Valuation Report

February 02, 2011

Bank Asia Limited

Analysts: Farjad Siddiqui and Qazi Musaddeq Ahamed

CMP: Tk. 781.75

Recommended: Buy and Hold

Mindspring Fair Value: Tk. 805.65

Forward P/E (At CMP): 10.33

Return Prospect: >Marekt Yield

COMPANY SNAPS

1000 900 800 700 600 500 400 300 200

mn

Volume Price

Bank Asia Limited

450000 400000 350000 300000 250000 200000 150000 100000 50000 0

100 0

EARNINGS DECOMPOSITION
Bank Asia
Net Interest Margin 46.86%

Private Conventional Banks

Net Interest Margin 44.07%

Investm ents 15.52%

Operating Income = 4.67 bn

Others 6.12%

Investm ents 27.75%

Operating Income = 131.23 bn

Others 8.98%

Comm, Brokera ge 31.50%

Comm, Brokera ge 19.91%

PERFORMANCE DECOMPOSITION MATRIX

EBT EAT NNER 53.09% 48.85% 58.05% NENIR 75.80% 55.64% 75.86% NEI 19.81% 13.81% 21.24% NETI 32.19% 23.74% 32.14% NREA 2.22% 1.49% 1.91% NRE 31.63% 23.00% 32.03% NRA 2.11% 1.50% 2.18% EBT NIR IR TOI EA BV Net Earnings to Earnings=NNER, Net Earnings to Net Interest=NENIR, Earnings to Net Interest=ENI Net Earnings to Interest= NEI, Earnings to Interest= ETE, Net Interest to Interest= NII, Net Earnings to Total Income= NETI, Earnings to Total Income= ETI, Interest to Total Income= ITI ENI 142.78% 113.91% 130.68% ETE 37.32% 28.27% 36.59% ETI 60.64% 48.60% 55.36% REA 4.19% 3.05% 3.29% RE 59.58% 47.08% 55.17% RA 3.97% 3.06% 3.75% Net Return on Earnings Asset= NREA, Return on Earning Asset= REA, Net Interest to Earning Assets= NIEA, Interest to Earning Assets= IEA, Total income to Earning Assets= TIEA, Net Return on Equity= NRE, Return on Equity= RE NII 26.14% 24.82% 28.00% NITI 42.47% 42.66% 42.37% NIEA 2.93% 2.68% 2.51% NTE 41.73% 41.33% 42.22% NIA 2.78% 2.69% 2.87% Net Interest on Equity= NIE, Interest On Equity= IE, Total Income on Equity= TIE, Earning Assets to Equity= EAE, Net Return on Assets= NRA, Return on Assets= RA, Net Interest on Assets= NIA, Interest on Assets= IA, Total Income on Assets= TIA, Earnings Assets Ratio= EAR ITI 162.48% 171.93% 151.29% IEA 11.21% 10.79% 8.98% TE 159.65% 166.57% 150.78% IA 10.63% 10.83% 10.24% Equity Multiplier= EM

Bank Asia

Industry Average
NIR

* All amounts are in million taka ** Except M. Cap all information are based on 3Q-2010

FUNDAMENTAL INDICATORS
2010E 2008 Net Interest Income (mn) Operating Income (mn) EPS NAV P/E P/B 2009
(Ratios At CMP)

IR

TOI

1,234 2,893
32.02 155.40 11.97 2.47

1,749 4,130
44.20 164.99 9.65 2.59

3,150 6,725
75.65 10.33

EA

BV

TECHNICAL INDICATORS
SMA (15) 776.80 2010 Accumulated Specific 2009 Accumulated Specific EMA (9) 785.47 RSI 49.05 MFI 68.05 Q2 34.85 18.73 Q2 14.70 8.31 Q3 57.29 22.45 Q3 22.17 7.47 ROC (15) 2.34 Q4(F) 75.65 18.35 Q4 44.20 22.03
TA

TIEA 6.90% 6.27% 5.93% TIE 98.25% 96.88% 99.66% TIA 6.54% 6.30% 6.77%

2007 2008 2009 EAI 1423.67% 1544.33% 1679.58% EAR 94.80% 100.46% 114.06%

EM 6.66% 6.50% 6.79%

QUARTERLY EPS
Q1 16.11 16.11 Q1 6.39 6.39

REG. CAPITAL DECOMPOSITION

Tier I Tier II

DIVIDEND PATTERNS
Year 2009 2008 2007 2006 2005 2004 Cash 10% Bonus 40% 23% 25% 25% 20% 25% Right -

