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JKSB Full Year Highlights_SANASA Development Bank PLC (SDB)_CY16

SDB reported a sharp 44% YoY decline in full year earnings for CY16, stemming mainly from 1) a contraction in its NIM (-1.3ppt YoY to 5.83%) amid controlled loan book growth, resulting in a higher cost to income ratio (+10ppt YoY to 71%); and 2) a steep increase in impairment charges due to more stringent provisioning on its NPL portfolio. The hit to SDB’s NIM has been mainly due to the bank’s loan book mix, with legacy fixed rate loans (disbursed at ~16% interest vs. a current 17% floating rate) accounting for ~80% of its portfolio in 2015. With new loans having been mainly disbursed on a floating rate basis, the mix has now been adjusted to a more favourable 60:40 split between fixed and floating rate loans in a rising interest rate environment. This re-pricing of the balance sheet is reflected in a QoQ improvement in 4QCY16 NIM (+0.18ppt QoQ to 5.83%) and a reversal of the trend of a YoY decline in net interest income seen over 2QCY16-3QCY16. Increased net interest income (+7% YoY), coupled with a sharp reduction in tax expenses (-91% YoY), supported bottom line growth of 12% YoY in 4QCY16 - the first quarter of earnings growth since 3QCY15.

We project full year earnings of Rs. 507mn for CY17, +26% YoY. We have currently factored in a broadly flat NPL ratio and improved credit growth for CY17, as we do not expect the prevailing drought to have a significant negative impact on SDB given that its agriculture-related micro finance/SME exposure is only ~10% of its total loan book. The proposed fund raising of Rs. 3.3bn for the bank would improve its CAR, thereby supporting higher loan disbursements from 2QCY17 onwards, while lower cost equity funding should also support an improvement in NIMs (as a LSB, SDB cannot operate current accounts and is therefore currently heavily reliant on fixed deposits for funding with cost of funds - including admin costs - at ~13%). At its current price of Rs. 100.90, SDB trades at a CY17E P/E of 8.4x, and a P/BV of 0.8x (based on Dec 2016 NAV). While the bank is yet to declare a dividend for CY16, we expect SDB to maintain its historical dividend of Rs. 10.00 per share, although the proportion of cash:scrip could vary.