Analyst: Abdullah Al-Rezwan, FRM [email protected]
BRAC EPL Research IDLC Finance Ltd.
Initiating Coverage Fair Value Estimate (December 2016): BDT 70.7 per share May 11, 2016 Sector: NBFI; Rating: OUTPERFORM A quality investment target in financial sector of Bangladesh
Company Summary IDLC Finance (DSE: IDLC), founded in 1985 through a collaboration of 52-week Price Range (BDT) 42.1-66.0 IFC, DEG, Kookmin Bank, KDLC and several local sponsors, is the Current Price (BDT) [May 04, 2016] 55.9 largest NBFI in Bangladesh to provide a broad range of financial Dec 2016 Fair Value (BDT) 70.7 services with BDT 55.2 billion ($703.2 million) gross loans in 2015. While Price Return 26.5% the foreign shareholders took exit by 2009, the initial culture and ethos of Dividend Yield 4.5% transparency and accountability seem to have stayed within the Total Return 31.0% company. Being an NBFI, IDLC is inherently in a disadvantageous Number of Shares mn 251.4 position as it cannot take CASA deposits and hence, its cost of deposits Market Cap USD mn 179 is generally higher than that of its competitors i.e. banks. Even then, we Free Float 40.3% think IDLC stands out in the financial sector of Bangladesh because of Average Daily Turnover USD’000 (LTM) 407 its history of topnotch management and capacity of adaptability in Balance Sheet (BDT Mn) 2015A 2016E 2017E different economic environment. IDLC’s transformation from leasing Gross Loans 55,212 63,887 77,814 company to capital market centric institution to a largely financing entity Total Assets 73,434 80,227 90,758 is a testament to that. More importantly, IDLC’s superior growth Shareholders' Equity 7,786 8,655 9,879 trajectory was achieved without compromising the asset quality in SME Income Statement (BDT Mn) 2015A 2016E 2017E and consumer loans in last 6 years. The company is also well capitalized
Net interest Income with 14.8% consolidated CAR in 2015. 3,418 3,594 4,473
Operating Profit We initiate coverage of IDLC with an OUTPERFORM rating with a 2,940 3,082 3,801 target price of BDT 70.7 per share for December 2016. With current
Net Profit 1,459 1,498 1,853 price of BDT 55.9 (as of May 04, 2016), the fair price implies a price Growth 2015A 2016E 2017E return of 26.5%. Our estimated fair price implies a P/B multiple of Gross Loans 17.3% 15.7% 21.8% 2.05x over 2016E NAV and 1.80x over 2017E NAV. Considering the Total Assets 24.6% 9.2% 13.1% latest published NAV, the stock is currently trading at a P/B Net interest Income 18.3% 5.2% 24.4% multiple of 1.87x, which is lower compared to companies with Net profit 17.1% 2.7% 23.7% similar business and ROE profile like HDFC in India and DBH in Per Share (BDT) 2015A 2016E 2017E Bangladesh which are trading at 3.5x and 3.9x respectively. Other Adjusted EPS 5.8 6.0 7.4 key points from the investment thesis are as follows: DPS 2.5 2.5 3.0 Restated BVPS 31.0 34.4 39.3 In response to the stock market crash in 2010, IDLC radically Asset Quality 2015A 2016E 2017E changed its business and gained highest market share in mortgage Gross NPL (%) 3.8% 3.5% 3.1% market with leading market share in auto loans and second highest NPL Coverage (%) 58.2% 68.9% 80.3% market share in home loan market. Moreover, IDLC more than Valuation 2015A 2016E 2017E doubled its market share from 0.61% in 2010 to 1.29% in 2015 in P/B 1.80x 1.62x 1.42x SME financing market with a CAGR of 39.2% in last 6 years. P/E 9.6x 9.4x 7.6x Currently, SME and consumer loans consist of 34.8% and 34.7% of Miscellaneous 2015A 2016E 2017E gross loans in 2015 respectively. More importantly, IDLC’s capital NIM 5.7% 5.1% 5.7% market operations have largely grown out of the negative equity Cost to Income 35.9% 37.5% 35.8% margin loan issues whereas most banks and financial institutions ROE 20.4% 18.2% 20.0% are still grappling with this particular problem. Besides, given the ROA 2.2% 1.9% 2.2% new CEO, Mr. Arif Khan was an ex-commissioner of Bangladesh CAR 14.8% 14.8% 14.8% Security and Exchange Commission (BSEC), we expect him to Payout Ratio 43.1% 42.0% 40.7% closely engage, lead and scale up the capital market operations Figure: Price performance of IDLC since Jan’15 going forward. Overall, IDLC is well positioned to capitalize on the opportunities in the capital market as well as maintaining its growth momentum in SME.
In 2013, IDLC recognized and restructured its problem exposure to capital market operations and took three important strategic decisions. Firstly, IDLC recognized its negative equity margin lending portfolios as NPL and stopped accruing interests. Secondly, IDLC started a campaign to incentivize its negative equity customers to regularize their accounts through fresh equity injection. Thirdly, leveraging on investment research and better management capacity, IDLC engaged with the negative equity portfolio customers and liquidated significant portion of negative Source: DSE, BRAC EPL Research, May 2016 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 equity portfolios and realized direct losses in the process. These three decisions have helped IDLC decrease NPL of margin lending portfolio from 63.3% in 2013 to 27.5% in 2015. More importantly, margin loans have come down from 30.0% of the gross loans in 2009 to only 2.9% in 2015.
IDLC’s superior business and financial performance was amply helped by the leader- ship and management prowess at the helm. The last two CEOs, Mr. Anis A Khan and Mr. Selim RF Hussain, were both among the better CEOs in the financial sector and helped transform IDLC during challenging period in financial sector. The current CEO, Mr. Arif Khan, is very well-known in the financial service community and policy offices and has a lot to offer in terms of taking the company to the next stage of growth and development.
Summary of Valuation
We have used 3-stage Dividend Discount Model (DDM) and Justified P/B multiple to cal- culate our fair value estimate for IDLC. With 50.0% weight given to each of the methods used, the weighted average valuation for IDLC is BDT 70.7 per share.
We have utilized 3-stage DDM model to calculate fair value of IDLC. For the 1st stage (2016-2020), we have provided explicit forecast for the next 5 years. With 13.5% Cost of Equity and assumed growth in shareholders’ equity of 12.0% and 8.0% respectively in 2nd (2021-2026) and 3rd stage (2027-2031) respectively, our DDM model calculates target fair value of IDLC to be BDT 63.5 per share.
To calculate justified P/B multiple of IDLC, we have taken the estimated average ROE for next 5 years which is 20.4%. The long-term growth rate is assumed to be 8.0%. All these lead to justified P/B multiple of 2.3x for IDLC. By multiplying justified P/B multiple by our forecasted Net Asset Value (NAV) of IDLC at the end of 2016, we have derived target fair value of IDLC. Our justified P/B valuation method indicates that the target fair value of IDLC is BDT 77.9 per share.
Our weighted average fair value estimate of BDT 70.7 per share implies P/B multiple of 2.05x and 1.80x based on 2016E and 2017E NAV respectively.
Major risks to our valuation
IDLC declared on February 26, 2015 that the BoD has recommended to issue rights shares at 1R:2 (1 Rights share for every 2 Ordinary shares held) at an issue price of BDT 20.0 each subject to the approval by the shareholders and regulatory authori- ties. If IDLC gets regulatory approval, it will be difficult to maintain the current ROE profile of the company which will lower the valuation level of the company. While it is unlikely that political violence will resume in near future, things remain murky in the political front and likely to remain so going forward. We have assumed slower growth and increased our NPL forecast for the election year in 2019. Howev- er, if the political unrest continues and lingers for a longer period than expected, that will strain our valuation. IDLC’s consumer loan basket is essentially driven by home loan portfolio. Given the stiff competition in recent times, we assumed 5.0% growth in home loan portfolio for 2016. However, we expect IDLC and other major NBFIs in this segment to dominate in long term. If private sector credit growth does not pick up, banks may continue to focus in this segment, which can hurt IDLC’s prospect in this segment even beyond the short-term. We expect the current CEO to scale up the capital market operations. Under such scenario, if equity market performs poorly, the volatility of the equity market will affect the earnings of IDLC.
2 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 Overview of IDLC
Corporate profile and transformation history
IDLC was established as the first Leasing Company in Bangladesh in 1985 through the collaboration of International Finance Corporation (IFC) of the World Bank, German Investment and Development Company (DEG), Kookmin Bank and Korean Development Leasing Corporation (KDLC) of South Korea, the Aga Khan Fund for Economic Development, the City Bank Limited, IPDC of Bangladesh Limited, and Sadharan Bima Corporation. In 1995, IDLC was licensed as a NBFI under the Financial Institutions Act, 1993. While initially IDLC was the abbreviated form of “Industrial Development Leasing Company of Bangladesh Limited”, it has changed its name to “IDLC Finance Limited” in 2007 to better reflect the holistic nature of the entity. It kept the initials to leverage on the brand name and goodwill already created by the name.
