md. monirul islam, aca bank analyst) banking sector, … sector_top... · md. monirul islam, aca...

Md. Monirul Islam, ACA (Bank Analyst) [email protected]

Md. Ashfaque Alam (Associate) [email protected]

Banks: 1Q 2010 earnings could trigger rallyBanks: 1Q 2010 earnings could trigger rally Sector rating: OUTPERFORMSector rating: OUTPERFORM April 29, 2010April 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

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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

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.

Table 1: Key indicators of top 10 picks

Source: Company annual reports

Figures in MM BDT or indicate otherwise

Key indicators Prime Bank

BRAC Bank

Eastern Bank

NCC Bank Islami Bank

Shahjalal Islami Bank

AB Bank NBL MTBL Pubali Bank

Total Assets 124,984.7 94,615.3 69,870.7 65,937.5 278,302.8 58,920.9 84,053.6 91,980.6 52,774.8 107,579.6

Total Loans and Advances 89,946.0 64,150.8 47,668.0 50,387.7 214,615.8 43,958.3 56,708.8 65,129.3 33,883.9 74,203.3

Total Deposits 107,077.3 74,455.7 49,189.5 53,900.2 244,292.1 47,459.2 68,560.5 76,834.2 42,354.1 88,466.5

Capital

Tier 1 9,056.6 6,074.4 6,441.1 5,366.3 14,675.7 4,676.0 6,127.9 7,329.9 3,300.6 8,344.2

Tier 2 3,111.9 1,434.9 1,875.4 956.2 8,944.1 754.0 1,311.9 1,794.7 668.7 1,727.8

Income *

Total Operating Income 8,262.9 7,404.6 4,630.2 4,372.3 12,326.9 2,916.8 6,149.0 6,550.2 2,544.0 6,898.3

Net Income 2,823.5 1,373.4 1,454.5 1,719.5 3,403.6 1,070.6 2,300.6 2,082.2 820.6 2,092.2

Operating ratio 35.5% 48.7% 35.6% 28.2% 36.9% 30.0% 30.1% 47.9% 36.0% 44.3%

Loan/Deposit 84.0% 86.2% 96.9% 93.5% 87.9% 92.6% 82.7% 84.8% 80.0% 83.9%

ROE 30.5% 19.2% 22.1% 34.1% 19.9% 25.1% 41.0% 27.6% 26.6% 24.5%

ROA 2.4% 1.6% 2.3% 2.8% 1.3% 2.1% 3.1% 2.5% 1.8% 2.1%

NIM 4.3% 6.5% 4.0% 3.9% 4.7% 2.9% 5.0% 4.6% 4.1% 6.3%

Growth **

CAGR of Total assets 31.4% 65.9% 24.6% 24.8% 22.7% 44.7% 20.6% 16.8% 34.2% 16.3%

CAGR of Total Loans and Adv. 32.7% 67.8% 27.1% 25.6% 24.0% 47.5% 22.6% 19.6% 33.8% 18.9%

CAGR of Deposits 31.7% 66.5% 26.6% 24.2% 23.2% 41.0% 20.3% 18.5% 34.5% 16.2%

Loan Growth 19.0% 21.8% 20.2% 8.8% 19.2% 33.5% 38.6% 31.1% 18.8% 20.1%

Deposit Growth 21.6% 28.4% 18.3% 14.9% 21.9% 38.4% 28.4% 27.7% 25.2% 21.2%

Earning Growth 126.1% 48.2% 82.3% 94.9% 27.2% 30.9% 20.9% 36.6% 169.0% 38.1%

* Actual performance of 2009 except for AB Bank 2008

** 6 year cumulative average

Table 2: EPS (diluted actual and forecasted) of top 10

Table 3: P/E and P/B of top 10 picks

Table 4: ROE (actual and forecasted) of 10 picks

Source: Company annual reports and BRAC EPL research

ROE

Sector/Company DSE Code Bloomberg Ticker 2006 2007 2008 2009 2010 2011

Banks

Prime Bank PRIMEBANK PB:BD 31.4% 30.7% 20.9% 30.5% 20.1% 19.4%

BRAC Bank BRACBANK BRAC:BD 23.1% 23.8% 21.8% 19.2% 19.3% 26.9%

Eastern Bank EBL EBL:BD 17.4% 12.0% 18.6% 22.1% 20.0% 21.1%

NCC Bank NCCBANK NCCB:BD 25.3% 26.6% 25.2% 34.1% 28.3% 25.1%

Shahjalal Islami Bank SHAHJABANK SJIB:BD 47.6% 32.4% 25.6% 25.1% 24.0% 26.0%

Islami Bank ISLAMIBANK ISLAMI:BD 15.4% 13.4% 21.2% 19.9% 16.5% 17.1%

AB Bank ABBANK ABBANK:BD 25.9% 53.7% 41.0% 38.1% 34.9% 32.3%

National Bank NBL NBL:BD 16.9% 31.6% 28.5% 27.6% 27.4% 23.8%

Mutual Trust Bank MTBL MTBL:BD 27.7% 10.7% 13.5% 26.6% 21.2% 23.4%

Pubali Bank PUBALIBANK PUBALI:BD 22.8% 25.9% 22.5% 24.5% 21.9% 24.3%

P/E P/B

Sector/Company DSE Code Bloomberg Ticker 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011

