Sampath Bank Plc [Samp.N0000] Downgrade to Hold

EQUITY | SRI LANKA | BANKS CORPORATE UPDATE |14 MAR 2018

SAMPATH BANK PLC [SAMP.N0000] DOWNGRADE TO HOLD

220.0 HEFTY CAPITAL BASE TO DELIQUESCE ROE 210.0 200.0 22.5 190.0 Fair Value [2019E]: LKR 210.0 [+12%] 180.0 170.0 Total Return without DPS 12% [AER 15%] 160.0 150.0 187.5 187.5 rd 140.0 SAMP, 3 largest privately-owned bank, is shifting its focus to corporate lending 130.0 from SME and retail, considering the higher growth trajectory experienced in the 120.0 past with a view to improve the portfolio quality. Its earnings stagnated at LKR Current 2019E 12.6Bn (-1%YoY) in 2018 while growing by a modest CAGR of 15% over 2016-18 Current Price Expected Capital Gain signalling the moderation of the bank’s growth amidst challenging environment coupled with the sizeable asset base. Recently announced Rights Issue proposes to FIRST CAPITAL RESEARCH raise LKR 12.1Bn further cementing the change in funding and lending strategies while significantly diluting the shareholding with ordinary shares increasing by 32% Amanda Lokugamage +94 11 263 9868 with funds being raised at a 58% discount to its book value. An expected moderate [email protected] credit growth of 14% coupled with continuous investments into digitalisation and fintech are likely to support a modest growth in earnings, at a CAGR of +15% over 2019-21E while diluted TP for SAMP for 2019E is estimated to be LKR 210.0, providing KEY DATA an annualized return of 15%. DOWNGRADE TO HOLD CSE Ticker SAMP.N0000 P/E 31 December 2015 2016 2017 2018 2019E 2020E 2021E Bloomberg Ticker SAMP SL Share Price (LKR) 187.5 Estimates (LKR 'Mn) 52w High (LKR) 319.0 Net Interest Income 18,550 23,955 30,297 40,872 47,313 53,477 60,898 52w Low (LKR) 186.4 Total Operating Income 26,742 33,957 42,473 57,233 62,048 69,117 77,291 Avg. Daily Volume (Shares) 196,045 Net Profit 6,623 9,496 12,683 12,606 14,447 16,618 19,226 Avg. Daily Turnover (LKR) 515,099 Adjusted EPS (LKR) 16.8 24.1 32.2 32.0 36.7 42.2 48.9 Issued Share Capital (Shares 'Mn) 292.5 YoY Growth (%) 26% 43% 34% -1% 15% 15% 16% Market Cap (LKR 'Mn) 54,835 Valuations Market Cap (USD 'Mn) 306 PER (x) 11.1x 7.8x 5.8x 5.9x 5.1x 4.4x 3.8x *1 USD = LKR 179 PBV (x) 1.4x 1.1x 0.8x 0.6x 0.5x 0.4x 0.4x Price Performance (%) 1 mth 3 mths 12mths DY (%) 6.9% 10.0% 9.2% 8.3% 5.9% 6.6% 8.6% SAMP -20% -20% -34% ROE dilutes to average of 14.0% over 2019-21E ASPI -6% -7% -14% SAMP’s ROE is expected to dip to 14.3% in 2019E and stabilise around 14.0% over 2019-21E period resultant to the strengthening of capital base owing to the change in funding strategy coupled with the moderation in earnings growth. Recently announced rights issue aims to raise LKR 12.1Bn in 2019 while SAMP raised LKR 20.0Bn SAMP vs ASI via two rights issues over 2017-18 period. Earnings growth moderates with a CAGR of 120.0 15% over 2019-21E in comparison to 24% CAGR registered in 2016-18 period further 110.0 contributing to the dip in ROE. 100.0 Investment into digitalisation, fintech and automation to improve efficacies 90.0 With the continuous investment into digital strategy, we expect the C/I ratio to remain 80.0 below the industry average albeit rising to 38% in 2019E and stabilising around same 70.0 levels considering the lagging effect in deriving the benefits. C/I ratio registered at 60.0 36% in 2018, was well below the industry average of 40%. Digital strategy focusing on digital innovation and competitive use of data analytics enabled SAMP to SAMP.N ASPI systematically expand the digital channels and integrate the physical and electronic distribution channels to enable customers to transact across multiple touchpoints. Source: CSE

SAMP rated HOLD Minimum Return for BUY: Significant dilution in shareholding due to the rights issue and script dividend coupled Buy Below [AER of 16.22% with DPS]: LKR 185.6 SAMP categorized as ‘Grade A’ counter (Refer page 19 for with moderation in earnings growth at 15% over 2019-21E justifies the PER of 5.5x, Recommendation criteria of Grade A, B & C Stocks) lower than industry average of 5.8x which depletes the TP to LKR 210.0 for 2019E. SAMP provides an annualized return of 15% at current market price of LKR 187.5. Disclosure on Shareholding: First Capital Group does not hold shares in SAMP and will HOLD not trade in this share for three trading days following the issue of this document.

