Earnings Update

FC Research Analyst: Atchuthan Srirangan Weerasinghe

SRI LANKA

Nations Trust Bank PLC [NTB.N0000] STRONG BUY

P/E 31 Dec 2014 2015 2016E 2017E 2018E

Net Interest Income (LKR mn) 8,940 9,105 10,048 11,286 12,567

Net Profit (LKR mn) 2,536 2,614 2,936 3,402 3,982

EPS (LKR) 11.0 11.3 12.7 14.7 17.1

YoY % Growth 19% 3% 12% 16% 17%

Valuations

PER (x) 6.8x 6.6x 5.9x 5.1x 4.4x

PBV (x) 1.5x 1.2x 1.1x 1.0x 0.9x

Dividend Yield (%) 2.8% 2.8% 3.2% 3.9% 4.8%

NAVPS 60.3 65.8 76.1 87.5 100.7

Adjusted DPS (LKR) 2.1 2.1 2.4 2.9 3.6

Dividend Payout 19% 19% 19% 20% 21%

Mar 2016 Current Price - LKR 73.5 Fair Value – LKR 95.0 4QFY15 Earnings 21% YoY

Source: ft.com

Price-Volume Chart

Disclaimer on Shareholding:

First Capital Limited holds 475,000 shares and affiliated Unit

Trusts hold 40,000 shares in NTB. Neither First Capital

Equities (Pvt) Ltd nor related entities have traded in the

shares in the three trading days prior to this document, and

will not trade in the shares for seven trading days following

the issue of this document.

1-4Q2015 1-4Q2014 YoY

Net Interest Income 9,105 8,940 2%

Total Operating Income 12,519 12,117 3%

Operating profit 4,672 4,571 2%

Profit / (loss) for the year 2,614 2,537 3%

4Q2015 4Q2014 YoY 3Q2015 QoQ

Net Interest Income 2,333 2,362 -1% 2,227 5%

Total Operating Income 3,314 3,101 7% 3,040 9%

Operating profit 1,217 1,025 19% 1,216 0%

Profit / (loss) for the year 675 556 21% 681 -1%

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Net earnings up by 21%YoY to LKR 675mn: NTB reported a net earnings growth of 21%YoY to LKR675mn in 4Q2015 on the back of lower impairment charges. The total impairment charges for the period declined by 51%YoY to LKR 176mn due to 53%YoY reduction in collective impairment. The bank’s continuous focus on quality loan growth and improved collection efforts paid off to report a dip. Meanwhile during 2015 NTB recorded a bottom line growth of 3% to LKR 2.6bn.

NTB’s NII edge down with lower margins: NTB NIMs saw dip to 5.5% in 4Q2015 compared to 5.8% in 4Q2014 and 5.6% in 3Q2015. Lower yields due to competition in the banking industry resulted in Interest income inclining by mere 1%YoY despite loan book increasing by 23% during 2015. However, interest expense increased by 3%YoY in 4Q2015 on the rising cost of funds and intensified competitive pressures though deposits grew at a much slower pace than loans by 16% in 2015.

Stable fee and commission income growth while other operating income jump: Net fees and commission income signified a growth of 11%YoY to LKR 858.9mn in 4Q2015 higher consumer spending via credit cards and increased trading related loans. Trading income in 4Q2015 managed to record a marginal profit of LKR 9mn, but full remained in losses amounting to LKR 94mn resulting from unfavorable movements in the yields of the Government Securities

Operating expenses increased to 12%: 4Q2015 operating expenses jump was primarily driven by the 26%YoY growth in personnel expenses. The increase is due to higher gratuity provisioning and filling of vacancies amounting to 62 employees. However, depreciation of property, plant and equipment declined by 9%YoY to LKR 93.0mn. NTB had no new branch openings during the quarter.