Banks

Prime Bank PRIMEBANK PB:BD 29.67x 22.22x 24.88x 11.01x 10.44x 8.24x 8.1x 5.9x 4.6x 2.6x 1.7x 1.5x

BRAC Bank BRACBANK BRAC:BD 47.27x 25.55x 17.05x 11.51x 8.39x 4.75x 7.5x 5.1x 2.9x 1.8x 1.5x 1.1x

Eastern Bank EBL EBL:BD 31.13x 38.12x 20.03x 10.98x 8.81x 7.16x 5.1x 4.2x 3.4x 1.9x 1.6x 1.4x

NCC Bank NCCBANK NCCB:BD 36.91x 26.12x 20.05x 10.29x 8.14x 6.76x 8.3x 6.0x 4.4x 2.9x 1.9x 1.5x

Shahjalal Islami Bank SHAHJABANK SJIB:BD 24.35x 17.43x 13.79x 10.53x 8.41x 6.02x 9.4x 4.0x 3.1x 2.3x 1.8x 1.4x

Islami Bank ISLAMIBANK ISLAMI:BD 26.12x 25.63x 13.68x 10.75x 10.30x 8.64x 3.7x 3.3x 2.6x 1.8x 1.6x 1.4x

AB Bank ABBANK ABBANK:BD 51.05x 14.27x 11.81x 8.81x 6.96x 5.63x 10.5x 6.0x 4.0x 2.9x 2.1x 1.6x

National Bank NBL NBL:BD 45.95x 18.83x 15.30x 11.20x 8.23x 7.34x 7.1x 5.1x 3.8x 2.6x 2.0x 1.6x

Mutual Trust Bank MTBL MTBL:BD 16.45x 37.33x 25.80x 9.59x 9.03x 6.50x 4.1x 3.8x 3.2x 2.1x 1.7x 1.4x

Pubali Bank PUBALIBANK PUBALI:BD 27.55x 17.21x 15.37x 11.13x 9.97x 7.10x 5.1x 3.9x 3.1x 2.4x 2.0x 1.5x

Diluted EPS


Banks

Prime Bank PRIMEBANK PB:BD 18.13 24.22 21.62 48.88 51.55 65.27

BRAC Bank BRACBANK BRAC:BD 12.49 23.10 34.62 51.30 70.33 124.18

Eastern Bank EBL EBL:BD 17.57 14.35 27.31 49.80 62.10 76.37

NCC Bank NCCBANK NCCB:BD 10.65 15.04 19.60 38.20 48.31 58.13

Shahjalal Islami Bank SHAHJABANK SJIB:BD 13.52 18.89 23.87 31.26 39.15 54.69

Islami Bank ISLAMIBANK ISLAMI:BD 18.89 19.25 36.08 45.91 47.89 57.10

AB Bank ABBANK ABBANK:BD 20.75 74.23 89.72 120.29 152.17 188.19

National Bank NBL NBL:BD 11.50 28.06 34.55 47.19 64.19 71.98

Mutual Trust Bank MTBL MTBL:BD 22.56 9.95 14.39 38.72 41.13 57.08

Pubali Bank PUBALIBANK PUBALI:BD 17.02 27.24 30.50 42.11 47.04 66.06

Table 5: NPLs to total loans and advances of top 10 picks

Table 6: Current Valuation summary of top 10 picks

Valuation (BDT)

Sector/Company DSE Code Bloomberg Ticker

P/E Mul-tiples

P/B Mul-tipl. P/E P/B

Residual Income

12 month Target price

Upside (%)

Banks

Prime Bank PRIMEBANK PB:BD 12.5x 2.5x 644.4 774.0 688.0 700.0 30.1%

BRAC Bank BRACBANK BRAC:BD 12.5x 2.5x 879.1 1000.6 1111.3 950.0 61.0%

Eastern Bank EBL EBL:BD 12.5x 2.5x 776.3 834.0 755.5 750.0 37.1%

NCC Bank NCCBANK NCCB:BD 12.5x 2.5x 603.9 519.4 621.2 500.0 27.2%

Shahjalal Islami Bank SHAHJABANK SJIB:BD 12.5x 2.5x 489.4 457.5 733.3 500.0 51.9%