First Capital Research “Hefty Capital base to deliquesce ROE”

Bloomberg

2.6

2.1

2.7

1.9

5.2

6.3

7.4

1.7

2.6

12.7

14.1 14.5

11.5

Source: Source:

Source: Source: Total (USD Bn)Assets Total (USD Bn) Assets

1.6%

4.7%

1.5%

3.7%

4.6%

2.6%

1.8%

0.9% Div Yield Div Yield

0.7%

0.9%

1.1%

1.3%

1.4%

1.6%

0.4%

0.3%

3.1%

0.7%

0.3%

2.5% ROA* ROA*

8.8%

6.4%

6.6%

4.4%

9.0%

5.7%

ROE*

13.4%

16.3%

15.9%

13.9%

16.6%

ROE* 17.4% 20.9%

0.6

0.4

0.5

0.8

0.6

0.7

0.8

0.5

0.4

4.7

0.4

0.5

1.0 P/B P/B

7.3

6.6

3.5

6.5

4.0

3.7

5.5

8.2

7.3

4.7

9.3

4.7

P/E P/E 27.2

102.5

111.1

119.0

140.0

298.3

465.4

544.9

395.2

381.6

427.0

481.5 371.7

318.8

Mkt Cap (USD Mn) Mkt Cap (USD Mn)

Italy

India

Israel

Bahrain

Country

Sri Lanka Sri

Sri Lanka Sri Sri Lanka Sri

Lithuania

Global

Local

– –

PeerComparison

PeerComparison Company

Company

Figure 02: Figure

Figure 01: Figure

Seylan Bank Seylan Plc

DFCC Bank Plc

National Development Bank Plc Development National

National Trust Bank Plc Trust National

Sampath Bank Plc Sampath

Hatton National Bank Plc National Hatton

Commercial Bank Ceylon of Commercial

South Indian Bank Ltd Indian South

Jammu and Kashmir Bank Ltd Kashmir and Jammu

Comonwealth Bank Ltd Comonwealth

Banco Banco di Sardegna Union Bank of IsraelBank of Union Siauliu

2 First Capital Research “Hefty Capital base to deliquesce ROE”

1.0 ROE dilutes to average of 14.0% over 2019-21E SAMP’s ROE is expected to dip to 14.3% in 2019E and stabilise around the same levels over 2019-21E period owing to the strengthened capital base amidst the issuance of rights shares coupled with moderation in earnings growth.

Figure 3: Significant dilution in ROE with the strengthening capital base

25% 160,000 21% 21% 140,000 20% 120,000 18% 16% 16% 15% 100,000 14% 15% 80,000 14% 10% 60,000

40,000 5% 20,000

0% -

Equity Return on Average Equity Source: Company annual reports & First Capital Research estimates

Capital base strengthens amidst rights issue and script dividends: SAMP Figure 4: Rights issues strengthening the raised LKR 20.0Bn via two rights issues during 2017-18 period while capital base (2017-19E) increasing the number of shares in issue by 81.0Mn thereby diluting the ROE to 15.9% from previous year’s 21.4%. Recently announced rights issue aims to raise LKR 12.1Bn by issuing 89.0Mn shares at LKR 136.0 a share while 89Mn shares increasing the shares in issue by 32% which is expected to dilute the ROE further in 2019E and beyond.

Shift in credit disbursement to moderate earnings growth at 15%: Earnings 50Mn shares CAGR is expected to moderate at 15% over 2019-21E on the back of credit disbursement strategy shifting from SME and retail to corporate lending 31Mn shares with emphasis focusing on deepening the penetration into captive markets, mainly focusing on high-growth sectors such as manufacturing, trading, IT and healthcare, etc while managing the exposure to construction, Source: Company annual reports agriculture and tourism which are facing challenging times. Lending growth is expected to fall in line with private sector credit growth to register at a CAGR of 14% over 2019-21E while concentrating on sector specialisation is expected to improve the lending portfolio quality.

NIMs to improve: SAMP’s NIMs is expected to register at 5.38% in 2019E, upholding the improving trend witnessed in the past primarily owing to funds raised through rights issue of shares generating stronger and stable yields.

