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Prime Bank LTD: Dse: Primebank Bloomberg: PB:BD
Prime Bank LTD: Dse: Primebank Bloomberg: PB:BD
com
Rating: Outperform Dec-2012 Fair Value Estimate: BDT 58 per share January 3, 2012
For the full year 2011, we forecast 12% growth in PBLs loans and advances, year-on-year (YoY), compared to a 32% 2010 loan growth, YoY. Increased government borrowing from banks and Bangladesh Banks contractionary monetary policy are the reasons behind the reduced loan growth rate. We estimate PBL deposits to grow at 28% YoY in 2011: higher than its 4 -year historical average growth rate. Deposit growth is a result of a slowing stock market, attractive rates on deposit products, and declining sales of national savings certificates. PBL is authorized to lend to the government, being a Primary Dealer (PD). To finance governments borrowing needs, PBLs investment in treasuries increased by 94% in 3Q11: represents 24% of deposits being allocated to treasury investments. PBLs aggregate yield from treasuries (including capital gains) is 11.512.0%. Since PBLs weighted average deposit rate is 8.5-9.0%, it earns a spread of 3% from treasuries. PBLs historical loan-to-deposit interest rate spread (IRS) is around 5.1% and even in 2011 IRS is anticipated to be over 5%. As is evident, the near-doubling treasury investments of PBL will imply significant spread erosion. Moreover, reduced 2011 export growth is expected to undermine PBLs 2011 commission income. We anticipate a 2011 growth in commission income 21% YoY: significantly lower than the 2010 growth of 56% YoY. For 2011, we forecast PBL fully diluted earnings per share (EPS) to be BDT 5.15 and Net Asset Value (NAV) per share to be BDT 27.92. Worth noting that since 2010 EPS growth was high, 2011 EPS growth had to account for a higher base from which to grow government borrowing and monetary tightening notwithstanding. Over the next 3 years, we anticipate higher EPS growth rates of 30%, 21%, and 20%, respectively. Gradual monetary policy easing, funds from International Financial Institutions (IFIs), reduced government borrowing, RMG volume growth and remittance recovery are expected to drive EPS growth in 2012-2014. . Rating: We estimate EPS of BDT 6.65 and BVPS of BDT 33.80 for the year ending in December 2012, and set a target price of BDT 58.0 per share with an OUTPERFORM rating. This implies a 29.0% total return on current share price of BDT 45.20 (as on January 2, 2012).
Margin and efficiency (%) Operating efficiency Loan/Deposit ROE ROA Net Interest Margin (%)
Other Key Indicators (%) 2010 2011E 2012E Loan-Dep Rate Spread % 5.25% 5.30% 5.30% NIM % 3.87% 3.75% 3.28% Cost-to-Income 34.93% 36.00% 36.00% NPL 1.23% 1.15%
Sources: Company Annual Report, BRAC EPL Research
70 65 60
Price, BDT
55 50
45 300.0
40 35 30 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Oct-11 Nov-11 Dec-11
200.0 100.0 .0
Turnover
Price
Growth in Loans and Advances (L&A): We expect L&A Growth Rate (GR) of 12% YoY in 2011, lower than 32.12% YoY growth in 2010, and 4-yr CAGR of 26.6% 2007-2010. L&A GR fell on spike in treasury investments as well as M2 contraction by the Bangladesh Bank (BB).
Figure 1: PBL L&A Growth
250,000
L & A (BDT MM)
28% 31%
32%
30% 25%
200,000 150,000
100,000
25%
19% 12%
15% 10%
5%
50,000 0
0%
2011E 2012E
2013E
2007
2008
2010
2009
L & A GR (YoY)
Higher fiscal deficit financing (increased by 36x during the July December 2011 YoY) will curb L&A growth for PDs such as PBL. Meanwhile, BoP pressure and increasing inflation prompted M2 contraction; BB raised repo rates multiple times and allowed large loans very selectively. Mandate to domestic private banks is to enable large loans to agriculture, SME, and exportoriented sectors, but restrict them in case of capital markets, real estate, and retail sectors.
Figure 2: PBL L&A Composition
M2 GR fell from 23.5% to 19.6% during March-Sep11, nearing BBs FY12 yearend target of 18%. We anticipate an M2 GR lower than BB-target, as BB tries to mitigate the inflationary effect of a BoP deficit and FX depreciation. Government borrowing is likely to drop in 1H12 with its impact becoming clearer in 2H12on upward revision of energy prices.
300,000
Deposits (BDT MM)
35%
29%
250,000 200,000
150,000
22% 17%
15% 10% 5% 0%
100,000
50,000
Bills payable
Fixed Deposits
Further, we estimate an LDR of 80% in 2011, far lower than 2010 LDR of 95%. This was likely to happen because of 2010s historically high L&A GR; further precipitated by monetary tightening and government borrowing. As sucha projected 80% LDR85% being the LDR upper-limit expected of PDs is testimony to PBLs enduring return on equity (also keeping record deposit mobilization in mind).
