous few quarters. While the corporate book drove growth, all segments saw positive movement. Given that only two weeks of work disruptions were seen in 1Q, we believe that the impact on growth will be more evident in 2Q and 3Q. The bank itself would remain cautious on expanding the book aggressively as well. While working capital loans will be in high demand, we note that the approvals for these lie directly with the CBSL and not with the banks individually (to avoid duplication). Retail demand would also be tepid amidst the weak personal income situation. Overall, we set our CY20E loan growth target at 2.0% YoY.
Impairment charges to continue its upward trajectory in CY20E
Impairment charges surged 36.8% YoY and 115% QoQ (4Q CY19 was a low base) with the annualized cost of risk increasing to 266bps. The rise comes mainly from the economic cycle adjustment which is an input into overall impairment calculation model and not due to individual or collective impairments. The accounting regulations under IFRS 9 (SLFRS locally) have allowed for not taking large impairments against loans which are directly hit by COVID-19. As a result, we see cost of risk increasing up to 185bps for CY20E (from 180bps in CY19).
We cut the 12-month TP to LKR 115.00/share; BUY on weak valuations
SAMP currently trades at 0.36x BV CY20E with a ROE of 11.5%. On our base case, the bank’s T1 CAR comes in at 12.90%, at a sizeable buffer from the minimum requirements. While we expect CY20E and 1H CY21E to see a negative impact from COVID-19, we believe that long-term value is not captured in the current valuations. Given that the ROE will remain below COE in the next few years, we value the stock at 0.4x BV CY20E which yields a 12-month TP of LKR 115.00/share (-40.1% to old; +11.3% upside; +22.0% TSR). Our BUY rating is mainly driven by the current weak valuations.