Tk. In millions

Total Cap.=6952.38 mn

VALUATION
Income Statement PARTICULARS Interest Income Less: Interest Paid Net Interest Income Income From Investment Comm., Exchange & Brokerage Other Operating Income Operating Income Less: Operating Expenses EBIT Less: Provisions Less: Tax Net Profit Flow To Equity Model
(Figures in Millions except per share data) (All amounts are in million Taka)

2007 3,662 2,705 957 467 700 129 2,254 679 1,575 208 641 726

ACTUAL 2008 4,973 3,739 1,234 607 851 201 2,893 988 1,905 499 719 687

2009 6,247 4,498 1,749 1,013 1,178 190 4,130 1,512 2,617 331 959 1,327

2010 9,414 6,264 3,150 1,629 1,654 292 6,725 2,216 4,509 558 1,679 2,271

2011 13,784 8,474 5,310 1,970 2,065 361 9,705 2,839 6,866 651 2,641 3,574

FORECASTED 2012 18,435 11,107 7,328 2,554 2,535 420 12,837 3,490 9,347 810 3,628 4,909

2013 21,887 13,386 8,501 2,796 3,067 481 14,845 4,138 10,707 818 4,203 5,686

2014 28,526 19,234 9,292 3,355 3,860 535 17,042 5,192 11,851 1,021 4,602 6,227

2010 NI (Adjusted) Invest. In Reg. Capital Invest. In Cap. Ex. Flow to Equity (FTE) PV of FTE

2011

2012

2013

2014

2,828 1,374 461 3,494 3,038

4,260 869 632 2,759 2,086 38,416 19,100 26,772

5,784 2,384 790 2,611 1,717

6,675 4,222 999 1,454 831

7,493 1,158 1,327 5,008 2,490

Terminal Value PV of Terminal Value Value of Equity Number of Shares Per Share Price

891.57
Terminal Growth Rate

Conceptual construction remains more or less same as conventional FTE, except two further adjustments that essentially derived from the Business and Regulatory Model followed by Banking Institutions. These two adjustments are Deducting Investment in Regulatory capital and Add back expected residual portion of provision set aside. Net Interest margin estimated on the basis of macroeconomic outlook, expected loan & deposit level & composition, operational expansion plan and potential diversification in business segments. Cost of Equity 15%, on the basis of perceived risk profile and quality of earnings. Effective tax rate 42.5%. Nominal Terminal growth rate 7%, after adjusting for expected inflation, population and real GDP growth. Sensitivity Analysis The sensitivity analysis shows that, per share value is most sensitive to terminal growth rate and discount rate. The table at the left hand side shows the results where the shaded area at the center shows the most possible range of alternatives:

1004 Discount Rate

13.0% 14.0% 15.0% 16.0% 17.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1000.3 871.6 771.3 691.3 626.4

1099. 942.8 4 824.0 731.2 657.1

1231.6 1034.4 889.8 779.9 694.0

1416.7 1156.6 974.5 840.8 739.1

1694.3 1327.5 1087.4 919.2 795.5

Economic Value Model

(Figures in Millions except per share data)

2010 Net Income (-) Cost of Equity Economic Value PV of Eco. Value

2011

2012

2013

2014

2,271 880 1,392 1,210

3,574 1,086 2,488 1,881 5,864 7,891 23,624 30.02

4,909 1,216 3,693 2,428

5,686 1,574 4,113 2,351

6,227 2,207 4,020 1,999

BV of Equity Invested PV of Terminal Value Value of Equity Number of Shares Per Share Price Dividend Discount Model

Decidedly depends on assumption relating excess return on equity over cost of equity in longer run time frame. Bangladesh Banking Industry is roughly perfectly competitive. But besides that as entrance is highly regulated, we expect sustenance of positive economic profit in longer run. Assumed spread of ROE over cost of equity is 7%. Remaining assumptions relating cost of capital, terminal growth rate, effective tax rate are assumed to be same.

786.76

High Growth 1
Year Earnings GR Ex. Dividends 2010E 35% 0 2011E 35% 0 2012E 35% 0

High Growth 2
2013E 20% 0 2014E 20% 0 2012E 15.6% 38.13

Transition
2013E 11.3% 84.92 2017E 7% 136.29

Per Share Price

688.87

A four stage growth model has been applied based on a 7-year forecast of dividends as cash flows The discount rate is assumed to be 15%. This is the cost of equity capital. Terminal ROE is assumed to be 19% considering banks risk profile, profitability, risk free rate, inflation and overall economic conditions. This rate is used to calculate the expected payout ratio. The future growth rates have been estimated based on the forecasted net incomes for the next 7 years. The terminal growth rate is assumed to be 7% as mentioned earlier.

