EUR 4.56 For Business Accounts Only

JKSB Quarterly Highlights_SANASA Development Bank PLC (SDB)_3QCY16

Note Summary:

SDB reported a steep 70% YoY decline in 3QCY16 profit, stemming from 1) a contraction in its NIM (-1.6ppt YoY to 5.65%) amid controlled loan book growth (+14% in 9MCY16 vs. +43% YoY in full year CY15); 2) a sharp increase in collective impairment charges due to more stringent provisioning on its NPL portfolio; and 3) a higher effective tax rate, due to impairment not being considered as an allowable expense in carrying out tax provisioning for the quarter. 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 17.5% 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. Despite robust loan demand, SDB has controlled its pace of credit disbursement since 3QCY15, as expected, due to its current capital adequacy position.

With 9MCY16 PAT at Rs. 246mn, we project full year earnings of Rs. 302mn for CY16 (-58% YoY). Given rising funding costs across the banking and NBFI sectors, we have factored in a NIM of 5.5% and a broadly flat NPL ratio for the year. Looking ahead to CY17, we project >20% full year loan book growth for SDB, given our expectations of an increased capital base (in compliance with a 2017 budget proposal to increase the minimum capital requirement for LSBs). At its current price of Rs. 101.80, SDB trades at a CY16E P/E of 14.2x, and a P/BV of 0.8x (based on Sep 2016 NAV).