Nations Trust Bank's (NTB) net profit has grown by 86% YoY to LKR280.1 mn in 2Q2010, enabling 1H2010 cumulative net profit to grow by 49% to LKR494.2. Net profit in 2Q2010 grew mainly on the back of 32% YoY increase in net interest income and 55% YoY reduction in provisioning cost. With low interest rates and expected economic boom, banking sector outlook remains positive with loan growth (grew by 2.2% in May) expected to gather momentum from 2H2010 on-wards. Despite slower private sector credit growth NTB recoded circa 15% growth in performing loans from December 2009 where other banks recorded an average growth rate of 8-9%. NTB's net interest margin has improved to near 5.5% whilst the young and dynamic bank is set to grow in the coming years. We are maintaining our forecast 2010E net profit at LKR969.7 mn (up 41% YoY) and projected 2011E net earnings at LKR1,296.9 mn (up 34% YoY). Thus the share offers good value on 14.8x forecast 2010E net profit, 11.0x projected 2011E net earnings, 2.0x PBV. Maintain BUY.
Interest income has dipped 22% YoY to LKR2,541.2 in 2Q2010. NTB’s interest income has dipped 21.9% YoY to LKR2,541.2 mn in 2Q2010, caused by a 19.8% YoY dip in interest income on loans and advances to LKR1,581.1 mn and a 25.2% YoY dip in Interest income on other interest earning assets to LKR960.1 mn. The interest income on loans and advances have dipped despite the 6.4% YoY increase in performing loans during the quarter mainly on the back of low interest rates. Though the government securities portfolio (held to maturity) has remained flat the reduction in Treasury bill rates has impacted the income from fixed income securities negatively.
Interest Expenses has dipped 42% YoY to LKR1,389.0 mn in 2Q2010. Interest expenses has dipped 41.7% YoY to LKR1,389.0 mn mainly on the back of a 48.3% YoY dip in interest expense on other interest bearing liabilities as well as a drop of 33.4% YoY in interest expense on deposit. The interest cost was reduced with low deposit rates and shift in the deposit mix towards low cost
CASA products (CASA contribution improved to 29% from 27%). NTB’s deposit base also grew 4.1% during the quarter to LKR45.9 bn.
Net interest income has increased by 32% YoY to LKR1,152.2 mn in 2Q2010. Despite interest income having dipped by 22% YoY interest cost has dipped at a faster pace by 42% YoY enabling the net interest income to grow by 32% YoY to LKR1,152.2 mn.
Non interest income grew 6% YoY in 2Q2010. Non interest income has grown by 5.7% YoY to LKR477.0 mn in 2Q2010 due to gains made in forex earnings compared to losses suffered in the 2Q2009. However other operating income dipped 66.7% to LKR416.4 mn during 2Q2010.
Operating costs have increased 21% YoY in 2Q2010. Operating costs have increased 20.8% YoY to LKR892.4 mn, which was resulted by 85% YoY increase in personal costs to LKR408.0 mn which could be attributable to the increase in the number of employees. However premises, equipment and
establishment expenses have reduced by 10.1% YoY to LKR188.8 mn. However NTB’s cost to income ratio has improved to 55% from 57% as at 31st March.
Provision for bad and doubtful debts and loans has decreased by 55% YoY in 2Q2010. Provision for bad and doubtful debts and loans has decreased by 55.2% YoY to LKR90.6 mn, which was resulted by the 63.7% YoY decrease in specific-provision to LKR79.1 mn. Further NTB’s gross NPL ratio improved to 6.1% (7.0% in 1Q2010) and net NPL ratio to 3.2% (3.8% in 1Q2010).We believe NTB would be able to improve its NPL’s in the coming quarters with the improvement seen in recoveries.
Total tax bill has increased 57% YoY to LKR366.1 mn in 2Q2010. Value Added Taxation on banking income has increased by 72.6% YoY to LKR139.2 mn whilst tax on consolidated profit has also increased by 49.1% YoY to LKR226.9 mn which increased the total tax bill by 57% YoY to LKR366.1 mn in 2Q2010. Thus the effective tax rate in 2Q2010 is near 57%.
Net profit up 86% YoY to LKR280.1 mn in 2Q2010. Consequently a 32% YoY increase in net interest income and 55% YoY reduction in provisioning cost has pushed up NTB’s net profit by 86% YoY to LKR280.1 mn in 2Q2010.
Forecast 2010 net profit maintained at LKR969.7 mn (up 41% YoY). With the expected growth in the economy and low interest rate environment the banking sector outlook remains positive with loan growth (grew 2.2% in May) expected to gather momentum 2H2010 onwards. Despite slower private sector credit growth NTB recoded circa 15% growth in performing loans from December 2009 where other banks recorded an average growth rate of 8-9%. NTB’s net interest margins is expected to be intact at around 5%, whilst the young and dynamic bank is set to grow in the coming years. Therefore, we are maintaining our forecast 2010E net profit at LKR969.7 mn (up 41% YoY) and projected 2011E net earnings at LKR1,296.9 mn (up 34% YoY).
Share offers good value on 14.8x forecast 2010E net profit. The share offers good value on 14.8x forecast 2010E net profit, 11.0x projected 2011E net earnings, 2.0x PBV. Maintain BUY.
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