Relative Valuation Models

Banks AB Bank Al-Arafah bank Brac Bank Bank Asia City Bank DBBL Dhaka bank EBL EXIM Islami Bank Jamuna Bank Mercantile Bank Mutual Trust Bank NBL NCC Bank One Bank Premier Bank Prime Bank SIBL Shahjalal Southeast Standard Trust UCBL Forward P/E 8.61 9.71 10.50 8.66 14.78 47.28 6.81 9.37 11.16 9.43 11.59 12.11 10.08 8.70 11.37 5.98 10.27 8.82 25.89 6.90 12.02 7.84 7.94 14.93 E(g) 62% 123% 19% 96% 184% 65% 142% 50% 95% 61% 54% 60% 54% 259% 34% 141% 32% 35% 24% 124% 46% 132% 161% 170% CV 12.05% 23.86% 13.60% 19.46% 13.71% 20.00% 23.95% 33.64% 21.28% 13.04% 10.48% 21.62% 24.04% 44.60% 21.28% 27.71% 23.36% 18.71% 20.48% 29.18% 18.73% 22.35% 21.65% 94.18% Banks AB Bank Al-Arafah bank Brac Bank Bank Asia City Bank DBBL Dhaka bank EBL EXIM Islami Bank Jamuna Bank Mercantile Bank Mutual Trust Bank NBL NCC Bank One Bank Premier Bank Prime Bank SIBL Shahjalal Southeast Standard Trust UCBL Book Value 318.87 15.24 311.22 164.99 298.6 217.59 18.67 28.86 14.72 271.22 17.85 140.84 173.83 20.25 15.94 149.16 15.91 25.53 11.9 14.38 245.19 133.06 169.32 19.61 P/BV 3.95 4.85 2.30 3.77 2.92 7.84 2.95 2.60 3.85 2.24 2.93 3.02 2.77 4.36 3.32 4.69 3.12 2.51 3.24 3.43 1.77 3.20 3.09 5.88 ROE 33.34% 24.10% 15.55% 26.79% 13.96% 26.14% 19.32% 17.26% 25.22% 16.93% 23.19% 14.33% 22.27% 23.22% 28.49% 23.68% 23.47% 24.04% 12.14% 21.73% 16.51% 18.27% 16.27% 10.67%

P/E Multiple: Conceptual P/E drivers are growth, riskiness and payout. Upon gathering relevant information, a regression model was built to determine driver coefficients. But statistical significance (p=.40) was not adequate, besides very low correlation (r2=.05). Thus this model was rejected. Alternatively, median of similar firms P/E (10.08) was used to determine the expected price. Considering the representative P/E multiple we derived the expected price of Tk.723.71.

P/BV Multiple: Largely depends on ROE. Similar classes of comparables were chose based on parallel ROE. Representative PB multiple was 4.16 Using the representative PB multiple of 4.16, Tk. 686.95 was derived as the expected price.

Intrinsic and Ms Values

By assigning proper weight to each of the above mentioned valuation models, Tk.805.65 has been derived as the target fundamental price. By adjusting this intrinsic value with the price pattern of the company and the future perspective of capital market, we have derived the Ms Value as follows: Intrinsic Value Ms Adjusted Factor For Price Trend and Market Sensitivity Ms Value Tk. 805.65 Tk.

ANALYSTS THESIS
Stand on our comprehensive analysis; we recommend to pursue Buy and Hold strategy for Bank Asia equity. We deem it as a sound investment item for next 2-3 years horizon. A tidy stock dividend is expected for next couple of years and there after combination of cash and stock dividend is likely. Besides that, we levy superior capital gain (+ve ) over the same time horizon.

Analyst Team Mahmudul Bari Noman Ahmed Khan N.M. Al Hossain Md. Farjad Siddiqui Qazi Musaddeq Ahmad
Disclaimer This material is produced by Mindspring Research (Mindspring), an independent research firm registered with Registrar of Joint Stock Companies and Firms, Bangladesh. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities, or to enter into any other agreement. Projections of potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain. Past performance is not indicative of future results. The information and any views expressed in this document are given as at the date of writing and subject to change. While the information has been obtained from sources believed to be reliable, Mindspring do not represent that it is accurate or complete and it should not be relied on as such. Mindspring and its employees accept no liability for any direct or consequential loss arising from the use of this document or its contents or otherwise arising in connection therewith. This