3 First Capital Research “Hefty Capital base to deliquesce ROE”

Figure 5: Steady improvement in NIMs with RI money provides stronger yields

6.00% Rights issue funds of LKR 12.1Bn in 2019E 5.50%

5.00%

4.50%

4.00% Rights issue funds of LKR 20Bn in 2017-18 3.50%

3.00%

Source: Company annual reports & First Capital Research estimates

4 First Capital Research “Hefty Capital base to deliquesce ROE”

Figure 6: SAMP boasts the lowest C/I in the 2.0 Investments into digitalisation and Fintech to favour C/I banking sector (2018) ratio in the long run C/I ratio to stabilize at 38%: Due to continuous investment into the 50% 48% 50% 45% 43% digitalisation strategy coupled with process automation is expected to impact 45% 42% 40% the C/I ratio to reach 38% in 2019E and stabilise around same levels due to 40% 36% 35% the lagging effect in reflecting the benefits. SAMP aims to expand its 30% customer reach through expansion in digitalisation and fintech infrastructure 25% as opposed to expanding its brick and mortar network. 20% 15% Figure 7: Above industry C/I due to continuous investment into digitalisation (2014-18) 10% 5% 60% 0% 55%

50% Source: Company annual reports and CBSL 45% 45%

40% 36% 35% 30%

SAMP Industry

Source: Company annual reports & CBSL Continuous investment into digitalization and Fintech: SAMP continued to invest into digitalisation and fintech strategy while focusing on expanding digital channel architecture aiming to increase the number of touchpoints thereby expanding the outreach to cater to the evolving needs of SME, retail and corporate clientele. Year 2018 saw the bank launching several digital platforms and fintech initiatives by launching “Slipless banking” app, Virtual Teller Machine which allows advanced banking functions like fund transfers, account opening and debit card issuance in addition to simple transactions, JustPay network adoption, digitalising web card issuance process, UStocktrade mobile app, AI powered Chatbot, PayHere, etc, thereby expanding their digital channel infrastructure. At present, Northern and Eastern provinces have the highest penetration into mobile and internet banking which is comprised of Sampath PAYAPP, Sampath Vishwa, Payeast.lk, etc.

Figure 8: ATM transaction volumes incline with expansion in ATM network (2015-18) 430 32

420 30

410 LKR (Bn) 28 - 400 26 390

No of ATMs 24 380 370 22

360 20 Volume Transaction

ATM network strength ATM transaction Volume (Mn) Source: Company annual reports 5 First Capital Research “Hefty Capital base to deliquesce ROE”

Process automation to improve efficacies: SAMP is in the process of revamping its operational architecture with the initiation of “Paradigm Shift” programme, the single-largest internal restructuring effort which commenced in 2017. Restructure programme aims to fuel growth of corporate business through sector-specialisation, to raise the standards of consumer banking and reach out to as many individuals and SMEs as possible across Sri Lanka and to position SAMP as the leader in fintech and digitalisation solutions provider in the country. Further, SAMP’s successful migration from the legacy system to the more powerful Finacle 10 Core Banking platform, which provides the requisite technology infrastructure to handle the surge in volume and complexity of customer transactions, broader range of financial products and services, as well as the management and analysis of customer information. With the increase in lending strategy focus into Corporate lending, SAMP has streamlined the credit disbursement process while centralising the credit approval enabling the credit approval granting within a day.

Figure 9: SAMP continued to expand its ATM and Kiosk network (2014-18)

1200

1000 365 800 208 133 29 95 82 91 600 41 77 83

400 285 293 298 309 328

200 229 229 229 229 229 0 2014 2015 2016 2017 2018 No of Branches On-site ATMs Off-site ATMs TotalDeposit Kiosks

Source: Company annual reports

Concentration towards virtual: Resultant to the focused investment into expanding digital infrastructure, SAMP’s branch network remained stagnated at 229 branches since 2016 while ATM network continued to grow with enhanced accessibility and facilities. On the back of process automation, staff count remained stagnated with total staff strength recording at 4,189 in 2018 with a staff/ branch ratio of 18.

