DFCC Bank's (DFCC) net profit has grown 70% YoY to LKR710.6 mn in 4QFY10 enabling FY10 earnings to grow by 26% YoY to LKR2,580.0 mn. 4QFY10 earnings grew mainly on the back of 20% YoY increase in net interest income, 73.4% YoY increase in non interest income and 44.0% YoY reduction in provisioning cost. With the economy expected to grow by circa 6%-7% during the next few years and contributions from the previously war affected North and East to the main stream economy, the banking sector outlook remains positive where loan growth expected to gather momentum (from 2H2010 onwards) with the low interest rate environment. DFCC's interest margins are healthy around 6.1% levels and we believe going forward they would be able to maintain an ave. interest margin of circa 5%. However it should be noted that DFCC's NPL ratios stand above the industry average.
Interest income dropped 16% YoY in to LKR2,670.5 in 4QFY10. DFCC’s interest income has fallen 16.2% YoY to LKR2,670.5mn in 4QFY10, due to a 27.4% YoY dip in interest income from loans and advances to LKR1,897.2 mn. This is mainly on the back of fall in interest rates and a 9.7% YoY dip in performing loans to LKR47.0 bn . However interest income from fixed income securities grew 34.7% YoY to LKR773.3 mn which was driven by a 131.5% YoY growth in the Treasury Bill and Bond portfolio (held to maturity) to LKR22.0 bn which is approx. 24% of the banks’ total asset base.
Interest expenses dipped 38% YoY to LKR1,225.5 mn in 4QFY10. Group’s interest expenses have dipped 38.2% YoY to LKR1,225.5 mn in 4QFY10, on the back of 29.4% YoY drop in interest cost on deposits to LKR593.7 mn and a 44.7% YoY drop in interest expenses on other interest bearing liabilities to LKR631.8 mn. The drop in deposit cost is largely attributable to low deposit rates and the shift in the deposit mix from high cost time deposits to low cost CASA products. However DFCC’s deposit base has grown by 8.2% YoY to LKR25.5 bn during FY10 and it is also noteworthy that the bank has been able to grow its low cost savings deposits by 94% YoY to LKR4.6 bn during the year amidst stiff competition.
Net interest income grew 20% YoY to LKR3,661.0 mn. The dip in interest income was off set by a faster decline in interest cost enabling net interest income to grow by 20.1% YoY to LKR1,445.0 mn during 4QFY10. Further net interest income during FY10 grew by 22.7% YoY to LKR5,197.6 mainly supported by a 15% YoY reduction in interest cost.
Non interest income grew 73% YoY in 4QFY10. Non interest income has grew 73.4% YoY to LKR374.3 mn largely due to a 122.6% YoY growth in other income such as dividend income, commission income, fee based income and capital gains in 4QFY10. However DFCC has recorded a foreign exchange loss of LKR33.7 mn during 4QFY10.
Operating cost has increased by 32% YoY in 4QFY10 to LKR835.5 mn. Operating costs have risen by 31.7% YoY to LKR835.5 mn, mainly due to a 17.0% YoY increase in personnel costs to LKR451.1 mn and 134.0% YoY increase in other overheads to LKR215.8 mn. Increase in operating costs can be attributable to the two new branches opened during the quarter. The operating cost per branch presently stands at LKR9.0 mn per quarter.
Provisioning cost has dipped 44% YoY to LKR105.8 mn in 4QFY10. The specific provisioning cost has reduced by 11.0% YoY to LKR275.5 mn whilst total recoveries have increased 11.9% YoY to LKR181.7 mn in 4QFY10 leading to an overall 44.0% YoY dip in total provisions to LKR105.8 mn. Further non performing loans have increased 15.3% YoY to LKR7.8 bn where the gross NPL ratio stands at 10.2% and net NPL exposure is at 5.1% which is above the industry average.
Associate company profit has risen 14% YoY to LKR325.0 mn in 4QFY10. DFCC’s associate company, Commercial Bank (COMB) has brought in a post tax profit of LKR325.0 mn (up 13.7% YoY) during the quarter. DFCC holds 28.63% of COMB which is presently reflected on the balance sheet valued at LKR7,819.0 mn vs. the current market value of LKR16,274 mn gives rise to an unrealised gain of circa LKR8,455 mn. However the banking regulator has presently introduced a 10% cap (which could go up to a maximum of 15% with special approval) on ownership, and thus requires DFCC to scale down its ownership in COMB by 2012.
Total tax bill has grown by 10% YoY to LKR471.2 mn in 4QFY10. Value Added Taxation on banking income has increased 35.3% YoY to LKR231.5 mn whilst tax on consolidated profit has fallen 7.0% YoY at LKR239.7 mn.
Net profit up 70% YoY to LKR711 mn in 4QFY10. Consequently with a 20.1% YoY growth in net interest income and 44% YoY dip in provision costs DFCC’s, 4QFY10 net profit has grown by 70.0% YoY to LKR710.6 mn. Further with this sharp net profit growth in the 4th quarter, the bank’s FY10 net profit also has risen 26.2% YoY to LKR2,580.0 mn.
Share offers good value at 10.5x forecasted FY11E net profit and 1.2x PBV. Despite the marginal increase in bottom line expected in FY11E, share continues to offer good value trading on 10.5x (circa 25% discount to the sector) expected FY11E and 10.1x forecast FY12E earnings whilst trading 1.2x PBV.
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