We raise our TP for SAMP to LKR 175.00/share (+4.8%; +5.7% upside; +13.3% TSR) with a target P/BV multiple of 0.60x CY 19e. While we continue to see earnings headwinds in H2 CY 19e, we believe these are largely priced in at the current levels. SAMP’s Q2 CY 19 results saw net profit of LKR 2.1bn (-39.4% yoy), with the weakness coming largely from high impairments that saw cost of risk increase to 220bps. This was largely expected, and we see this trend continuing into H2 CY 19 as well. On the positive, loan book marked a 1.7% qoq growth, in contrast to the industry, and we believe SAMP will be able to maintain stable NIMs despite downward pressure on lending rates, which we expect to see in H2 CY 19. The other key positive is SAMP’s strong capital position, (Tier 1 CAR at 14%), which would be supportive in the current weak credit environment.
Loan book marks growth, we maintain our thesis of a better H2 CY 19
Contrary to peers and the industry, SAMP’s loan book marked a 1.7% qoq growth, surpassing the growth seen in Q1 CY 19. The positive development came mainly from corporate (term loans: +5.1% qoq) and retail (leasing: +3.2% qoq and pawning: +10.9%) lending. While, management indicated that the credit demand remains weak, it could, however, see a pickup in H2 CY 19 if the business sentiment improves, and from the upcoming elections. We maintain our loan growth estimate at 7.0% with the strong Q2 CY 19 results.
Asset quality deteriorates further; more downside in H2 CY 19
Gross NPL ratio increased to 5.66% (+0.8ppts qoq; +1.9ppts yoy) in the quarter, while the NPL stock has increased by 57.4% YTD. The construction sector exposure continues to add pressure, while no major improvement is seen with the underlying cash-flow stress. Even though the government has started to release payments to the sector, the majority is used for working capital, hence repayments are still lagging. In H2 CY 19, we see added pressure from tourism sector as well as some parts of the agriculture value chain, which was impacted by the Easter Sunday attacks. Accordingly, our NPL estimate increases to 6.2%.
Market rates on a downward trend; NIM upside capped due to high NPLs
Market deposit rates continue to be on a downward trend. With the additional liquidity coming through the SRR cut and SAMP’s fully subscribed rights issue, we see lower funding pressure in H2 CY 19. However, deposit rates had a front-loaded impact with lending rates expected to see a drop in H2 CY 19. Coupled with rising NPLs, we note the average loan yields will see a larger impact, which drives our view of largely stable NIM for CY 19e.
We set our TP at LKR 175.00/share on market momentum, but rate Hold
SAMP currently trades at 0.56x BV CY19E with a ROE of 9.9%. We believe that the earnings headwinds are largely factored in at the current valuations. One key positive in the current environment is SAMP’s strong Tier 1 ratio (at 14.00% as of Q2 CY 19 vs. the 10.00% requirement) providing a solid buffer against further asset quality weakness expected in the next 12 months. With overall market sentiment improving, we set our target multiple at LKR 0.60x CY19E BV, with a new TP of LKR 175.00/share (+4.8% to old; +5.7% upside; +13.3% TSR). Hold.