6 First Capital Research “Hefty Capital base to deliquesce ROE”

3.0 Future Outlook

SAMP Earnings CAGR of 15% 2019-21E: Earnings growth moderates at a CAGR of 15% over 2019-21E period with slowdown in loan book growth at 14%, owing to sizable asset base of LKR 948Bn while ROE dilutes to 14% over the same period on the back of stronger capital base and heavy dilution in shareholding in line with the recently announced rights issue of 89Mn shares to raise LKR 12.1Bn, we expect an earnings of LKR 14.4Bn in 2019E. With a TP of LKR 210.0, SAMP provides an annualised return of 15% at current market price of LKR 187.5. HOLD

P/E 31 December 2015 2016 2017 2018 2019E 2020E 2021E Estimates (LKR 'Mn) Net Interest Income 18,550 23,955 30,297 40,872 47,313 53,477 60,898 Total Operating Income 26,742 33,957 42,473 57,233 62,048 69,117 77,291 Net Profit 6,623 9,496 12,683 12,606 14,447 16,618 19,226 Adjusted EPS (LKR) 16.8 24.1 32.2 32.0 36.7 42.2 48.9 YoY Growth (%) 26% 43% 34% -1% 15% 15% 16% Valuations

PER (x) 11.1x 7.8x 5.8x 5.9x 5.1x 4.4x 3.8x PBV (x) 1.4x 1.1x 0.8x 0.6x 0.5x 0.4x 0.4x DY (%) 6.9% 10.0% 9.2% 8.3% 5.9% 6.6% 8.6%

Return Expected SAMP price for 2019E Target Price 210.0 Justified PBV based target price 199.7 Current Price 187.5 PER Valuation based target price 202.1 Capital Gain (LKR) 22.5 RI Valuation based target price 243.2 Dividends upto 31.12.2019 (LKR) 0.0 Average Target Price 215.0

Capital Gain % 12% Target Price after Rounding off 210.0 Dividend Yield % 0% Total Return % 12%

Annualized Return % 15%

3.1 Justified PBV valuation

COE Justified PBV based Valuation Rf 11.2% ROAE 14.3% Rm 19.2% Growth 3.0% Growth % 3.0% COE 19.1% β 0.99 PBV 0.7 Ke=Rf+β(Rm-Rf) 19.1% NAVPS 284.1 Target Price 199.7

7 First Capital Research “Hefty Capital base to deliquesce ROE”

3.2 PER based valuation

PER based Valuation 2019E Earnings (LKR 'Mn) 14,455 No. of Shares ('Mn) 393.4 2019E EPS 36.7 Expected PER 5.5x Price at 5.5x 2019E Earnings 202.1

800

700 600 500 400

300

200

100

4 7 10 13 16 Price

Source: CSE, Company Annual Reports and First Capital Research Estimates

3.3 Residual Income based valuation

Residual Income based Valuation PV of Residual Income -25,443 No. of Shares ('Mn) 393 RI per Share -64.7 Opening Book value per Share 307.9 Value per Share 243.2

8 First Capital Research “Hefty Capital base to deliquesce ROE”

4.0 Company Profile

Service spanning over Three decades: Sampath Bank, country’s third commercial private bank incorporated in 1987 is the third largest privately- owned commercial bank with an asset base of LKR 948Bn. With successfully 93 229 419 raising LKR 20Bn capital via two rights issues during 2017-18 period, SAMP BranchesBranches ATM reiterates the confidence placed by its shareholders. With a strong equity hold of LKR 90Bn providing a ROE of 15.9% in 2018, SAMP announced a rights issue of 89Mn shares with the aim to raise LKR 12.1Bn in 2019. SAMP 1 serves its 2.9Mn customers offering wider banking products accessible 271 through multi-channel infrastructure consists of 229 branches, 419 ATMs, VTM Kiosks 271 Kiosks, 1 VTM (Virtual Teller Machine) and numerous online digital platforms. 4,189 2.9Mn Figure 10: SAMP’s price performance vs ASPI Employees Customers3014 120.0 110.0 Employee 100.0 90.0 80.0 70.0 60.0 50.0

SAMP.N ASPI Source: CSE

Share Price Performance: SAMP’s share price underperformed the benchmark index during the past 12 months with SAMP price dipping by 30% in comparison to ASPI dipping 9%. With the announcement of rights issue of 89Mn shares at an issue price of LKR 136.0 (58% discount to the book value), SAMP saw its price dipping by 16% to LKR 195.7.

Figure 11: SAMP’s diverse range of loan book

Source: Company Annual Report

9 First Capital Research “Hefty Capital base to deliquesce ROE”

5.0 Licensed Commercial Banking Industry in Sri Lanka

Industry Overview: Sri Lankan Licensed Commercial Banking (LCBs) Sector Licensed Commercial Banks (LCBs) comprises of 13 local banks and 13 foreign banks which together comprise of 26 88% banking sector asset while specialized banks (LSB) At the end of 3Q of 2018, local LCBs lead the LCB sector with a market share of 83%. The health of the financial system depends largely on local LCBs while its stability is Local Banks Foreign Banks primarily dependent on the performance and financial strength of 6 largest 13 13 LCBs, consisting of two state banks and three largest domestic private commercial banks referred to as 'Systemically Important Banks”.

Figure 12: Distribution of Assets among LCBs Listed Banks

10 Foreign Commercial Banks 15% SAMP 9% Unlisted Banks NDB 4% 3 Private Sector HNB 10% Commercial Banks SEYB 4% 46% State Owned COMB 12% NTB 3% Banks 37%

PABC 1% UBC 1% DFCC 4%

Source: Company Reports and CBSL

LCBs are expected face challenges on the macro front despite the recent growth witnessed: Sri Lankan banking sector has been growing steadily with a total asset CAGR of 17% since 2009 in the midst of challenging economic environments. LCB sector loan growth has been a good proxy for economic growth of the country while indicating a positive correlation with real GDP growth rate over last decade. LCB sector assets and deposits have grown steadily over the years while deposit remaining the major source of funding for more than 72% of total assets.

Figure 13: LCBs gross loans (%) have moved in tandem with real GDP Figure 14: Total Assets and Deposits growth of LCBs sector growth (%) 12,000 10.0 We expect the GDP growth to remain 35.0 9.0 moderate ranging from 3%-4% while 30.0 credit growth to record at 13% 2019 E- 10,000 8.0 Total assets CAGR – 17% 2020E 25.0 7.0 20.0 8,000 Total deposits CAGR –16% 6.0 15.0 5.0 6,000 10.0 4.0 Bn LKR 3.0 5.0 4,000 2.0 0.0 1.0 -5.0 2,000

0.0 -10.0 0

Real GDP Growth (LHS) Gross Loan Growth of LCBs (RHS) Deposits Other Assets Source: CBSL, Bloomberg Source: CBSL 10 First Capital Research “Hefty Capital base to deliquesce ROE”

Modest credit growth of 13%: Going forward, we expect operating conditions for LCBs to be difficult against the challenging macroeconomic backdrop, which is expected to continue to pressure LCBs performance in the short to medium term. Sri Lanka is due to enter an election cycle. In addition, the country has large external debt-refinancing needs from 2019-2020 amidst tighter global monetary conditions, with heightened capital requirements which could dampen prospects for banks in the short to medium term. Accordingly, we expect modest 13% annual private sector credit growth for 2019E and next 2 years based on the tight macroeconomic fundamentals and capital pressure on banks, despite historical average being 15% for last 5 years.

Profitability of LCBs: LCBs have been able to maintain strong profitability over the years while expanding rapidly since 2009. Albeit there was a strong growth of profitability in initial years of post war era, NIIs, PAT, ROEs and ROAs have been remaining almost stable in last 3 years due to considerable increase in the assets and capital base of the banking sector to meet the minimum regulatory requirements.

Figure 16: LCB’s Net Interest Income and Profit After Tax Figure 17: ROEs and ROAs of LCBs

140% 26% 2.0% 1.8% 120% 21% 1.6% 100% 1.4% 80% 16% 1.2% 1.0% 60% 11% 0.8% 40% 0.6% 20% 6% 0.4% 0.2% 0% 1% 0.0% -20%

-40% ROE ROA Net Interest Income Growth PAT Growth Source: CBSL Source: CBSL

LCB’s significant investment towards Digitalization is expected to improve the Cost to Income Ratio thus improving the bottom line: Previous cost structure of Sri Lankan LCBs was more than 50% of their total income and placing above the average of other Asia Pacific countries. Despite the significant branch expansion witnessed after war, which was expected to weigh on the higher cost-to-income ratio, we expect the shift towards virtual banking platform to cut down operational cost, thus bringing down the cost structure of banking sector in medium to long term.

11 First Capital Research “Hefty Capital base to deliquesce ROE”

Figure 18: Stagnant branch expansion of LCBs Figure 19: Cost to Income ra tio of LCBs is gradually declining

3,100 56% 2,900 54% 54% 53% 2,700 53% 52% 52% 2,500 51% 50% 2,300 49% 49% 48% 48% 48% 2,100 46% 1,900 44% 1,700 44%

1,500 42% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CBSL Source: CBSL

Increased Regulations to affect the LCB sector: Globally and domestically there has been an onset of increased financial sector regulation to ensure stability and soundness of banks and other financial institutions. Increased regulations are expected to create greater complexity and higher compliance costs for financial institutions, some of which may impact customers through pass-on effects.

Figure 20: Upcoming policies and regulations affecting LCBs

Regulation Minimum Value Timeline

Basel III: Capital Adequacy By 01.01.2019 Banks with Assets Less than Rs. 500 Bn ➢ Common Equity Tier 1 including Capital Conservation Buffer. 7.00% ➢ Total Tier I including Capital Conservation Buffer. 8.50% ➢ Total Capital Ratio including Capital Conservation Buffer. 12.50%

Banks with Assets above Rs. 500 Bn 8.50% ➢ Common Equity Tier 1 including Capital Conservation Buffer. 10.00% ➢ Total Tier I including Capital Conservation Buffer. 14.00% ➢ Total Capital Ratio including Capital Conservation Buffer. SLFRS 9: Financial Instruments N/A Adoption after 01.01.2018 Liquidity Coverage Ratio 100% By 2019

Net Stable funding Ratio 90% and 100% By 01.01.2019 and 01.07.2019

Leverage Ratio 3% Commencing from 01.01.2019

Limitations on foreign currency borrowings Based on capital N/A

12 First Capital Research “Hefty Capital base to deliquesce ROE”

However, low credit penetration is expected to drive the credit growth in the long term. Despite the steady growth in credit, Sri Lanka remains comparatively underpenetrated compared to regional peers which will enable it to record a sound credit growth in the long run as country is heading towards per capita GDP of USD 4,000.

Figure 21: Despite strong credit growth, SL remains underpenetrated compared to peers in credit

180 The increase in disposable income should 156 allow for increase in personal 160 consumption and should provide 140 128 opportunity for personal lending, leading 119 120 112 to growth in bank loan book. 100

(% (% of GDP) 80 60 50 48 47 32 40

20 Domestic Domestic credit to sector private banks by 0

Source: World Bank

Analysis of LCB industry in Sri Lanka

Bargaining power of ▪ Bargaining power of depositors are high at times of High suppliers increasing interest rates. ▪ Funding institutions have high bargaining power during periods of tight liquidity. Bargaining power of ▪ Large corporate clients have bargaining power based on Neutral customers their high credit worthiness. ▪ Retail and SME customers' bargaining is relatively low. Threat from substitutes ▪ NBFIs create a significant threat to LCBs. High ▪ Equity financing and alternative financing products for borrowers. ▪ Large corporates raise capital from debentures. Threat of new entrants ▪ Tight licensing requirement and regulations by CBSL create Low a strong entry barrier. ▪ Initial and subsequent investments are very high making industry entry difficult for new banks. Existing Rivalry ▪ Competition amongst existing banks and other NBFIs are High very high due to large number of players operating in the industry compared to the size of the economy. Industry consolidation can control this competition. Based on the above factors overall LCB industry attractiveness Low

13 First Capital Research “Hefty Capital base to deliquesce ROE”

Figure 22: Analysis of Competition in the LCB industry Figure 23: Analysis of Competition in the LCB industry in terms of Assets Bargaining Bank Value of Assets* Market Share power of Bank of Ceylon 2,099,678 21% suppliers 5 Peoples Bank 1,882,320 19% 4 Commercial Bank 1,255,287 13% 3 Bargaining Hatton National Bank 1,090,283 11% Existing 2 power of Sampath Bank 925,527 9% Rivalry 1 customers 0 National Development Bank 463,073 5% Seylan Bank 442,340 4%

DFCC Bank 380,602 4% Threat of new Threat from Nations Trust Bank 319,800 3% entrants substitutes Pan Asia Banking Corporation 156,378 2% Union Bank 131,174 1% Foreign Banks 746,935 8% Total 9,893,397 100% Source: First Capital Research *Note- Value of assets are in LKR Mn Source: Company Reports

14 First Capital Research “Hefty Capital base to deliquesce ROE”

6.0 Key Ratios

SAMP P/E 31 December 2015 2016 2017 2018 2019E 2020E 2021E Capital Tier 1 (5%) 7.9% 8.3% 10.3% 12.1% Tier 2 (10%) 12.3% 12.9% 14.4% 15.7% Equity / Assets

Earnings Return on Average Equity 17.99% 21.38% 21.38% 15.86% 14.32% 14.08% 14.50% Return on Average Assets 1.35% 1.56% 1.68% 1.42% 1.45% 1.48% 1.50% Avg. yield on earning assets 8.99% 10.79% 12.45% 13.19% 13.82% 13.83% 13.88% Avg. cost of funds 4.79% 6.38% 7.95% 8.05% 8.52% 8.33% 8.20% Net Interest Spread 4.20% 4.41% 4.50% 5.13% 5.31% 5.50% 5.67% Net Interest Margin 4.20% 4.38% 4.50% 5.19% 5.37% 5.45% 5.51% Efficiency Cost / Income 52% 48% 42% 36% 38% 38% 38% Cost/ Core Income 35% 28% 21% 20% 20% 19% 19% Cost / Average Assets 2.8% 2.7% 2.4% 2.3% 2.4% 2.3% 2.3% Cost / Branch (Rs.'Mn) 62.1 71.0 78.3 90.9 103.8 114.8 128.6 Rev. / Employee (Rs.'Mn) 12.3 17.8 24.3 29.1 33.5 37.3 41.7