As the company evolved over the years, initial sponsor foreign shareholders started taking successful and profitable exit. Kookmin and KDLC which owned 10.0% and 20.0% respectively were the last foreign shareholders to take the exit in 2008-09. Therefore, the initial foreign sponsor shareholding of 49% was completely withdrawn by 2009 and was sold to local sponsors and institutions. As a result, The City Bank’s ownership in IDLC increased from 9.7% in 2008 to 28.4% in 2009.
While IDLC started its journey as a leasing company in response to the market need for medium to long-term financing, it has gradually expanded the scope of the organization over the years. IDLC gave increased focus in its capital market operations in the lead up to 2009-10. After the stock market crash in the 2010- 11, with new leadership, IDLC transformed its business and shifted its focus from leasing and capital market operations to SME and consumer financing. This is reflected in the fact that SME’s contribution to the company’s total gross loan increased from 16% in 2009 to 35.0% in 2015.
Currently, IDLC is the largest NBFI in Bangladesh to provide a broad range of financial services. It has three subsidiaries in its capital market operations: i) IDLC Investments Limited, the merchant banking arm of the company, which was inaugurated in 2011 ii) IDLC Securities Limited, the brokerage arm of the business, which started operations in 2006, and iii) IDLC Asset Management Company Limited, the recently formed AMC subsidiary of the NBFI. IDLC group has currently 32 branches and two SME booths across Bangladesh. IDLC has branches in 14 out of 64 districts Bangladesh.
Business and financial performance summary
The transformation of IDLC from being capital market centric entity to a diversified financing entity is pretty evident considering the concentration of loans in different segments. In 2010, margin loans consist of 30.0% of the gross loans which came down to only 2.9% in 2015. At the same time, SME’s contribution increased from 15.7% in 2009 to 34.8% in 2015. Consumer loans, which consist of home loans and car loans, also increased from 23.4% in 2009 to 34.7% in 2015. This shifting focus has helped IDLC navigate in a better way during the turbulent situation in capital market.
Table: Concentration of loans by segment Segment 2009 2010 2011 2012 2013 2014 2015 SME 15.7% 20.0% 24.2% 26.2% 26.5% 32.3% 34.8% Consumer loans 23.4% 24.8% 26.4% 23.7% 27.1% 33.4% 34.7% Industrial loans 23.9% 21.2% 25.5% 24.3% 24.9% 20.0% 19.0% Margin loans 30.0% 26.5% 17.9% 14.1% 8.4% 4.4% 2.9% Others 7.0% 7.5% 6.0% 11.6% 13.1% 10.0% 8.7% Total loan 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: IDLC Annual Report and BRAC EPL Research 3 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 From funding perspective, IDLC has shown increasing focus on customer deposit over the years and started decreasing its dependence on institutional borrowings gradually. Customer deposit consists 81.8% of the funds in 2015 whereas it was 63.2% back in 2009. Chart: Funding sources of IDLC
Source: IDLC Annual Report and BRAC EPL Research
Because of the increasing focus on customer deposit collection, customer deposit growth has surpassed the loan growth in last 6 years. Gross loans grew at 18.9% CAGR in last 6 years whereas customer deposits increased by 28.9% CAGR in the same period. Chart: Historical gross loans and customer deposit growth
Source: IDLC Annual Report and BRAC EPL Research
IDLC has also improved in optimizing its balance sheet to capitalize on the interest rate direction in recent years. For example, its loan-to-customer deposit spread has improved significantly in last two years from 2.2% in 2013 to 3.8% and 4.5% in 2014 and 2015 respectively. At the same time, NIM has improved from 5.0% in 2013 to 5.7% in 2014 and 2015. Just to put it in perspective, interest rate spread for the banking sector was 5.06%, 5.21% and 4.84% in 2013, 2014 and 2015 respectively. IDLC’s continual strong NIM/spread was driven by balance sheet structuring in the right side of interest rate direction. Higher duration of rate-sensitive assets compared to duration of rate-sensitive liabilities has helped IDLC to achieve such NIM/ spread in falling interest rate environment. Please note that, IDLC did not mention the duration mismatch of rate-sensitive assets and liabilities in 2010 and 2011.
Table: Net interest income indicators of IDLC Indicators 2010 2011 2012 2013 2014 2015 Loan-customer deposit spread 3.0% 2.4% 2.7% 2.2% 3.8% 4.5% NIM 5.5% 5.9% 5.4% 5.0% 5.7% 5.7% Duration mismatch in next one year for rate-sensitive N/A N/A -865 -650 307 692 assets and rate- sensitive liabilities (BDT mn) Source: IDLC Annual Report and BRAC EPL Research 4 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 After the stock market crash in 2010, non-interest income, which includes investment income, commission, exchange and brokerage income and other operating income, has nosedived in 2011 like any other financial service companies in the country as all the players had high exposure to the crashing stock market. Since then, non-interest income has steadily increased till 2014. In 2015, non-interest income increased by 52.1% which was mainly driven by investment income, the funded portion of the non-interest income. Compared to funded non-interest income, non-funded noninterest income has been more stable in last few years and increased by 14.2% and 10.7% in 2014 and 2015 respectively.
Chart: Historical non-interest income of IDLC
Source: IDLC Annual Report and BRAC EPL Research
Total operating income has increased by 32.4% and 25.4% in 2014 and 2015 respectively which has outpaced the growth in operating expenses. As a result, IDLC’s Cost to Income (C/I) ratio has also improved in last two years. C/I ratio decreased from 45.0% in 2013 to 40.0% and 35.9% in 2014 and 2015 respectively.
IDLC has also posted impressive ROE in last two years with slightly more than 20.0% ROE in both 2014 and 2015. 2010 is largely an anomaly as IDLC was mainly benefitted by the stock market bubble at that time. After a lull of three years, ROA and ROE profile have improved a lot in recent years.
Chart: Historical Operating Income and Cost to Income ratio Chart: ROA and ROE of IDLC of IDLC
Source: IDLC Annual Report and BRAC EPL Research Source: IDLC Annual Report and BRAC EPL Research
5 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 Ownership Structure and Board
Ownership structure As of 29 February, 2016, 59.7% and 22.0% of IDLC’s shares is owned by directors/ sponsors and institutions respectively. Two sponsor shareholders-The City Bank Ltd. and Sadharan Bima Corporation (SBC) still own 24.2% and 7.6% respectively.
Chart: Ownership Structure of IDLC as of 29 February, 2016
Source: DSE
Table: Top 10 shareholders of IDLC
Serial Name of shareholder Ownership Board Brief description (%) represen- tation 1 The City Bank Ltd. (CBL) 24.2% Yes A first generation PCB with assets of BDT 200.3 billion. Focused in corporate banking, CBL has 2.0% banking sector asset market share in Bangla- desh. Transcom Group 13.3% Yes 2 Eskayef Bangladesh Limited 8.0% Eskayef Bangladesh Ltd, acquired by Transcom Group, is a successor of SmithKline & French (SK&F), USA. It has 6th largest market share with 4.5% market share in pharmaceuticals industry. 3 Transcraft Limited 4.0% The largest high speed, modern printing & packag- ing facility in Dhaka, Chittagong & Bogra, owned by Transcom Group. 4 Bangladesh Lamps Limited 1.3% A 54.1% owned subsidiary of Transcom Ltd and manufacturer of electric light bulbs. 5 Sadharan Bima Corporation 7.6% Yes The only state owned organization to deal with all classes of General Insurance & Re-insurance busi- ness and the largest insurance underwriter in Bang- ladesh in terms of gross premium. Currently owns the market shares of over 20% of the total premium income of the insurance market. 6 Mercantile Bank Limited 7.5% Yes A second generation PCB with total asset of BDT 184.7 billion and 1.9% banking sector asset market share in Bangladesh. 7 Reliance Insurance Co. Limited 7.0% Yes First Generation Private Sector Non-Life Insurance Company which transacts all classes of non-life insurance business in Bangladesh. 8 Bangladesh Fund 3.2% No Special purpose open-end Growth Mutual Fund under the management of ICB which was initiated with AUM of BDT 50.0 billion. 9 ICB’s mutual funds 2.3% No Established in 1976, ICB has pioneered the mutual fund industry in Bangladesh and floated 13 closed end mutual funds with AUM of BDT 7 billion. It also has 6 open end mutual funds with AUM of BDT approx. 39 billion. 10 LR Global Bangladesh’s mutual 1.1% No An affiliate of LR Managers Investments, a NY funds based investment holding company, with 6 closed- end mutual funds and AUM of BDT 9.3 billion. Source: IDLC Annual Report and BRAC EPL Research
6 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
Transition from foreign-based BoD to local institution dominated BoD
As mentioned earlier, when it was established in 1985, IDLC was 49% owned by foreign institutions and 51% was owned by local institutions. Some of the key management positions were also held by foreigners. By 2008-09, all the foreign institutions took exit and some of the local sponsors also sold their shares. Currently, the board is dominated by The City Bank, Transcom Group, Mercantile Bank, Sadharon Bima Corporation, and Reliance Insurance, all of which are local institutions.
