EUR 4.56 For Business Accounts Only

JKSB Full Year Highlights_Commercial Bank of Ceylon PLC (COMB)_CY16

COMB reported a healthy 22% YoY increase in full year earnings for CY16, driven mainly by 1) an 8% YoY increase in net interest income, supported by 22% loan book growth (amid a slight contraction in NIM); a 2) a reversal of Rs. 1.9bn on collective impairment charges; and 3) a lower effective tax rate for the year. NIM contraction (-0.2ppt YoY to 3.47%) for the year, stems largely from a lower CASA ratio (-8ppt YoY to 42%) which reflects a widening interest rate differential between savings and fixed deposits amid rising funding costs across the sector. Net loan book growth for the year (+22% YoY) was supported by healthy growth in 1) term loans - short term +65% YoY and long term +23% YoY; 2) overdrafts (+24% YoY); and 3) housing loans (+17% YoY). QoQ loan book growth picked up in the Dec quarter (+7% QoQ in 4QCY16 vs. +4% QoQ in 3QCY16 and +3% QoQ in 2QCY16).

We expect CY17 to be a more difficult year for the banking sector as a whole, with credit growth expected to slow down (COMB’s credit growth should be ~2ppt higher than industry growth in CY17) amid a projected drop in demand in the leasing and housing segments, while operators with exposure to agriculture-related micro finance/SME lending could see a negative impact due to the prevailing drought (COMB is not exposed to this segment). We project full year earnings of Rs. 15.9bn for COMB for CY17, translating to an EPS of Rs. 17.78 (+9% YoY). While a repricing of balance sheet assets should somewhat alleviate pressure on NIMs in CY17, we expect funding costs to continue to rise across the sector given strong competition amid smaller sized banks for 3m and 6m deposits. At its current price of Rs. 143.00, COMB trades at a CY17E P/E of 8.0x and a P/BV of 1.6x , at a premium to our banking & finance coverage universe P/E.