Asset Quality Asset Growth 22% 26% 22% 15% 11% 14% 13% Deposit Growth 20% 26% 24% 10% 13% 15% 14% Borrowings Growth 49% 33% 5% 20% 11% 14% 10% Loan Growth 25% 22% 24% 15% 14% 14% 15%

Liquidity Loan / Deposits 95% 92% 92% 97% 97% 97% 97% Loan / (Deposits+ Borrowings) 81% 78% 80% 83% 84% 84% 84% Loan / Total Assets 72% 70% 71% 71% 73% 74% 74% Deposit / Liabilities 82% 81% 84% 82% 84% 85% 85% CASA 47% 38% 35% 33% 38% 38% 38% Source : Company Annual Reports and First Capital Research Estimates

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7.0 Shareholding of SAMP

Top 20 shareholders - (% held) 4Q2018 3Q2018 QoQ 4Q2017 YoY Vallibel One PLC 15.0% 15.0% - 15.0% - Mr Y S H I Silva 10.0% 10.0% - 10.0% - Employees' Provident Fund 10.0% 10.0% - 10.0% - BBH-Matthews International Funds-Matthews Asia Growth Fund 5.7% 5.7% - 4.6% 1.2% Rosewood (Pvt) Limited - Account No.1 4.2% 4.1% 0.1% 5.0% -0.8% BBH-Matthews Emerging Asia Fund 3.0% 3.1% -0.1% 2.4% 0.6% Citi Bank Newyork S/A Norges Bank Account 2 3.0% 2.0% 1.0% 1.5% 1.5% Phoenix Ventures Private Limited 2.0% 1.0% 1.0% 1.0% 1.0% Akbar Brothers Pvt Ltd A/C No. 1 2.0% 2.0% 0.0% 1.9% 0.1% Mr S E Captain 1.5% 1.7% -0.2% 1.3% 0.2% Sampath Bank PLC Account No. 4 (Sampath Bank Pension Fund) 1.3% 1.3% - 1.4% -0.2% Seylan Bank PLC / W D N H Perera 1.1% 0.0% 1.1% 0.0% 1.1% Pershing LLC S/A Averbach Grauson & Co. 1.0% 1.0% - 0.0% 1.0% Pemberton Asian Opportunities Fund 1.0% 1.1% 0.0% 0.0% 1.0% Employees Trust Fund Board 1.0% 0.8% 0.2% 0.0% 1.0% Jinadasa Brothers (Pvt) Ltd 0.9% 0.9% - 0.8% 0.1% Union Assurance PLC/No-01 A/C 0.9% 0.9% - 0.9% - BNYMSANV RE-MAGNA UMBRELLA FUND PLC 0.9% 0.9% - 1.0% -0.2% Mellon Bank N.A.- UPS Group Trust 0.8% 0.8% - 0.8% - BNYM RE-BUTTERFIELD Trust ( Bermuda ) Limited 0.8% 0.0% 0.8% 0.9% -0.1%

16 First Capital Research “Hefty Capital base to deliquesce ROE”

8.0 Investment Risks

Higher impairment amidst high lending growth: In spite of the moderation in lending growth to fall in line with the private sector credit growth, we expect the impairment provision to average around LKR 9Bn over 2019-21E owing to the lagging effect witnessed in lending growth and NPAs. With a CAGR of 21% over 2016-18 period SAMP maintained its lending growth well above the private sector credit growth thereby achieving a loan portfolio of LKR 675Bn by end 2018. Above average loan growth resulted in an impairment provision of LKR 12Bn leading to an NPL ratio of 3.7%, above the industry average of 3.4%.

Rights issue to dilute shareholding: SAMP announced a rights issue of 89Mn shares aiming to raise LKR 12.1Bn in Mar 2019 thereby increasing the shareholding by 32% while script dividend is likely to weaken the shareholding further resulting in ROE diluting to 14% in 2019-21E. SAMP boasts a ROE of 21% over 2016-17 period. However, with the two rights issues executed in 2017-18 period, SAMP’s shareholding increased by 81Mn shares thereby diluting the ROE to 15.9% in 2018.