Figure 4: PBL Loan-Deposit Ratio (LDR)
100%
95%
90%
LDR
85%
80% 75%
Deposits GR
25%
28%
5% 4% 4% 3% 3% 2% 2% 1% 1% 0%
5.4% 5.3% 5.2% 5.1% 5.0% 4.9% 4.8% 4.7% 4.6% 4.5% 4.4%
NIM
7% 7%
9%
NIM
Sources: Company Annual Report, BRAC EPL Research
18,000
Interest Income (BDT MM)
16,000 14,000
12,000 3.2%
10,000 8,000
6,000 4,000
2.5% 2.0%
1.5% 1.0%
0.5% 0.0%
Interest Income
Non-Interest Income Non-interest income constitutes 61.6% of PBLs expected 2011 EPS. As per 4year average, its proportion rises to 63.5% of Total Operating Income, with investment income at 30.7% and commissions & fees income at 24.3%. Given that IRS and NIMs decline over time, PBLs earnings drivers are diversified. Estimated 2011 non-interest income comprises 60% of Total Operating Income.
NIM (%)
10%
10%
12% 10% 8% 7% 7% 6% 4% 2% 0%
3% 28% 1% 68%
6% 28%
5% 22% 38%
6% 23% 42%
24%
43%
40%
National Bank
35%
29%
Southeast Bank
Source: BRAC EPL Research (As on 2011 E) Figure 9: PBL Operating Income Composition
20,000 15,000
10,000 5,000
We expect 2011 investment income to grow by 28.7% YoY, vs. -19.4% YoY in 2010. In 9M11, treasury earnings rose on 91% higher treasury investments (equaling 23% of total deposits). For 2011, we estimate 85% higher treasury investments YoY. Meanwhile, 2011 portfolio investments income (mainly dividend income) is expected to grow by 47% YoY from its lower base of 2010. In contrast, portfolio income declined by 75% in 2010 YoY. This is on account of decline in trading profit of portfolio shares.
40,000
23%
25%
20% 20% 18% 15% 10% 5% 0%
30,000
20,000 10,000 0
2007 2008 2009 2010 2011E 2012E 2013E Investment in Treasury (BDT MM) Ratio of Investment to Total Deposit
Moreover, we estimate 2011 commission income GR of 21% YoY, compared to 2010 GR of 51.67% YoY. The slower growth can be attributable to crowding out effect of government borrowing which reduces trade financing, slower export GR YoY, and dried up income from Merchant Bank Subsidiary.
Figure 11: PBL Commission & Fees Income Growth
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -
60%
52%
40%
21%
Higher cost-to-income ratio in comparison to historical average PBL has maintained an average cost-to-income ratio of 34% in 2007-2010. We expect the cost-to-income ratio to reach 36% by 2013-end. Higher costs are expected to emerge from an increased focus on human capital development, e.g. training, increments in salary and benefits, etc.
50%
50,000
30%
37% 36%
Cost to Income (%)
2.8% 2.7% 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0% 2007 2008 2009 2010 2011E 2012E 2013E Cost to Income Cost to Assets
Cost to Assets (%)
35%
34% 33%
Projected EPS growth amid macro shocks We estimate EPS of BDT5.15 for the full financial year of 2011, 10.3% higher YoY, against 24.5% YoY EPS GR in 2010. Four-year average EPS GR is 45.4% as of 2010. Year 2011 has been severe on the bank sector. High inflation and government borrowing cut spread income, whereas a 44% stock market correction eroded 2010 portfolio gains. Moreover, trade finance commissions are expected to fall on slowdown in Euro-zone demand. PBLs projected EPS on a three-year horizon is as follows:
Figure 13: PBL EPS (Fully Diluted)
10
EPS (BDT)
8 6 4
2 0
1.79
1.60
2007
2008
2009
2010
2011E
2012E
2013E
EPS (BDT)
Sources: Company Annual Report, BRAC EPL Research
A relatively lower 2011 EPS should enable a higher 2012 EPS growth rate. Moreover, macroeconomic fundamentals such as inflation rate and currency risks are expected to ease in 2012, on energy price revisions, lower government borrowing, and BoP support from the IMF. We forecast a 30% YoY growth rate for EPS by end of 2012.
10%
5%
90% 80%
70% 60%
NII GR & Non Interest Income GR NII GR & Non Interest Income GR
100%
Inflation (YoY)
0%
-5%
2007
2008
2009
2010
2011
50% 40%
30% 20%
-10%
-15%
-20%
Sources: Company Annual Report, BRAC EPL Research Figure 15: PBL Treasury Investment, Net Interest Income & Non Interest Income GR
100%
Treasury Income GR
80%
60% 40%
20% 0%
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
GR in Treasury Investments
GR in Non Interest Income
2009 9,057 3,112 12,169 169,910 82,710 10% 8,271 3,898 9.81%
2010 15,793 5,692 21,485 242,832 183,747 10% 18,375 3,110 11.69%
The minimum capital adequacy ratio prescribed by Bangladesh Bank is 5% for Tier-I and 10% for total capital. As on 4Q10, PBL exceeds these minimum ratio thresholds with a Tier-I capital ratio of 8.6% and total capital ratio of 11.7%.