Islami Bank ISLAMIBANK ISLAMI:BD 12.5x 2.5x 598.7 776.9 520.5 650.0 31.7%

AB Bank ABBANK ABBANK:BD 12.5x 2.5x 1902.1 1258.8 2072.9 1700.0 61.5%

National Bank NBL NBL:BD 12.5x 2.5x 802.3 666.6 676.0 700.0 38.6%

Mutual Trust Bank MTBL MTBL:BD 12.5x 2.5x 514.2 537.4 560.2 500.0 51.9%

Pubali Bank PUBALIBANK PUBALI:BD 12.5x 2.5x 588.0 596.1 759.6 650.0 44.6%

NPLs to total loans and advances


Banks

Prime Bank PRIMEBANK PB:BD 1.52% 0.96% 0.82% 1.35% 1.76% 1.29%

BRAC Bank BRACBANK BRAC:BD 2.25% 3.04% 4.45% 4.69% 6.04%

Eastern Bank EBL EBL:BD 7.19% 5.41% 3.79% 4.31% 3.30% 2.46%

NCC Bank NCCBANK NCCB:BD 7.87% 4.82% 4.95% 4.17% 4.14% 2.82%

Shahjalal Islami Bank SHAHJABANK SJIB:BD 0.27% 0.49% 0.19% 0.62% 0.44% 0.94%

Islami Bank ISLAMIBANK ISLAMI:BD 6.92% 3.25% 3.43% 2.93% 2.39% 2.35%

AB Bank ABBANK ABBANK:BD 11.37% 8.21% 4.02% 4.31% 2.99%

National Bank NBL NBL:BD 17.37% 7.07% 6.01% 4.53% 5.39% 5.96%

Mutual Trust Bank MTBL MTBL:BD 0.00% 0.00% 1.03% 2.39% 4.92% 2.81%

Pubali Bank PUBALIBANK PUBALI:BD 14.30% 7.94% 4.98% 3.59% 2.94%

Source: DSE Web and BRAC EPL research


1. Prime Bank (current price BDT 538, target price BDT 700)

Company Summary

52-week Price Range (BDT) 345 - 790

Current Price (as at 28 April 2010) 538

12-month Target Price 700

Cash Dividend 2009 10.31

Expected Total Return 32%

Number of Shares MM 57.8

Market Cap BDT MM 31,076.9

Float (% of shares) 57% 0

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2. BRAC Bank (current price BDT 590, target price BDT 950)

Company Summary


Current Price (as at 28 April 2010) 590.25







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3. EBL (current price BDT 547, target price BDT 750)

Company Summary



12-month Target Price 750.0


Expected Total Return 40.5%



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Graph 2: 1 year price chart of Prime Bank

Graph 3: 1 year price chart of BRAC Bank

Graph 4: 1 year price chart of EBL


TOP 10 PICKS (Company summary and price chart)

4. NCC (current price BDT 393, target price BDT 500)

Company Summary









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5. IBBL (current price BDT 493.5, target price BDT 650)

Company Summary









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6. Shahjalal Islami Bank (current price BDT 329.25, target price BDT 500)

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7. AB Bank (current price BDT 1052.75, target price BDT 1700)

Company Summary








Float (% of shares) 49%

Company Summary








Float (% of shares) 70.69%

Company Summary








Float (% of shares) 53%

8. NBL (current price BDT 505, target price BDT 700)

9. MTBL (current price BDT 329.25, target price BDT 500)

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10. Pubali Bank (current price BDT 449.5, target price BDT 650)

Company Summary








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Graph 12: Market cap over a year of DGEN vs Banks

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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

DGEN

Source: DSE web



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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

2010 outlook

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

BRAC-EPL Brokerage Limited.

BRAC EPL Investments Capital Markets Group

Aminul Haque Head of Capital Markets [email protected] 01730317802

Md. Monirul Islam Research Analyst [email protected] 01730357150

Parvez Morshed Chowdhury Research Analyst [email protected] 01730357154

Ali Imam Investment Analyst [email protected] 01730357153

Asif Khan Investment Analyst [email protected] 01730357158

Md. Ashfaque Alam Research Associate [email protected] 01671020956

Khandakar Safwan Saad Research Associate [email protected] 01911420549

BRAC EPL Research www.bracepl.com WW Tower (8th Floor) 68 Motijheel C/A, Dhaka-1000 Tel: +88 02 9514731-40 Fax: +88 02 7116418 E-Mail: [email protected]

mailto:[email protected]







http://www.bracepl.com/


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