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Appendix I: Statement of Financial Performance

Profit & Loss Statement (LKR mn) 2015 2016 2017 2018 2019E 2020E 2021E P/E 31st Dec Gross Income 49,443 70,211 97,100 121,884 138,090 156,334 175,210 Interest Income 39,706 58,976 83,909 103,833 121,803 135,822 153,401 Interest Expenses 21,156 35,021 53,612 62,960 74,490 82,345 92,503 Net Interest Income 18,550 23,955 30,297 40,872 47,313 53,477 60,898 Fee & Other Income 8,192 10,001 12,175 16,361 14,734 15,639 16,393 Total Operating Income 26,742 33,957 42,473 57,233 62,048 69,117 77,291 Impairment (Charges)/ Reversal -993 -1,535 -2,634 -12,139 -8,975 -9,282 -9,147 Net Operating Income 25,749 32,422 39,839 45,094 53,073 59,835 68,145 Less : Operating expenses Staff Cost 6,524 7,835 8,702 9,675 10,943 11,928 13,360 Depreciation of PPE Other Operating Expenses 7,438 8,431 9,318 11,149 12,822 14,360 16,084 13,962 16,266 18,019 20,824 23,765 26,289 29,443

Profit from operations 11,787 16,156 21,820 24,270 29,307 33,546 38,701 VAT on Financial Services & DRL 1,998 2,943 4,309 5,149 8,050 9,095 10,412 Profit Before Tax 9,790 13,214 17,510 19,121 21,257 24,451 28,289 Income Tax Expense 3,161 3,712 4,828 6,515 6,802 7,824 9,053 Profit for the Year 6,628 9,501 12,683 12,606 14,455 16,627 19,237 Minority Interest 5 5 0 0 0 0 0 Profit attributable to Equity Holders 6,623 9,496 12,683 12,606 14,455 16,627 19,237

EPS 16.8 24.1 32.2 32.0 36.7 42.3 48.9 Source : Company Annual Reports and First Capital Research Estimates

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Appendix II: Statement of Financial Position

Balance Sheet (LKR mn) 2015 2016 2017 2018 2019E 2020E 2021E as at 31st Dec Assets Cash and cash equivalents 13,713 17,222 22,088 19,218 31,242 50,435 56,544 Financial instruments 4,911 73,229 23,917 31,150 32,037 47,682 42,534 Loans to & Deposits with Banks 26,535 42,475 44,325 45,305 44,414 51,913 62,912 Loans and Receivables to Customers 421,297 514,105 637,808 798,648 882,793 978,736 1,111,082 Financial Assets 58,524 14,945 77,108 0 0 0 0 Property, plant & equipment 8,697 10,709 12,631 13,602 9,137 8,126 7,124 Other Assets 4,969 7,414 8,839 39,862 49,680 61,354 76,692 Total Assets 538,647 680,099 826,717 947,785 1,049,305 1,198,246 1,356,889

Liabilities Due to other customers 407,164 512,550 634,641 699,661 790,617 909,210 1,036,499 Due to banks 3,418 6,955 4,820 8,965 9,487 9,092 14,511 Debt issued and other borrowed funds 74,291 94,338 95,593 123,035 120,943 138,903 147,955 Current tax liabilities 5,021 4,386 5,631 9,682 0 0 0 Other liabilities 9,550 12,127 17,123 16,391 16,484 16,749 17,098 Total Liabilities 499,444 630,356 757,808 857,735 937,532 1,073,954 1,216,063 Shareholders Funds Stated Capital 5,381 6,471 16,308 32,796 47,666 50,652 54,690 Reserves 29,103 36,955 44,067 48,773 46,234 44,965 45,927 Retained earnings 4,624 6,315 8,534 8,482 17,872 28,674 40,210 Shareholders Funds 39,109 49,742 68,908 90,051 111,773 124,291 140,826 Minority Interest 95 0 0 0 0 0 0 39,203 49,742 68,908 90,051 111,773 124,291 140,826 Total Liabilities & Shareholders' Funds 538,647 680,099 826,717 947,785 1,049,305 1,198,246 1,356,889

NAVPS 99.4 126.4 175.2 228.9 284.1 316.0 358.0 Source : Company Annual Reports and First Capital Research Estimates

Appendix III: Recommendation criteria

Categorization Company Category Buy Hold Sell

Grade A S&P SL20 Companies T.Bill + 5% & Above T.Bill + 1% & Above Below T.Bill + 1%

Grade B Rest of the Companies T.Bill + 8% & Above T.Bill + 3% & Above Below T.Bill + 3%

Grade C Companies less than LKR 1Bn Market Cap T.Bill + 11% & Above T.Bill + 6% & Above Below T.Bill + 6%

Weighted Average 1-year T-bill rate during Dec 2018: 11.22%

Categorization Company Category Buy Hold Sell

Grade A S&P SL20 Companies 16.22% 12.22% 12.22%

Grade B Rest of the Companies 19.22% 14.22% 14.22%

Grade C Companies less than LKR 1Bn Market Cap 22.22% 17.22% 17.22%

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