Current board structure
Table: Board structure of IDLC
Name Status Brief Profile Aziz Al Mahmood Chairman (Nominated by Immediate past Chairman of City Bank & holds Managing Director & Direc- The City Bank Limited) tor positions in a number of Partex Star Group Companies, a large conglom- erate in Bangladesh. Md.Shahidul Ah- Director and Chairman of Sponsor director of Mercantile Bank Ltd, Mercantile Bank Securities Ltd. san the Executive Committee Also the Sponsor shareholder of Meghna Bank Ltd. & Chairman of Ahsan (Nominated by Mercantile Group, a large conglomerate in Bangladesh. Bank Limited) A.K.M. Shahidul Independent Director and Managing Director of Islamic Finance and Investment Limited (IFIL), former Haque Chairman of the Audit Managing Director & CEO of Mercantile Bank Ltd. & Midland Bank Ltd. Committee Meherun Haque Director (nominated by Serving as the Vice Chairperson & a member of the The City Bank Ltd.) Executive Committee of the Board of Directors of the City Bank. Also holds the Director position in Phoenix Insurance Co. Ltd. & Phoenix Finance & Investment Ltd. Faruq M. Ahmed Director (nominated by Additional Managing Director, Chief Risk Officer and Chief Anti Money Laun- The City Bank Ltd.) dering Compliance Officer of The City Bank Ltd. S. M. Mashrur Director (nominated by Deputy Managing Director, Chief Operating Officer & CCO of The City Bank Arefin The City Bank Ltd.) and former head of consumer banking in EBL. Mohammad Director (nominated by CFO of the City Bank. Mahbubur Rah- The City Bank Ltd.) man, FCA Md. Kamrul Has- Director (nominated by Executive Director-Finance at Transcom group, a Bangladeshi business san, FCA Transcom Group of Com- conglomerate. panies) Md. Rezaul Karim Director (nominated by Managing director of Shadharan Bima Corporation, Director of Asian Re- Sadharan Bima Corpora- insurance Corporation, Bangkok, Thailand. tion) Atiqur Rahman Director (nominated by Holds the position in the board of directors in a number of Transcom group Reliance Insurance Lim- of companies & other companies as well. Chairman of Heritage Agro Farms ited) Ltd. & Director of Monipur Tea Co. Ltd., Marina Tea Co. Ltd. & M. Rahman Tea Co. Ltd. Monower Uddin Independent Director CEO and Lead Consultant of Monower Associates, an HR & Management Ahmed Consulting house and former member of Board of British American Tobacco (BAT). Arif Khan, CFA, CEO & Managing Direc- President of CFA society and ICMAB in Bangladesh, former commissioner FCMA tor of Bangladesh Securities & Exchange Commission (BSEC). Prior to joining BSEC, he was Deputy Managing Director of IDLC for 14 years and 8 months. Source: IDLC Annual Report and BRAC EPL Research
Regulatory Landscape
Banks and NBFIs inherently have some general differences. If we look beyond these general differences, generally speaking, the regulatory landscape is lot more relaxed for NBFIs than that of banks as indicated by the table in the following page:
7 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
Table: Major Contrast between banking and NBFI sector Regulation Bank NBFI Paid-up capital Paid-up capital requirement for banks is BDT 4,000 Paid-up capital requirement for NBFI is BDT million 1,000 million CASA A Bank can take demand deposits which is generally A NBFI cannot take demand deposits and can known as current/ savings account or CASA. These only have customers’ term deposits which are are very low cost deposits. higher interest paying longer in duration deposits. Reserve ratio Cash Reserve Ratio (CRR) requirement is 6.5% of CRR requirement is 2.5% on Total Term Depos- total time and demand liabilities. Statutory Liquidity its. SLR requirement is 5.0% of total liabilities, Ratio (SLR) requirement is 13.0%, which excludes the which includes the CRR. CRR, of total time and demand liabilities. Foreign ex- A bank can be involved in foreign exchange dealings NBFIs cannot be involved in foreign exchange change dealings financing
Call money Banks have no limitation to participate in the call mon- NBFIs can borrow maximum 15.0% of its net market ey market asset from call money market Loan classifica- Bank’s loan classification policy is stricter than that of Generally speaking, for NBFI, if a loan is past due tion policy NBFI. Generally speaking, if a loan is past due for 3-6 for 6-12 months, 12-18 months and above 18 months, 6-9 months and 9-12 months, it is classified months, it is classified as SS, DF and BL respec- as Sub-standard (SS), Doubtful (DF) and Bad/Loss tively. (BL) respectively. Advance-to- Bangladesh Bank suggests conventional banks to The advances-to-loanable fund ratio should not deposit Ratio maintain Advances-to-Deposit (ADR) ratio at 85.0%. exceed 95%. Definition of fund includes capital, For shariah-compliant banks, the ratio is 90.0%. reserve, deposit, bank borrowing, bonds and others. Capital Market As per existing regulations, banks will have to maintain NBFI’s regulation is less rigid compared to banks. Exposure capital market exposure at 25.0% of its capital on a NBFIs also have to maintain capital market expo- solo basis and 50.0% of its capital on a consolidated sure at 25.0% of its capital. However, the defini- basis. The definition of capital excludes revaluation tion of capital market exposure includes only the reserve. Capital market exposure is defined as invest- investment is shares/mutual fund units. Margin ment in shares/mutual fund units, margin loans provid- loan provided to customers is not included in ed to own subsidiaries, and margin loan provided to capital market exposure calculation for NBFI. other brokerage/merchant banks. Risk Manage- Bangladesh Bank (BB) has provided a clear framework BB is yet to provide any specific timeframe for ment for Basel III implementation for banks. The banks are Basel III implementation for NBFIs. Currently, expected to be fully compliant to Basel III from 2019. NBFIs follow Basel II framework. It is expected that Basel III implementation will lag by 2-3 years after its implementation in banks. Consumer Fi- There are some specific guidelines for consumer fi- BB has no such restrictions for NBFIs. nancing nancing by banks. For example, the maximum limit for home loan financing is BDT 12 million or 70% of the value of the home, whichever is lower. A bank can only finance home loans maximum 10.0% of its total out- standing loans.
For Car loans, a bank can provide financing for BDT 4 million or 50% of value of the automobile, whichever is lower.
Source: IDLC Annual Report and BRAC EPL Research
Investment Theme #1: One of the better managements in financial sector
Solid management track-record with excellent leadership
Along with foreign shareholders, some key management positions were also held by foreigners when IDLC was first established. For example, Yongbok Jo, the Deputy Managing Director of IDLC from 2000 to 2008, had a long career with KDLC, one of the sponsor shareholders of IDLC. Management was largely empowered by the board from the initial years in IDLC and that culture of transparency and accountability between management and board seem to stay
8 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 with the company even after the foreign shareholders and management left the company.
While Bangladesh’s NBFI industry is significantly weaker than that of banking sector, which itself is not very strong either, IDLC is a notable exception in terms of management quality and financial performance in last decade. IDLC was amply helped by the leadership and management prowess at the helm. The last two CEOs, Mr. Anis A Khan and Mr. Selim RF Hussain, were both among the better CEOs in the financial sector. While IDLC was just a leasing company, Mr. Anis helped IDLC become much more than that. During his tenure from 2003-2008, IDLC put increasing focus on capital market operations and the company was all ready to capitalize on the opportunities of a booming stock market. Mr. Anis is now CEO of Mutual Trust Bank Ltd, a third generation bank established in 1999.
After Mr. Anis, Mr. Selim RF Hussain joined IDLC in 2009. After the stock market crash in 2010-11, like most, if not all, banks and financial institutions, IDLC has found its risk management framework largely inadequate to mitigate the risk arising from the bubble formed in the equity market in 2010. Therefore, under Mr. Hussain’s leadership, IDLC put more emphasis on redefining its business focus to optimize the strategy and manage the risks more prudently. As already mentioned earlier, the company has aptly shifted its dependence on capital market operations to a broad range of financial products. IDLC became a market leader in auto loans and had second largest market share in home loan market leveraging on competitive advantages driven by differences in regulatory framework between banks and NBFI. Moreover, its SME business has continued to grow exponentially with a CAGR of 37.7% during his period while other SME dominant players like Islami Bank and BRAC Bank grew with a CAGR of 31.4% and 5.8% respectively. Mr. Selim recently became CEO of BRAC Bank in October, 2015.
The current CEO, Mr. Arif Khan is no stranger in IDLC as he was the former Deputy Managing Director of IDLC before he joined Bangladesh Security & Exchange Commission (BSEC) as commissioner in 2010. Mr. Arif worked for 14 years and 8 months in IDLC before he left the company. He is very well-known in the financial service community and policy offices and has a lot to offer in terms of taking the company to the next stage of growth and development.
Higher ability to attract and retain talents throughout management layers
IDLC has a Management Trainee (MT) program, a fast-track leadership role aiming to groom future leaders, which targets top business school graduates. IDLC has consistently been able to attract strong young talents and has a reasonable corporate structure to groom them. In fact, some of the current top managements came from this very MT program. Moreover, IDLC does attract relatively better managers for mid-management positions due to its better performance management and strong corporate culture. Therefore, the company has no noticeable deficiency or gap in terms of capacity in different layers of management.