Impairment charges declined 51%: Impairment dipped mainly due to reduction in collective impairment of 53%YoY to LKR 284mn in 4Q2015. This improvement reflects the Bank’s emphasis on quality loan growth and substantial improvements in collection efforts during the quarter. Further, individual impairment also edged down by 33%YoY in 4Q2015. Meanwhile during 2015 the impairment charges

KEY DATA

Share Price (LKR)

Average Daily Volume (Shares) 35,171

Average Daily Turnover (LKR mn) 3.30

230.6

Market Capitalisation (LKR mn) 16,800

Price Performance (%) 1 mth 3 mths 12mths

NTB -5.3% -14.4% -30.1%

ASPI -4.3% -12.1% -14.7%

20.00%

15.00%

9.90%

8.98%

8.06%

Public Holdings 34.85%

Major Shareholders as at 31st Dec 2015

John Keells Holdings PLC

HWIC Asia Fund

Mackinnons Keells Limited

Central Finance Company PLC A/C No 03

Janashakthi General Insurance Limited

73.50

52w High/Low (LKR) 107.9/73.0

Issued Share Capital (Shares mn)

Earnings Update

FC Research Analyst: Atchuthan Srirangan

SRI LANKA

Ratio Analysis 2014 2015 2016E 2017E 2018E

Tier 1 (5%) 14.16% 13.15%

Tier 2 (10%) 18.28% 15.53%

Return on Average Equity 19.79% 17.99% 17.94% 17.99% 18.23%

Return on Average Assets 1.68% 1.56% 1.57% 1.57% 1.57%

Net Interest Spread 6.56% 6.71% 6.70% 6.05% 5.74%

Net Interest Margin 6.67% 6.47% 6.38% 5.99% 5.67%

Cost / Income 53% 55% 53% 53% 54%

Cost / Average Assets 4.2% 4.1% 4.2% 4.2% 4.1%

Asset Growth 12% 10% 13% 18% 16%

Deposit Growth 16% 16% 18% 21% 18%

Borrowings Growth 16% 27% -19% -42% 47%

Loan Growth 19% 23% 18% 18% 19%

Avg. yield on earning assets 13.0% 11.8% 14.0% 12.6% 12.0%

Avg. cost of funds 6.5% 5.1% 7.3% 6.5% 6.2%

Loan / Deposits 89% 94% 94% 92% 93%

Loan / Total Assets 62% 69% 72% 72% 74%

Deposit / Liabilities 76% 80% 84% 86% 87%

Equity / Assets 9% 9% 9% 9% 9%

CASA 33% 32% 31% 32% 32%

Cost / Branch (Rs.'Mn) 71.8 74.6 79.5 83.5 88.1

Rev. / Employee (Rs.'Mn) 4.73 4.65 5.0 5.2 5.4

Employees 2,562 2,695 2940 3240 3540

Branches 89 92 98 108 118

New Branches during the Year 17 3 6 10 10

declined by 17%YoY to LKR 986mn despite a one off individual impairment made in 1Q2015. Future Outlook

Earnings grow by CAGR of 13% despite downgrade: NTB earnings are likely to grow by a CAGR of 13% 2015-18E with 2016E growing by 11% and 2017E growing by 15%. NTB CAGR has been downgraded from our previous forecasts amidst the expected increase in VAT to 15% from 11%. NTB’s loan book is expected to grow by 14% to LKR 207Bn in 2016E while accelerating to 18% in 2017E. Spreads to improve in 2016E: NTB’s market leadership in credit card business has led bank to maintain its NIM at appropriate levels despite its large leasing portfolio. With the rise in interest rates we spreads to increase by at least 40bps with deposits re-pricing faster than its loan book. We expect NTB to continuously work on improving its cost-to- income and while fee based income growth is also expecting remain in line with the Bank’s historic growth rates. SME focus: NTB is planning to further strengthen SME in the coming years with emphasis increasing on process efficiencies and relationship-driven marketing. The strategy to growth in SME s representing all regions and industry sectors. Target price downgraded to LKR 95.0: FC Research downgraded NTB’s target price to LKR 95.0 from LKR 100.0 amidst the bank 4Q2015 performance falling below our expectations. Inline we have downgraded NTB future earnings as well. However, market price has significantly declined resulting in an upgrade in our recommendation.

FCE recommends a STRONG BUY on NTB with a total return of 32% on a 1-year time horizon: At LKR 73.50, NTB trades at a 2016E PER of 6.57x. Our target price of LKR 95.0 (+29% