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JKSB Quarterly Highlights_SANASA Development Bank PLC (SDB)_3QCY17

SDB reported a significant 167% YoY increase in earnings for 3QCY17, driven by 1) a strong 29% increase in net interest income, stemming from an expansion in NIM (+1.1ppt YoY; +0.9ppt YTD) amid healthy loan book growth (+22% YoY; +19% YTD); 2) an improved cost to income ratio (-7.1ppt YoY to 68%), supported by cost efficiencies stemming from automation of previously manual processes; and 3) a lower effective tax rate, due to investments in unit trusts. The YoY expansion in the bank’s NIM stems mainly from an increase in higher rate floating loan disbursements during the year (vs. legacy fixed rate loans disbursed at ~16% interest), while net loan book growth in 9MCY17 has been largely driven by the SME and higher margin retail segments, which now account for roughly 23% and 70% of the loan book respectively.

With 9MCY17 earnings at Rs. 331mn (+35% YoY), we maintain our relatively conservative full year earnings projection of Rs. 464mn (+15% YoY) for CY17, on the back of expected loan book growth of >20% and an improved cost to income ratio. Despite robust loan demand, SDB had controlled its pace of credit disbursement from 3QCY15 onwards, due to its  capital adequacy position (the bank lacked cushioning in its Tier 2 capital - its total CAR was 11.7% as at end Sep 2016 vs. a minimum requirement of 10%). With the recent fund infusion of Rs. 3.3bn to the bank from FMO, SBI-FMO, and IFC via 1) private placement of ordinary shares at a price of Rs. 140.00 per share; 2) subordinated convertible debt of Rs. 951mn; and 3) a senior USD term loan of Rs. 892.4mn, SDB now comfortably meets Basel III requirements with Tier I and Tier II capital adequacy ratios of 12.02% and 14.25% respectively as at end September 2017. Consequently, we expect loan book growth in CY18 to exceed 25% amid a broadly flat NIM. While SDB plans to expand its branch count to 100 by 2020 (vs. 92 branches currently), the bank’s cost to income ratio should remain below 70% due to cost efficiencies stemming from process automation. At its current price of Rs. 107.00, SDB trades at a CY17E P/E of 12.6x, and a P/BV of 0.8x (based on Sep 2017 NAV).