Recent management transition poses challenges
However, along with the departure of the former CEO, Mr, Selim RF Hussain, there were some important management changes in recent times. Irteza Ahmed Khan, former head of Consumer Division, left to join Meridian Finance & Investment Ltd, a NBFI with a paid-up capital of BDT 1,200 million. Moreover, Zahid Ibne Hai, Head of SME, went abroad to join in Westpac, an Australian Bank. Both consumer and especially SME divisions were mainly responsible for the success of IDLC in last 5 years. The loss of two successful leaders in a short period of time may make things difficult to maintain the momentum in these two important business units. It is natural to expect for the new leaders in
9 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
SME and consumer segments to take some time to regroup things and regain the momentum.
Investment Theme #2: SME will continue driving overall growth from the front
Headroom for SME’s growth remains substantial
SME plays a crucial role in a developing country like Bangladesh. SME’s contribution to employment is of paramount significance, especially given the young demography of Bangladesh. Bangladesh’s consistent GDP growth and resultant steady increases in per capita income has helped the country graduate from low-income country to lower middle-income country. Given this development, Bangladesh remains in the cusp of the ramping up of SME activities. IFC’s SME Banking Knowledge Guide indicates that SME usually contributes 16% of GDP and 32% of employment for a low income country. However, it increases significantly when the country fully graduates from low income to middle income country. SME’s contribution to GDP and employment is likely to increase to 39% and 55% respectively.
Chart: SME’s contribution to GDP and employment
Source: IFC SME Banking Knowledge Guide 2010
Chart: SME loan to GDP, Bangla- Taking SME loan to GDP as a proxy of SME’s contribution to GDP, we can see desh that SME loan to GDP is more representative of low-income countries. Total number of SME entrepreneurs, as of July, 2015, is 501,974 which is 0.3% of the total population of Bangladesh. Assuming each of these SME units employ 50 people on average, SME’s contribution to working age population stands at 25.1% which also confirms the view that Bangladesh’s SME story resembles the trajectory of other low-income countries. Therefore, as Bangladesh moves forward, ease of doing business improves and resultantly Bangladesh fully graduates from low-income country status, SME is highly likely to spur growth and have a lot of headroom to contribute to the GDP and employment in future.
Source: Bangladesh Bank and BRAC SME driving the financial sector credit growth in last few years EPL Research
Although SME loans was 19.9% of the total loans in the financial sector at the end of 2009, this ratio has increased to 23.6% at the end of 2015. Moreover, SME’s contribution to total loan growth has been increasing. For example, if we look at the following chart, we can see that SME has contributed almost 43.5% YOY credit growth in the financial sector in the first half of 2014. As large borrowers have performed poorly and remained cautious during political uncertainty, SME has dictated the financial sector credit growth in 2013 and 2014.
If we dissect the financial sector and SME credit growth further, we notice that SME has mostly outperformed the general credit growth in Bangladesh in last 5
10 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 years. Except for few quarters of 2011 and 2012, NBFI’s SME loans have consistently and significantly outperformed the general financial sector credit growth. Chart: SME as % of total loans and SME’s contribution to loan growth
Source: Bangladesh Bank and BRAC EPL Research
While PCB’s SME credit growth has recently slowed down, NBFI’s SME growth has continued to get momentum. Chart: SME and general credit growth trajectory, Bangladesh
Source: Bangladesh Bank and BRAC EPL Research
Chart: IDLC’s market share in total SME market and NBFI SME market IDLC doubled its market share in SME segment in last 5 years
In 2010, IDLC’s market share in SME was 17.2%. IDLC’s increasing and aggressive focus on SME has helped seizing market share. At the end of 2015, among the NBFIs, IDLC’s market share in SME has increased to 35.3%. Similarly, IDLC’s market share in SME also got doubled in the whole financial sector. IDLC’s market share in SME in the total financial sector was 1.29% in 2015 which was 0.61% in 2010. The market leaders of SME segment in the financial sector are Islami Bank and BRAC Bank with 13.0% and 3.2% market Source: Bangladesh Bank and BRAC share respectively in 2014. IDLC’s outstanding SME loans, including the BB EPL Research refinancing schemes, stood at BDT 22,368 million in 2015. SME loan book of IDLC has grown at a CAGR of 39.2% in last 6 years. SME loan disbursement grew at an even higher rate of 44.0% CAGR in last 6 years. Table: SME loan and disbursement growth of IDLC Indicators 2009 2010 2011 2012 2013 2014 2015 SME Loan outstanding, including refinancing 3,069 4,249 6,870 10,178 14,334 17,905 22,368 scheme (BDT million) Growth YOY 38.4% 61.7% 48.2% 40.8% 24.9% 24.9% SME Disbursement (BDT million) 1,758 2,712 4,485 7,498 10,392 12,053 15,656 Growth YOY 54.3% 65.4% 67.2% 38.6% 16.0% 29.9%
Source: IDLC Annual Report and BRAC EPL Research
11 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 Critical success factors for IDLC’s SME segment
According to the management, IDLC’s success in SME is mainly driven by three factors. Firstly, before sanctioning a loan approval, client visit by CRM team is part of IDLC’s policy. To comply with the policy, IDLC maintains a relatively bigger CRM team with semi decentralized structure of credit team. Therefore, CRM team plays an active role in the whole business process. IDLC’s target is to complete this process and disburse the loan by 5 business days. Secondly, asset quality and performance of the loans directly affect the executive compensation for both Relationship Managers (RM) and Credit Risk Managers. Therefore, both front and back office have a stake in ensuring the quality of the loans. NPL target is given to both CRM and business team and there is a process of cross evaluation of both CRM and business team. Thirdly, as a collection strategy, a financing entity usually takes pre-encashment cheques of the client’s bank account. While a loan-client can provide cheques against any of the many bank accounts generally maintained, IDLC takes the cheques drawn only on the main banker of the client, thereby keeping the loan exposure very close to the operating cashflows of the business.
IDLC continuing focus on the SME-driven loan book expansion
The average ticket size of SME for IDLC is 2.5-3.0 mn. IDLC’s main focus is in the small segment of SME loans. In this segment, the main competitor is BRAC Bank. Given the performance of SME and macroeconomic headroom for growth within SME segment, the management of IDLC wants to keep its focus on SME in future.
NPL in SME segment is c. 3.0%. Given the upheaval political situation in 2013 and 2014 which affected the businesses of SME units on daily basis, the performance of SME loan portfolio is quite reasonable.
As mentioned earlier, the former Head of SME who has helped IDLC to transform its SME business has recently left the company in last year. To replace him, Mr. Ahmed Rashid Joy has joined the company. With 15 years of experience in Financial Services Industry, he worked as a Senior Financial Market Specialist in IFC, Head of Medium Business, SME Banking and other different roles in Eastern Bank. Prior to joining IDLC, Mr. Joy was Head of SME in Mutual Trust Bank.
Investment Theme #3: Consumer segment poses compelling opportunities beyond short-term challenges
Led by home loans, consumer division also triggered growth momentum in last few years
Consumer division mainly consists of home loans, auto loans, loan against deposits and personal loan products. Consumer division also drives customer deposits for the company. Along with SME, IDLC was also benefitted by consumer division’s superior performance in last 5 years. In the asset side, home loan financing is the main driver of the total consumer loans outstanding as more than 80% loans are home loans. In 2015, IDLC had total home loan outstanding of BDT 16,622 million, in addition to the separate central bank
Chart: Consumer loan and disbursement growth Indicators 2010 2011 2012 2013 2014 2015 Consumer loan outstanding 6,777 8,428 9,851 12,950 17,519 20,633 Growth 24.4% 16.9% 31.5% 35.3% 17.8% Consumer loan disbursement 2,439 2,867 4,201 6,258 8,587 8,382 Growth 17.5% 46.5% 49.0% 37.2% -2.4% Source: IDLC Annual Report and BRAC EPL Research
12 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
refinancing schemes offered in partnership with the company. IDLC’s outstanding auto loans total BDT 2,514 million in 2015. Currently, IDLC has the highest market share in auto loans and second highest market share in home loan market. Home loan market is led by DBH with 19.1% market share in 2014 compared to IDLC’s 10.0% home loan market share in 2014.
Chart: Home loan market share of IDLC and DBH
Source: Financial Stability Report, Bangladesh Bank and BRAC EPL Research
IDLC likely to be loser in the price war against CASA heavy banks
Because of the excess liquidity within the financial system, which amounts more than BDT 1,000 billion, banks are increasingly focusing on the retail loan segment. As the large borrowers have mostly opted not to go for expansions due to perceived higher political uncertainty, banks have started focusing to diversify and mobilize its funds in retail loans, especially home loans. For Chart: Historical base rate of IDLC example, recently Standard Chartered Bank (SCB) and BRAC Bank, both of which have very low cost of funds, are aggressively going for takeover loans in home loan market. For takeover loans, SCB and BRAC Bank are charging only 8.99% and 8.75% respectively. Even City Bank, which mostly focuses on corporate customers, is offering takeover home loans at 9.5% rate. This has put IDLC and other NBFIs, which naturally have higher cost of funds than CASA heavy banks, in a difficult situation. If we look at the base rate of IDLC, which is essentially the cost of funds for IDLC, we can see that IDLC’s base-rate stood at 11.69% in December, 2015. Even though IDLC decreased its cost of funds by 574 bps from 17.43% in 2012 to 11.69% at the end of 2015, this is still lot higher than that of its CASA heavy competitors. For example, as of February, 2016, BRAC Bank and SCB’s cost of deposits was 3.8% and 2.01% Source: IDLC Annual Report and respectively. As a result, many loans provided by the NBFIs are being taken BRAC EPL Research over by banks. As long as private sector credit growth doesn’t pick up significantly and banks do not find opportunities to lend its deposits to other sectors, this trend can persist in the home loan market and this development will hurt IDLC.
