Md. Monirul Islam, ACA (Bank Analyst) [email protected]Md. Ashfaque Alam (Associate) [email protected]Banks: 1Q 2010 earnings could trigger rally Banks: 1Q 2010 earnings could trigger rally Sector rating: OUTPERFORM Sector rating: OUTPERFORM April 29, 2010 April 29, 2010 The banking sector has started gaining after a long bearish trend. This appreciation was long overdue. Recently banking sector came into the limelight at Dhaka Stock Exchange (DSE). Already in past 7 trading sessions of this month, the banking sector’s market capitalization at DSE has in- creased by 8.63% compared to DSE General index gain of 0.84%. The renewed interest in the banking sector could be linked with the growing expectations of better earnings perform- ance in the first quarter of 2010 (1Q 10) while sign of stabil- ity in NPL accretion has also improved the investors’ com- fort level for fresh investment in the sector. Meanwhile, improvement in macro economy, Central Bank’s (BB) ap- proval for opening of new branches/SME units, reduction of interest rates to address more customer base and bank- ing sector outlook for the year 2010 would generate addi- tional credit demand thereby helping banks to expand their loan books. BB allowed banks to reschedule classified loans without any down payment through a recent circular. We noticed a slowdown in provision against NPLs in 2009 due to the effect of that new circular. Due to the effect of that circular, higher investment and fee income with moderate loan growth, most of the banks brought some positive earn- ings surprises in their 2009 annual results (those who have already published their results). In addition to this, bull-run in equity market and relatively better yield rate in govt. treasury bill and bonds might be the other reasons of the positive surprises. Thus the reported income dur- ing the year 2009 was substantially higher. Considering 2010 banking sector outlook, growth poten- tials of loans & advances, deposits and investment, Central Bank's positive view of allowing banks to open new branches and SME units, borrowing and lending rate structure and yield rate of govt. treasury bill & bond with capital market scenario, we expect positive performance of the banks to continue in 1Q 10. Moreover, there has been a strong rumor that stocks such as banks currently having par value of BDT 100 shall be reduced to BDT 10 per value. The retail investors always prefer smaller par value stocks. If Securities and Exchange Commission ap- prove this, rally would continue for a while. That said, banking stocks may witness a strong rally at DSE ahead of their 1Q, 2010 result announcements. It may be worth buying of our top 10 selected banking stocks. Graph 1: Close market cap over a year of banking sector .0 100,000.0 200,000.0 300,000.0 400,000.0 500,000.0 600,000.0 4/28/2009 5/28/2009 6/28/2009 7/28/2009 8/28/2009 9/28/2009 10/28/2009 11/28/2009 12/28/2009 1/28/2010 2/28/2010 3/31/2010 Banking sector, Mcap Source: DSE web as on 28 April, 2010 Source: DSE web Top 10 picks Bank (ticker): 12 month target price (current price) (expected price return) Prime Bank (PRIMEBANK): BDT 700 (BDT 538) (30.10%) BRAC Bank (BRACBANK): BDT 950 (BDT 590) (61.00%) Eastern Bank (EBL): BDT 750 (BDT 547) (37.10%) NCC Bank (NCCBANK): BDT 500 (BDT 393) (27.20%) Islami Bank (ISLAMIBANK): BDT 650 (BDT 493.5) (31.70%) Shahjalal Islami Bank (SHAHJABANK): BDT 500 (BDT 329.25) (51.90%) AB Bank (ABBANK): BDT 1700 (BDT 1052.75) (61.50%) National Bank (NBL): BDT 700 (BDT 505) (38.60%) Mutual Trust Bank Limited (MTBL): BDT 500 (BDT 329.25) (51.90%) Pubali Bank (PUBALIBANK): BDT 650 (BDT 449.5) (44.60%) Sector: Banks No of Listed companies 29 Sector market capitalization (BDT mn) 454,372.2 Sector market capitalization (USD mn) 6,491.0 % ∆ last 7 days in Mkt Cap 8.63% Banking Sector Weight age in DGEN 19.26% Dhaka Stock Exchange (DSE) DGEN 5,655.8 Transaction Value (BDT mn) 28, Apr 2010 13,654.8 Mkt Cap (BDT mn) 2,359,213.1 Value (USD mn) 195.1 Mkt Cap (USD mn) 33,703.0 % ∆ last 7 days (DGEN) 0.84% %∆ (y-o-y) Mkt Cap 128% Avg mkt P/E 21.08 Avg sector P/E 11.48 1 Yr high Mkt Cap (BDT mn) 2,366,229 1 Yr low Mkt Cap (BDT mn) 1,019,962 1 Yr high Mkt Cap (USD mn) 33,803 1 Yr low Mkt Cap (USD mn) 14,571
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Md. Monirul Islam, ACA Bank Analyst) Banking sector, … Sector_top... · Md. Monirul Islam, ACA (Bank Analyst) ... As per the latest data issued by BB the MoM and YoY credit growth
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Prime Bank (PRIMEBANK): BDT 700 (BDT 538) (30.10%)
BRAC Bank (BRACBANK): BDT 950 (BDT 590) (61.00%)
Eastern Bank (EBL): BDT 750 (BDT 547) (37.10%)
NCC Bank (NCCBANK): BDT 500 (BDT 393) (27.20%)
Islami Bank (ISLAMIBANK): BDT 650 (BDT 493.5) (31.70%)
Shahjalal Islami Bank (SHAHJABANK): BDT 500 (BDT 329.25) (51.90%)
AB Bank (ABBANK): BDT 1700 (BDT 1052.75) (61.50%)
National Bank (NBL): BDT 700 (BDT 505) (38.60%)
Mutual Trust Bank Limited (MTBL): BDT 500 (BDT 329.25) (51.90%) Pubali Bank (PUBALIBANK): BDT 650 (BDT 449.5) (44.60%)
Sector: Banks
No of Listed companies 29
Sector market capitalization (BDT mn) 454,372.2
Sector market capitalization (USD mn) 6,491.0