Figure 16: PBL Tier I & Tier II Capital
16%
Tier I & Tier II Capital
14% 12%
10%
3.76%
2.00%
2.21%
3.09%
8% 6% 4% 2%
0% 9.50%
8.67%
10.95%
8.60%
2007
2009
2010
One of PBLs key managerial strengths lies in its capacity to maintain below industry-average NPL ratios. In 2010, NPL ratio was 1.23% in comparison to 1.29% in 2009. In 2010, aggregate loans and advances increased 32.1%, while classified loans and advances decreased by 19%. We forecast an NPL ratio of 1.15% for 2011, a 6.5% decrease YoY.
Relatively lower profitability We estimate PBLs Return on Equity (ROE) and Return on Assets (ROA) at 20.5% and 2.3%, respectively, for 2011. Corresponding ratios for 2010 are 24.3% and 2.5%. Declining profitability is a result of the squeezed LDR, interest rate spread & NIM, relatively lower net yield from treasury investments, a stock market correction, and relatively lower commission income growth. However, we expect both ROE and ROA to improve in 2012.
Figure 17: PBL ROE & ROA
1.3% 2008
2.3% 2011E
2.3% 2012E
2.3% 2013E
PBL in comparison to leading frontier market banks A quick look at the largest listed banks in frontier markets such as Vietnam, Sri Lanka, and Nigeria indicates how PBL fares in relation to its frontier market peers.
Table 3: Comparative Analysis of Frontier Market Banks Frontier Market Banks Prime Bank Ltd Vietcom Bank Vietnam Joint Stock Commercial Bank For Industry And Trade Commercial Bank of Ceylon PLC Hatton National Bank PLC First Bank of Nigeria PLC Country Bangladesh Vietnam Vietnam Sri Lanka Sri Lanka Nigeria MCAP (USD MM) P/E P/B ROE ROA
1.80x 19.17% 2.13% 1.71x 22.20% 1.50% 1.87x 16.80% 1.10% 2.07x 21.00% 2.00% 1.89x 17.20% 1.70% 0.90x 12.90% 1.50%
10
PBL has lower P/E and P/B ratios than the median P/E and P/B ratios for the above six banks. PBL P/E (10.20x) is lower than the median P/E (10.25x), while PBL P/B (1.80x) is lower than the median P/B (1.84x). Profitability ratios RoE and RoA however are lower PBL than the median of the above group. Lower valuation multiples than the median but lower profitability ratios as well indicates markets consensus to reward higher profitability with higher price multiples and vice versa.
Figure 18: Comparative Analysis of Volume to MCAP
26% 24%
22%
ROE (%)
20%
18%
16% 14%
12%
3.0
4.0
Our rating and target price Considering the estimated EPS of BDT 6.65 and BVPS of BDT 33.80 for the year ending December 2012, we set a target price of BDT 58.0 per share with an OUTPERFORM rating. This implies 29% total return on the current share price of BDT 45.20 (as on 2nd January 2012).
11
Income Statement, MM BDT Interest/Investment Income Interest/profit paid on deposit Net Interest Income Income from investments Commission, Excng & Brok Other Income Total Operating Income Operating Expense Profit Before Provision Provision Pre-Tax Profit Tax Profit After Tax
2008 9,107.9 7,129.6 1,978.3 1,743.7 1,469.0 628.3 5,819.2 1,954.9 3,864.4 1,383.5 2,480.9 1,231.9 1,249.0
2009 10,881.2 8,428.7 2,452.5 3,372.5 1,792.2 673.8 8,290.9 2,934.1 5,356.8 624.0 4,732.8 1,805.8 2,927.0
2010 12,695.4 8,047.1 4,648.3 2,717.5 2,718.2 708.5 10,792.5 3,769.7 7,022.8 551.0 6,471.7 2,829.1 3,642.7
2011E 17,217.8 12,158.0 5,059.8 3,498.2 3,289.0 1,033.1 12,880.1 4,636.8 8,243.3 1,184.6 7,058.7 3,042.3 4,016.4
2012E 20,440.5 14,696.4 5,744.1 4,610.4 3,946.8 919.8 15,221.2 5,479.6 9,741.6 951.6 8,789.9 3,603.9 5,186.0
2013E 25,549.5 18,121.7 7,427.8 4,961.3 4,736.2 957.9 18,083.2 6,510.0 11,573.3 937.2 10,636.1 4,355.5 6,280.6
2008 Total Assets Growth L & A Growth Deposit Growth EPS GR 48.95% 30.84% 24.86% -10.71%
12
Beximco Pharmaceuticals
(DSE: BXPHARMA; Bloomberg: BXPHAR:BD)
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.
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