Long-term potential of home loan market likely to be robust
While the real estate market has been undergoing persistent depression because of the bubble created in real estate market until 2012, the long term outlook of real estate is far from bleak. Consistently increasing urbanization and strong middle class are likely to translate in robust real estate market in the long term. Urbanization level as percentage of total population has increased from 24% in 2000 to 34% in 2014. Bangladesh’s urbanization level is close to other regional countries like India and Pakistan but lags behind China. With more
13 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
affordability among the urban population, real estate market cycle is likely to reverse in short to medium term.
Chart: Urbanization of Bangladesh Chart: Urbanization of countries in the region, 2014
Source: World Bank Source: World Bank
Historically speaking, Bangladesh’s real estate market has almost never seen price slump in property prices. Therefore, most people assumed the real estate boom to continue for a foreseeable future. Cost of construction materials also rose significantly in 2008-2010. As a result, the prices of land and apartment have risen unsustainably high and a bubble was formed in real estate market. Since 2012, prices have gone through a modest correction as prices are down by 20-25% from 2010-12 level. As rental yields are still hovering around 3-4%, prices are very unlikely to see an upward trend for at least next few years. Given that the inventory of the real estate developers has been piling up over the years, realtors will face increasing pressure to start clearing their inventories. The ratio of sold to unsold apartments in Dhaka City has plummeted from 0.83 in 2010 to only 0.14 in 2014. Besides, falling interest rates and increasing competition within the home loan market may incentivize the potential customers take home loans now. In light of excess liquidity in the financial system, interest rates for home loans have been falling precipitously in recent months. For example, home owners who had to take mortgage loans at 15-16% just two years back are increasingly taken over by banks at 8.75%- 9.50%. Therefore, along with inventory piling up, falling interest rates can catalyze the real estate market in short to medium term. Chart: Number of sold/unsold apartments in Dhaka City (in Thousands)
Source: REHAB
Moreover, as the credit growth picks up, signs of which are there as private sector credit growth is in an increasing trend in last few months, in our opinion Banks will shift their focus from home loan market and this market will continue to be dominated by NBFIs. The high duration nature of the product also makes it difficult for banks to maintain high focus in this segment for CASA heavy banks because of the mismatch of duration and resultant interest rate risk in the
14 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 balance sheet. Besides, by central bank’s regulations, a bank cannot have more than 10.0% of its loan book exposed to home loans. A NBFI does not have any such regulation at the moment.
IDLC to focus in pockets of opportunities available outside Dhaka
Given the excessive competition in home loan market, especially in Dhaka region, IDLC intends to increasingly focus on areas outside Dhaka. IDLC wants to follow the blue-ocean strategy and enter the new potential markets earlier than that of competitors. Given how unsustainable the living condition of Dhaka, the capital city of Bangladesh, is turning out with ever increasing population, decentralization may well be the only possible option to sustain the development momentum of the country. To capture this possible opportunity, IDLC unveiled its plans to open two new branches outside Dhaka in 2016. IDLC also has a new head in the Consumer Division. To replace Mr. Irteza A. Khan, Mr. Nasar Hassan Khan joined in late 2015. Prior to joining IDLC, he was the Head of Underwriting of BRAC Bank. He was also a Financial Markets Specialist in IFC and Head of Retail Credit Risk of HSBC Bangladesh.
Investment Theme #4: Funding strategy of pivotal importance in falling interest rate environment
Customer deposits source of more stable funding
As explained in the business and financial performance summary, customer term deposits showed steep growth in last 5 years. Customer deposits has grown at a CAGR of 28.9% in last 5 years whereas institutional borrowings has increased at a CAGR of 9.8% in similar time period. During this period, gross loans has increased at a CAGR of 18.9%. This means IDLC has mostly financed its growth in last 5-6 years with superior customer deposit mobilization and it has, hence, decreased its dependence on institutional borrowings.
Being an NBFI, IDLC is inherently in a disadvantaged position as it cannot take CASA to decrease its cost of funds. However, customer term deposits is a much more stable source of funding compared to institutional borrowings as institutional lenders are more rate sensitive in nature. Customer deposits, on the other hand, is a more diversified source of funds and therefore, mass withdrawal is unlikely for small differences of deposit rates provided to the customers. Hence, IDLC’s strategy to focus more on customer term deposits makes sense to ensure stability in funding sources. In fact, in the falling interest rate environment, NBFIs were benefitted more as the cost of customer deposit decreased by 350 bps whereas banks’ deposit cost declined by 210 bps only. Moreover, the average spread has increased for NBFIs by 22 bps whereas average spread for banks declined by 22 bps from 2013 to 2015. As mentioned in business and financial performance summary, IDLC has improved its both NIM and loan-customer deposit spread in the same period. Table: Deposit rate and call money rate trends Month Weighted avg. Average spread for Weighted avg. Average spread for Avg. call money deposit rate of banks deposit rate of NBFI rate banks NBFI Dec'13 8.4% 5.06% 13.4% 3.94% 7.1% Jun'14 7.8% 5.31% 12.5% 4.38% 6.3% Dec'14 7.3% 5.21% 11.2% 4.63% 7.9% Jun'15 6.8% 4.87% 10.6% 4.51% 5.8% Dec'15 6.3% 4.84% 9.9% 4.16% 3.7%
Source: Bangladesh Bank and BRAC EPL Research
15 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 With abundant excess liquidity in financial system, Institutional borrowings can be lucrative
Given the massive excess liquidity within the banking system, funding strategy has become a bit trickier for NBFIs. While customer deposit rates for NBFIs decreased from 13.4% in 2013 to 9.9% in 2015, it is still 360 bps higher than that of average bank deposit rates at the end of 2015. The call money rate is even lower than average deposit in banks. The call money rate is hovering at ~3.0% which is its historical low. Given this dynamics, while institutional borrowings may not be the most stable sources of funding, in the current interest rate environment, IDLC may opt for borrowing more from institutions. Please note that a NBFI can borrow maximum 15.0% of its net asset from call money market.
Chart: Excess Liquidity of Banking sector (BDT Billion)
Source: Major Economic Trends, Bangladesh Bank
Alternative funding strategies also in the mix
IDLC Finance has recently issued IDLC Infrastructure & SME Zero Coupon Bond amounting to BDT 5,000.00 million. The effective cost of the zero coupon bond is c. 11.0%. Given that both customer deposits and institutional borrowings cost much less than that in current interest rate environment, it is not conducive for decreasing the cost of funds at the moment. This can, however, remain a long-term stable source of funding as the maturity of the bond is 5 years.
Investment Theme #5: Relatively better managed capital market operations
Impact of negative equity margin loans mostly neutralized
In the aftermath of bubble created in the stock market in 2010, most, if not all, brokerages and merchant banks suffered heavily. IDLC Investments Ltd and IDLC Securities Ltd were no exceptions. Thankfully, among the two subsidiaries, IDLC Securities Ltd. did not provide margin loans and therefore could escape the brunt of client’s negative equity portfolios. However, IDLC Investments, the merchant banking arm of IDLC Finance, used to lend margin loans to its customers. Please note that given the huge demand of margin loans during the raging bull market in Bangladesh, most parent companies with capital market focused subsidiaries (brokerage and merchant banking subsidiaries) used to provide margin loans.
As the stock market continued to fall from the late 2010 to 2011 and 2012, IDLC Investments consistently focused on downsizing its margin loan portfolio exposure. In fact, in all of the last 6 years, margin loan portfolios shrank compared to earlier years and therefore, margin loan portfolio has become almost one-fourth the amount outstanding in 2009.
16 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 Chart: IDLC’s margin loan portfolio
Indicators 2009 2010 2011 2012 2013 2014 2015
Margin loan outstanding (BDT million) 5,862 5,633 4,727 4,603 3,445 2,050 1,587 Growth -3.9% -16.1% -2.6% -25.2% -40.5% -22.6% Source: IDLC Annual Reports and BRAC EPL Research
In 2010 when the market was at its peak, a customer could borrow maximum twice his or her equity. As a result, the maximum debt to equity ratio in the market peak was 2:1. To mitigate the risk, this was later gradually revised down to 0.5:1. However, the damage was already done as market plummeted by losing 36.6% and 19.7% in 2011 and 2012 respectively. Most, if not all, companies could not impose the margin call to the customers due to “alleged” direction by the regulator to stem the free fall of the market. Because of the inability to exercise margin call, risk management tools could not work properly for the margin lenders.
Chart: Historical market index return
Source: Dhaka Stock Exchange and BRAC EPL Research
IDLC took some important strategic decisions in 2013 which helped them to navigate through the tough time in a better way.
Firstly, IDLC stopped accruing interest on questionable margin loans since 2013 given the bad quality of the loans themselves. This has helped IDLC to trim down the margin loan portfolio over the years. As lending rate for margin loans was 18-20% in 2010-2012, if interests were accrued and booked as income in the income statement, margin loan portfolio would grow by c. 20% every year and the fictitious income booked in the income statement would only perpetuate the problem.
Secondly, IDLC opted for aggressively recognizing the losses from the negative equity margin loan portfolios and took actions to mitigate the lingering impact. In 2013, IDLC recognized all its negative equity loans as Sub-standard (SS) loans as part of the classified loans. To put things in perspective on the negative equity accounting treatment, consider this example: if a customer has taken loan of BDT 20 million against his or her equity of BDT 10 million and the portfolio value came down from BDT 30 million to BDT 19 million, the customer has a negative equity of BDT 1 million, which is a potential loss for the margin lender. IDLC recognized the full loan amount provided to the negative equity portfolio account, i.e. 20 million in the example mentioned, as Substandard (SS) loans. Please note that although the full amount is recognized as SS loan, the potential loss for the company in this example is only BDT 1 million or 5.0% of the total loan provided. On the other hand, if the portfolio came down from
17 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 BDT 30 million to BDT 10 million, the potential loss for the company is BDT 10 million, which is 50.0% of the total loan provided. Therefore, the negative equity portfolio amount would not explicitly indicate the extent of the underlying health of the portfolio.
Leveraging on investment research and better management capacity, IDLC engaged with the negative equity portfolio customers and liquidated significant portion of negative equity portfolios and realized losses in the process and hence, reduced the NPL in margin loan portfolio from 63.3% in 2013 to 22.0% in 2014 and 27.5% in 2015.
Chart: Negative Equity Margin Loan Portfolio of IDLC
Source: IDLC Annual Reports and BRAC EPL Research
According to the management, while liquidating the negative equity margin loan portfolio, Instead of booking realized principal losses in separate heading in the income statement, IDLC recognized its liquidation losses due to negative equity margin portfolio in net interest income (loss), which also provided tax benefits for the company. It is difficult to pinpoint the exact amount of losses incurred by IDLC for the liquidation of negative equity portfolios as the amount also consists of the interest earned from regular margin loans.
Thirdly, IDLC started a campaign in 2013 and 2014 for its negative equity portfolio clients to incentivize them to inject fresh equities. IDLC’s incentives like waiver of interest encouraged a sizeable number of clients to inject cash into their negative equity portfolio accounts. Therefore, some of the negative equity portfolios turned into regular margin portfolios.
Chart: Net interest Income (BDT million) of IDLC Investments Ltd.
Source: IDLC Annual Reports and BRAC EPL Research
18 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
To wrap up this discussion, consider the following two scenarios. In scenario 1, the market value of the portfolio went down by 36.67% and in scenario 2, the market value went down by 66.67%. In both scenarios, IDLC has three possible options and probable impact of these options is provided in the below tables:
Scenario 1 Year 0 BDT million Year 1 BDT million Equity 10 Equity -1 Loan provided 20 Loan provided 20 Market value of portfolio 30 Market value of portfolio 19 NPL 0 NPL 20 Option A Provision in Income 0 Provision in Income State- -1 Statement for the proba- ment for the probable loss ble loss in margin loan in margin loan Option B Probable realized loss in 0 Probable realized loss in -1 Income Statement if sold Income Statement if sold right now right now
Option C Required cash from cus- 0 Required cash from custom- 1 tomer to regularize margin er to regularize margin loan loan
Scenario 2 Year 0 BDT million Year 1 BDT million Equity 10 Equity -10 Loan provided 20 Loan provided 20 Market value of portfolio 30 Market value of portfolio 10 NPL 0 NPL 20 Option A Provision in Income 0 Provision in Income State- -10 Statement for the proba- ment for the probable loss
ble loss in margin loan in margin loan Option B Probable realized loss in 0 Probable realized loss in -10 Income Statement if sold Income Statement if sold right now right now Option C Required cash from cus- 0 Required cash from custom- 10 tomer to regularize margin er to regularize margin loan loan
More focus expected from new CEO to scale up capital market operations
As mentioned earlier, prior to joining IDLC, Arif Khan, the new CEO, was the Commissioner of Bangladesh Security & Exchange Commission (BSEC). Before joining IDLC, he worked in IDLC for 14 years and 8 months. During his time, IDLC had a lot more emphasis in capital market operations. Given his background and relative stability in the stock market, we expect more focus to be given in capital market operations going forward. Moreover, IDLC’s capital market operations is comparatively more research based compared to most players in the market. IDLC has two dedicated separate research teams for its merchant banking and brokerage arms and the way IDLC dealt the negative equity margin loan situation shows the management capacity of the company.
Investment Theme #6: Better capitalization although asset quality reporting less stringent than earlier times
Asset quality reporting less stringent in recent years
Gross NPL of IDLC was very volatile, especially in 2013 due to full recognition of negative equity margin loan portfolios as NPL. As a result, NPL jumped from 2.0% in 2012 to 6.9% in 2013. However, excluding the margin loans, gross NPL actually decreased in 2013 to 1.5% and increased slightly to 1.9% in 2014. But gross NPL, excluding the margin loans rose to 3.0% in 2015,
19 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 indicating the deteriorating quality of loan book of IDLC. The full first quarter of 2015 was marred with political violence and it has directly affected the SMEs. Given that 34.8% of IDLC’s loan book is exposed to SME (excluding BB refinancing schemes), this has possibly affected the asset quality of the company. Moreover, IDLC’s exposure to Chittagong region, which consists 10.8% of its total loan book, suffered as the Chittagong region-based commodity trading businesses suffered heavily with inventory piling up on global commodity market weakness.
NPL coverage, which is defined as accumulated provision divided by the total classified loan amount, has drastically come down in recent years. While NPL coverage was consistently above 100% from 2009-2012, it has nosedived to 37% in 2013. The primary reason for this was the recognition of negative equity margin loan portfolio as NPL. It is not rational to put aside provisions for the full amount of loan given to negative equity accounts as the market value of the portfolio can be recovered through selling off. Please refer to the tables in previous section to understand this point.
Therefore, the unique nature of margin loan naturally dictates that recognition of margin loan provided to negative equity portfolios will automatically put downward pressure on NPL coverage. If we exclude the impact of margin loans, NPL coverage became 153% in 2013 which is similar to earlier years.
In 2014, IDLC opted to follow the Bangladesh Bank provisioning policy for financial institutions instead of its internal more stringent guideline for provisioning which resulted in decreasing provisioning requirements. While we do not have full understanding of differences between the two policies, we think the recognition of market value of collaterals for classified loans was taken more conservatively in the internal policy of IDLC. However, NPL coverage, excluding the margin loans, was 98% in 2014 which is still significantly higher than most banks and financial institutions in the country.
In 2015, NPL coverage, excluding margin loans, came even further down to 70%. This is partly explained by the recent change in regulation for provisioning requirement for unrealized losses in mutual fund unit holdings. Earlier, if the market value was lower than cost value, the difference was required to be provisioned by the company. As per the circular issued by BB on 11 May, 2015, financial institutions do not need to keep provisions for the mutual fund holdings if the average cost price of the units is lower than or equal to 85% of the net asset values of the funds. On May 10, 2015, just before the new guideline came into effect, mutual fund sectors was trading at P/NAV of 0.54x. IDLC’s consolidated exposure to mutual fund sector in its proprietary fund was BDT 315.9 million in 2015 which was 17.8% of its total portfolio cost. Therefore, IDLC was benefitted due to the change of this regulation which explains a lower provisioning in 2015.
Chart: Historical asset quality of IDLC Indicators 2009 2010 2011 2012 2013 2014 2015 Gross NPL Ratio 3.2% 2.8% 2.3% 2.0% 6.9% 2.9% 3.8% Gross NPL, excluding margin loans 3.2% 2.8% 2.3% 2.0% 1.5% 1.9% 3.0% NPL Coverage 139 155 162 140 37% 68% 58% % % % % NPL Coverage, excluding margin loans 139 155 162 140 153 98% 70% % % % % % Source: IDLC Annual Reports and BRAC EPL Research
As the negative equity portfolios are largely in check, IDLC is unlikely to post negative surprises from its capital market operations. However, given resumption of political strife in coming years, like 2015, IDLC’s asset quality, especially in the SME segment, will be greatly affected. Currently, IDLC does
20 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 not have any client with outstanding amount exceeding 15% of total capital of the company.