% ∆ last 7 days in Mkt Cap 8.63% Banking Sector Weight age in DGEN 19.26%
Dhaka Stock Exchange (DSE)
DGEN 5,655.8
Transaction Value (BDT mn) 28, Apr 2010 13,654.8
Mkt Cap (BDT mn) 2,359,213.1
Value (USD mn) 195.1
Mkt Cap (USD mn) 33,703.0
% ∆ last 7 days (DGEN) 0.84%
%∆ (y-o-y) Mkt Cap 128%
Avg mkt P/E 21.08
Avg sector P/E 11.48
1 Yr high Mkt Cap (BDT mn) 2,366,229
1 Yr low Mkt Cap (BDT mn) 1,019,962
1 Yr high Mkt Cap (USD mn) 33,803
1 Yr low Mkt Cap (USD mn) 14,571
Moderate credit growth in first two months of the year 2010
As per the latest data issued by BB the MoM and YoY credit growth of January-February were 0.82% and
19.73% respectively. Considering the banking sector outlook of 2010, we expect 19%-22% credit growth in
2010.
Steep decline in provision against NPLs in 4Q 2009
Provisions against NPLs declined sharply in 2009, could be a significant point to consider. Provision for loans
and advances declined in 4Q 2010 due to the effect of new circular of rescheduling of classified loans and ad-
vances without any down payments in certain sector and efficient management of loans and advances. As per
the latest data published by BB, percentage share of classified loan to total outstanding and percentage share
of net classified loan declined from 10.3% to 9.21% and 2.34% to 1.73% respectively in 4Q 2010.
2009 report: strong underlying profitability with loan, deposit and investment income growth
During the year 2009, bottom line figures of most of the banks improved , which is a continuation of profit-ability of the banks. The banking sector achieved moderate level of loans and attractive investment income growth of 20% and 35% respectively. Similar level of growth in investment income may be achievable in 2010 considering the current capital market scenario. Investment income depends on overall capital market scenario of the country. Considering banking sector outlook and capital market scenario, we project 25% net earnings growth in 2010. Improved asset quality
During the year 2009 the quality of loans and advances improved compare to previous year. Efficient management of
loans & advances and rescheduling of classified loans & advances were the factors to be improved asset quality. As per
the latest data published by BB, percentage share of classified loan to total outstanding and percentage share
of net classified loan declined from 10.3% to 9.21% and 2.34% to 1.73% respectively in 4Q 2010.
Considering 2010 banking sector outlook, growth potentials of loans & advances, deposits and invest-
ment, Central Bank's positive view of allowing banks to open new branches and SME units, borrowing
and lending rate structure and yield rate of govt. treasury bill & bond with capital market scenario, we
expect better performance in 2010.
It can be said, banking stocks may witness a strong rally at DSE ahead of their 1Q, 2010 result announce-ment. The average turnover at DSE during the 1Q 09 and 1Q 10 were BDT 3519.0 MM and BDT 11,141.4 MM. It indicates a growing interest of investors over a year in terms of trading value and volume of stocks.
IMPORTANT DISCLOSURES
Analyst Certification: Each research analyst and research associate who authored this document and whose name appears herein certifies that the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed therein that are within the coverage universe. Disclaimer: Estimates and projections herein are our own and are based on assumptions that we believe to be reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any security. As it acts for public companies from time to time, BRAC-EPL may have a relationship with the above mentioned company(s). This report is intended for distribution in only those jurisdictions in which BRAC-EPL is registered and any distribution outside those jurisdictions is strictly prohibited. Compensation of Analysts: The compensation of research analysts is intended to reflect the value of the services they provide to the clients of BRAC-EPL. As with most other employees, the compensation of research analysts is impacted by the overall profitability of the firm, which may include revenues from corporate finance activities of the firm's Corporate Finance department. However, Research analysts' compensation is not directly related to specific corporate finance transaction. General Risk Factors: BRAC-EPL will conduct a comprehensive risk assessment for each company under coverage at the time of initiating research coverage and also revisit this assessment when subsequent update reports are published or material company events occur. Following are some general risks that can impact future operational and financial performance: (1) Industry fundamentals with respect to customer demand or product / service pricing could change expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes; (3) Unforeseen developments with respect to the management, financial condition or accounting policies alter the prospective valuation; or (4) Interest rates, currency or major segments of the economy could alter investor confidence and investment prospects. Special Disclosure: BRAC Bank Limited is the majority shareholder of BRAC-EPL Investments Limited and