Seylan Bank shows signs of recovery

• Seylan Bank (SEYB) has recorded a net profit of LKR195.5 mn in 1Q2010. The bank's bottom line has grown from a considerable portion when compared to 1Q2009. Though the core business activity has improved the escalation of provisioning costs has hindered the profitability of SEYB in 1Q2010.

• Net interest income (NII) has grown by 52.4% to LKR1,760.8 mn in 1Q2010. SEYB's interest income has dropped by 34.7% to LKR4,052.6 mn largely due to the high non performing loans and low interest rates but on the contrary SEYB's interest expenses have dipped by 54.6% to LKR2,291.8 mn which has weathered the negative impact on interest income enabling the bank to improve their NII levels

• SEYB is showing signs of recovery from the financial turmoil which it underwent in 2008. Therefore on the assumption that bank will perform inline with the favourable macro economic environment and growth potential in the banking sector we forecast 2010E net profit to rise by 51% YoY to LKR861.1 mn.

• The voting share currently trades at 15.6x projected 2010E earnings and 11.0x on projected 2011E earnings whilst trading at 1.2x PBV. The non voting share currently trades at 9.5x forecasted 2010E earnings and 6.7x forecasted 2011E earnings whislt trading at 0.7x PBV.

Net interest income (NII) has grown by 52% to LKR1,760.8 mn in 1Q2010. SEYB’s interest income has dropped by 34.7% YoY to LKR4,052.6 mn largely due to the high non performing loans and low interest rates but on the contrary SEYB’s interest expenses have dipped by 54.6% YoY to LKR2,291.8 mn which has weathered the negative impact on interest income enabling the bank to improve their NII levels.

Operating expenses (OPEX) has decreased by 7% to LKR1,568.0 mn in 1Q2010. Bank’s OPEX has decreased by 7.4% mainly on the back of reductions in personnel expenses, equipment and establishment expenses and other overheads.

Profit before provisions and tax has recorded a four fold increase. Improved NII levels and reduction in OPEX have helped the bank to record a growth of 429.9% YoY to LKR719.8 mn in 1Q2010.

Two fold increase in provisioning cost. Provisioning cost has increased by 260.1% YoY to LKR214.4 mn in 1Q2010 mainly due to increased specific provisions by 96.3% YoY.

Total tax bill has increased by 121% to LKR293.2 mn. Value added tax on financial services have increased by 65.5% YoY and corporate tax have increased by 303.5% YoY which in turn has increased the total tax bill.

SEYB has recorded a net profit of LKR195.5 mn in 1Q2010. Bank’s bottom line has grown by a considerable portion when compared to 1Q2009. Though the core business activity has improved the escalation of provisioning costs has hindered the profitability of SEYB in 1Q2010.

Tier I CAR was at 11.2% and Tier II CAR stood at 13.6%. SEYB managed to improve the CAR ratios from December 2009 where Tier I CAR was at 10.6% and Tier II CAR at 12.9%.

Marginal decrease in NPL ratios in 1Q2010. Gross NPL ratio improved to 26.5% YoY in 1Q2010 from 29.3% December 2009 and Net NPL ratio improved to 19.2% YoY from 22.3% as at 31st December. However compared to the industry average SEYB’s NPL’s are still at high levels.

Marginal growth in the loan book (performing loans). SEYB’s loan book has recorded a 2.3% YoY growth in 1Q2010 and we see the non performing loans have also reduced by 9.3% YoY to LKR28.2 bn.

SEYB is showing signs of recovery from the financial turmoil which it underwent in 2008. Therefore on the back of the bank’s recovery, favourable macro economic environment and growth potential for the banking sector we forecast 2010E net profit to rise by 51% YoY to LKR861.1 mn.

The voting share currently trades at 15.6x projected 2010E earnings and 11.0x on projected 2011E earnings whilst trading at 1.2x PBV. The non voting share currently trades at 9.5x forecasted 2010E earnings and 6.7x forecasted 2011E earnings whislt trading at 0.7x PBV.

The voting share is trading at a near 40% premium to the sector (whilst non voting share trades at a circa 60% discount to the voting share). However we believe given SEYB’s branch network and reach and the recovery in its core business coupled with the reviving macro economy and growth potential in the banking sector SEYB has further upside, hence we rate SEYB a HOLD.