Strong CAR and with probable rights offer
While the regulatory requirement of capital adequacy ratio (CAR) is 10.0%, IDLC’s CAR in last 5 years was consistently stronger. Although BB is yet to provide the timeline of Basel III implementation for NBFIs, considering the current CAR, IDLC is likely to have no difficulty in complying with Basel III implementation. IDLC’s CAR is likely to be even more strengthened as the company is likely to issue rights offer to its shareholders. The company declared on February 26, 2015 that the Board of Directors has recommended to issue rights shares at 1R:2 (1 Rights share for every 2 Ordinary shares held) at an issue price of Tk. 20.00 each subject to the approval by the shareholders and regulatory authorities. Chart: Historical Capital Adequacy Ratio of IDLC
Source: IDLC Annual Reports and BRAC EPL Research
Although it has been almost one and half year from the rights offer declaration, IDLC is yet to get the approval of the regulatory authorities. The main reason for the extended delay for the approval is the fact that the chairman of IDLC was changed twice in the period after the rights declaration. After the rights offer declaration, the tenure of Mr. Anwarul Huq, who was the Chairman at the end of 2014, was ended and he was replaced by Mr. Rubel Aziz, who was nominated by The City Bank. Mr. Aziz was also the Chairman of The City Bank Ltd. Under the amended Banking Companies Act 1991, anyone holding the directorship on the board of a bank company is not eligible to hold directorship of any other bank company or financial institution at the same time. Because of this regulation, the Chairman of IDLC had to be replaced again by Mr. Aziz Al Mahmood. All these events delayed the approval process and the company expects the approval will be in order by the end of 2016.
Can IDLC become a Bank?
As mentioned in the “Regulatory Landscape” section of this report, paid-up capital requirement for a NBFI is BDT 1,000 million whereas the requirement for a bank is BDT 4,000 million. At the end of 2015, the paid-up capital of IDLC was BDT 2,514 million. If the rights offer gets the nod from the regulator, the paid-up capital will increase to BDT 3,771 million which is very close to the paid-up capital requirement for a bank. If IDLC, for example, declares 10.0% stock dividend in 2016, IDLC will exceed this requirement. While of course there is no regulatory requirement to convert a NBFI to a bank just because a NBFI meets the paid-up capital requirement, the increasing size of IDLC may prompt the regulatory authority to bring IDLC under a stricter regulatory system. At present, NBFIs operate in a much relaxed regulatory environment
21 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 and most NBFIs will find it difficult to survive if the regulatory environment becomes as strict as banks’.
However, the path for IDLC to be a bank is rather a complex one. As two of its current major shareholders are The City Bank and Mercantile Bank, these major shareholders, according to the existing regulations, will have to take exit before IDLC can convert into a bank. While IDLC is highly likely to eventually convert into a bank, a development which we think will be largely beneficial for the company, this is unlikely to happen in the short to medium term horizon.
Earnings outlook
To forecast the loan book of IDLC, we have taken a granular approach and projected segment-wise loan book for IDLC. As mentioned in the investment themes, we expect SME to drive the business for IDLC. SME momentum is unlikely to stop and it will create even better momentum as we expect the economy to fare better with more political stability. IDLC’s strong presence and understanding in the SME market will help the company to keep the SME momentum going forward. However, as the business grows and the base becomes large enough to make it difficult to continue to grow at earlier pace, we think SME growth will gradually slow down. On the other hand, IDLC will face more difficult time in the consumer financing market as competition in this segment has become pretty stiff. We expect the consumer loan book to grow at a much slower pace than seen in last few years. As Corporate or industrial loans are not the primary focus of the company, we forecast a slower growth than that of average loan growth of the company.
Table: Segment-wise projection of IDLC’s loan book
Major segments 2014A 2015A 2016E 2017E 2018E 2019E 2020E
SME 40.1% 26.7% 25.0% 30.0% 20.0% 15.0% 15.0%
Home loan 35.0% 19.3% 5.0% 15.0% 15.0% 15.0% 15.0%
Auto Loan 128.3% 39.9% 20.0% 30.0% 25.0% 20.0% 20.0% Corporate Loan -7.6% 11.4% 15.0% 15.0% 15.0% 15.0% 15.0% Margin Loan -40.5% -22.6% 5.0% 20.0% 20.0% 10.0% 10.0% Total loans 15.0% 17.3% 15.7% 21.8% 18.0% 15.5% 15.5%
Source: IDLC Annual Reports and BRAC EPL Research
Table: Asset quality of IDLC Asset Quality 2014A 2015A 2016E 2017E 2018E 2019E 2020E NPL 2.9% 3.8% 3.5% 3.1% 2.9% 3.4% 3.2% NPL Coverage 67.5% 58.2% 68.9% 80.3% 91.4% 83.6% 93.3%
Source: IDLC Annual Reports and BRAC EPL Research
In terms of asset quality, Because of higher recognition in 2015 amid the transition of the new management, we think the current loan book has recognized most, if not, all NPLs. Therefore, going forward only new NPL formation will erode the quality of loan book. Given the political stability, we think a benign NPL formation of 0.3% of gross loans will be there in 2016- 2018. We assumed higher NPL addition (1.0% of gross loans) for 2019, which is an election year and we have duly incorporated a deterioration of asset quality due to possible political violence. For NPL coverage, which is defined as accumulated provisions divided by classified loans, we assumed higher NPL coverage going forward for IDLC and by 2020, NPL coverage will be above 90.0% which is comfortable enough coverage in our opinion.
IDLC is likely to be loser in the competition in home loan market which is likely to result in slower growth in net interest income in 2016. As the downturn in credit cycle reverses and the private sector credit growth is expected to 22 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 increase, as evidenced by recent upticks, and the new management gets fully ready to ramp up the business, led by SME we expect the core business to fare better in 2017-2018. The recent issuance of SME zero coupon bond, which costs c. 11.0%, will drag down the NIM a bit in 2016. But as the deposits are re-priced faster than the loans, NIM is again likely to be close to last two years’ figures after 2016. We also expect IDLC to do well in its proprietary fund management as the company is relatively more research driven than that of most financial institutions in the country and we believe on average, the company will be able to generate decent yield from its capital market investments. We also forecasted IDLC to maintain its Cost to Income ratio to hover around 35.0% in next 5 years. Table: Income statement items of IDLC
Income Statement items 2014A 2015A 2016E 2017E 2018E 2019E 2020E
Net Interest Income 2,889 3,418 3,594 4,473 5,657 6,412 6,852 % change 39.0% 18.3% 5.2% 24.4% 26.5% 13.3% 6.9% NIM 5.7% 5.7% 5.1% 5.7% 6.2% 6.0% 5.6% Non-interest Income 769 1170 1333 1451 1622 1804 2026 % change 12.4% 52.1% 14.0% 8.9% 11.8% 11.2% 12.3%
Operating Income 3,658 4,588 4,927 5,924 7,279 8,216 8,877
% change 32.4% 25.4% 7.4% 20.2% 22.9% 12.9% 8.1%
Cost to Income 40.0% 35.9% 37.5% 35.8% 33.5% 34.2% 35.4%
Net Profit 1,246 1,459 1,498 1,853 2,398 2,664 2,769
% change 86.0% 17.1% 2.7% 23.7% 29.4% 11.1% 4.0%
Source: BRAC EPL Research
On an average, we forecast IDLC to generate 20.4% ROE for the next 5 years. The dividend payout will hover around 40.0% going forward. CAR is also expected to be at comfortable situation for the company.
Table: Ratios of IDLC
Ratios 2014A 2015A 2016E 2017E 2018E 2019E 2020E ROA 2.3% 2.2% 1.9% 2.2% 2.4% 2.3% 2.1% ROE 20.9% 20.4% 18.2% 20.0% 22.4% 21.6% 19.8% Dividend payout 16.1% 43.1% 42.0% 40.7% 41.9% 42.5% 40.9% CAR 14.5% 14.8% 14.8% 14.8% 14.6% 14.4% 14.0%
Source: BRAC EPL Research
Valuation and Risk
Valuation
We have calculated forward fair value of IDLC at BDT 70.7 at the end of 2016. With current market price of BDT 55.9, the fair value implies 26.5% capital gain. Together with expected dividend yield of 4.5% (considering expected cash dividend of 2016), total potential return stands at 31.0%. Our target price implies a forward P/E and P/B of 11.9x and 2.05x respectively .
Cost of Equity
To calculate the Cost of Equity (CoE), we have assumed the risk free rate to be 9.45%. In the last four years, we have calculated that average real risk free rate to be 3.45%. With our expected inflation of 6.0% in next 12 months, the nominal risk free rate is calculated to be 9.45%. To calculate equity risk premium, we have calculated beta for IDLC to be 1.06. The time horizon taken to calculate this beta is 7 years (2009-2015). Given the lack of data points to form high conviction on market risk premium of Bangladesh stock market, we have taken the market risk premium of the world equity market which is 3.8%. Therefore, our equity risk premium for IDLC is 4.0%. In aggregate, the cost of equity for IDLC is 13.5%. 23 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 Valuation Method
We have used 3-stage Dividend Discount Model (DDM) and Justified P/B multiple to calculate our fair value estimate for IDLC. The detailed discussion on each of the model is followed. With 50.0% weight given to each of the methods used, the weighted average valuation for IDLC is BDT 70.7 per share.
Dividend Discount Model (DDM)
We have utilized 3-stage DDM model to calculate fair value of IDLC. For the 1st stage (2016-2020), we have provided explicit forecast for the next 5 years. The financial statements containing Balance Sheet and Income statement are included with this report. During this time, average forecasted ROE for the company is 20.4% and shareholders’ equity increased on an average by 14.0%. For the 2nd stage (2021-2026), we have assumed shareholder’s equity to grow at constant 12.0% rate every year from 2021-2026. At the same time, the ROE is assumed to linearly fall from 20.0% in 2021 to 17.0% in 2026. For the 3rd stage (2027-2031), we assumed shareholder’s equity to grow at a constant rate of 8.0% every year from 2027-2031. During the time, the ROE is assumed to linearly fall from 17.0% in 2026 to 13.5% in 2031. Our DDM model calculates the target fair value of IDLC to be BDT 63.5 per share.
Sensitivity Analysis of DDM
We have run a sensitivity analysis on our DDM model varying our assumptions on cost of equity and growth rate of shareholders’ equity in the 3rd stage of DDM model. The output of the sensitivity model is below:
Table: Sensitivity analysis
52 week high-low
Justified P/B
To calculate justified P/B multiple of IDLC, we have taken the average ROE for next 5 years which is 20.4%. The CoE, as described earlier in this section, is calculated at 13.5%. The long-term growth rate is assumed to be 8.0%. All these lead to justified P/B multiple of 2.3x for IDLC. By multiplying justified P/B Table: Scenario Analysis multiple by our forecasted Net Asset Value (NAV) of IDLC at the end of 2016, we have derived target fair value of IDLC. Our justified P/B valuation method Growth Justified Fair value P/B estimate indicates that the target fair value of IDLC is BDT 77.9 per share. (BDT) 4.0% 1.7x 59.6 Scenario analysis of justified P/B model 5.0% 1.8x 62.5 6.0% 1.9x 66.3 We have run a different scenario analysis on the assumption of long-term 7.0% 2.1x 71.2 growth rate. The base case scenario is equivalent to assumed shareholder’s 8.0% 2.3x 77.9 equity growth in the 3rd stage of DDM model. The scenario analysis is given in 9.0% 2.5x 87.6 left side of this page. 10.0% 3.0x 102.9 24 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
Table: Historical P/B of IDLC Historical P/B of IDLC
Indicators Histori- Historically speaking, from 2012-2015 IDLC’s P/B range was 1.3x-3.9x. cal P/B However, the median P/B in last 4 years was very stable. The 4-year, 3-year, 2-year and 1-year median P/B was 2.2x, 2.1x, 2.1x and 2.1x respectively. Our Max (2012-2015) 3.9x target price has implied P/B of 2.05x which closely resembles the historical Min (2012-2015) 1.3x median P/B of IDLC. 4-year median 2.2x 3-year median 2.1x 2-year median 2.1x 1-year median 2.1x Source: BRAC EPL Research Chart: Historical P/B of IDLC
4-year Median: 2.2x
Source: BRAC EPL Research
Comparable Compsheet
We have looked into different regional companies which have similar sort of business model to IDLC. From the comparables, we have seen IDLC has significantly outperformed its Bangladeshi counterparts in terms of earnings growth. Among the regional companies, India Infoline Finance Ltd. (IIFL) slightly outperformed IDLC in terms of the earnings growth. IDLC’s ROA and ROE profile are mostly representative of the median of the comparables. Our valuation also closely resembles the median figures as our implied forward P/ E and P/B based on our target price is 11.9x and 2.05x respectively.
Table: Regional comparables Regional Similar Companies Region Earnings ROE ROA P/E P/B MKT Cap 3-year USD million CAGR HDFC India 15.3% 21.5% 2.9% 11.9x 3.5x 25,911 IIFL Holdings Limited India 27.9% 19.0% 2.8% 10.8x 2.4x 1,080 People's Leasing & Finance Sri Lanka 15.2% 20.3% 3.8% 6.7x 1.2x 205
LankaBangla Bangladesh 9.2% 6.7% 0.9% 20.9x 1.4x 113 DBH Bangladesh 18.2% 24.9% 2.0% 16.6x 3.9x 154 IDLC Bangladesh 27.0% 20.4% 2.2% 9.5x 1.8x 177 Median NA 16.8% 20.4% 2.5% 11.3x 2.1x NA Source: Capital IQ, May 04, 2016
25 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016 Major risks to our valuation
Lower than forecasted ROE after rights offer: As mentioned earlier, the declared rights offer, if approved by relevant regulatory authorities, can come at any moment in this year. For every two shares of IDLC, shareholders will subscribe to one rights share at BDT 20.0 per share. Given that IDLC’s CAR is already 14.8% and the whole financial system has excess liquidity of BDT 1,000 billion, we are of the opinion that IDLC has no dire need of this rights offer. In fact, it can be difficult to maintain the current ROE profile of the company which can lower the valuation level of the company.
Slower credit growth due to resumption of political violence: While it is unlikely that political violence will resume in near future, things remain murky in the political front going forward. For example, the next general election which is supposed take place in 2019 may resume the political violence seen in 2013 and 2015. We have assumed slower growth and increased our NPL forecast for the election year in 2019. However, if the political unrest continues and lingers for a longer period than expected, that will strain our valuation.
Significant loss of market share in consumer loan market: IDLC’s consumer loan basket is essentially driven by home loan portfolio. Given the stiff competition, we assumed 5.0% growth in home loan portfolio for 2016. However, as private sector credit growth is expected to increase and resultantly banks will again focus more on large borrowers, we expect IDLC and other NBFIs to continue to dominate in home loan market. If it does not play out the way it is assumed, IDLC may not be able to grow its home loan portfolio in our assumed growth rate.
Impact of volatility in equity market likely to affect earnings: IDLC’s proprietary fund management is more research driven than that of most banks and financial institutions in the country. At the same time, we expected the current CEO to focus to scale up the capital market operations. Under such scenario, if equity market performs poorly, the volatility of the equity market will affect the earnings of IDLC.
Table: 1 year, 2 year and 3 year IDLC outperformed the market in each of the last 3 years return of IDLC and DSEX index From the table provided in the left side of this page, we can clearly see that IDLC DSEX IDLC has outperformed the market by hefty gains in the last 12 months. The 1 year 33.4% 7.5% 12 month returns of IDLC and DSEX are 33.4% and 7.5% respectively. IDLC 2 year 33.6% -5.5% has also significantly outperformed the benchmark DSEX in each of the last 3 year 50.3% 22.8% 3 years, as shown in the table. Source: Dhaka Stock Exchange and BRAC EPL Research, May 2016 Liquidity
The average daily turnover of IDLC is BDT 31.9 million (USD .41 million) in last one year. Last 2-year and 3-year average daily turnover are BDT 37.6 million (USD 0.48 million) and BDT 32.1 million (USD 0.41 million) respec- tively.
26 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
IDLC Finance Limited Income Statement For the Year Ended December
Income Statement (BDT Mn) 2015A 2016E 2017E 2018E 2019E 2020E Interest Income 8,251 8,437 10,069 12,174 13,713 15,322 Interest Expense 4,833 4,843 5,597 6,517 7,301 8,471 Net Interest Income 3,418 3,594 4,473 5,657 6,412 6,852 Investment Income 372 456 486 560 636 741 Commission, exchange and brokerage 357 393 432 475 523 575 Other income 441 485 533 587 645 710 Operating Income 4,588 4,927 5,924 7,279 8,216 8,877 Operating Expenses 1,648 1,846 2,122 2,441 2,807 3,144 Profit before provision and tax 2,940 3,082 3,801 4,839 5,410 5,736 Total provision 312 361 440 519 599 692 Profit before tax 2,628 2,721 3,362 4,320 4,811 5,044 Taxes paid 1,169 1,223 1,509 1,921 2,147 2,275 Net Profit for the year 1,459 1,498 1,853 2,398 2,664 2,769
IDLC Finance Limited Balance Sheet For the Year Ended December
Balance sheet (BDT 2015A 2016E 2017E 2018E 2019E 2020E Mn) Assets Cash 892 1,124 1,210 1,430 1,685 1,965 Balance with Other 12,543 10,222 6,225 7,343 8,478 9,791 Banks & F.I Money at call ------Investment 3,393 3,417 3,723 4,339 5,166 6,002 Loan and lease 55,212 63,887 77,814 91,784 105,973 122,388 Fixed Assets 537 634 748 882 1,041 1,229 Other Assets 858 944 1,038 1,142 1,256 1,382 Total Assets 73,435 80,227 90,758 106,920 123,599 142,757
Liabilities & Equities
Liabilities Borrowing from oth- 10,586 17,532 22,549 26,499 30,051 33,762 er banks and F.I Deposits 47,625 45,672 48,915 58,307 68,452 80,774 Subordinated Bond ------Other Liability 7,438 8,368 9,414 10,591 11,915 13,404 Total Liabilities 65,649 71,572 80,878 95,396 110,418 127,939 Shareholder's Eq- 7,786 8,655 9,879 11,524 13,181 14,818 uity Total Liabilities & 73,435 80,227 90,758 106,920 123,599 142,757 Equities
27 IDLC Finance Limited (DSE: IDLC; Bloomberg: IDLC:BD) May 11, 2016
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.
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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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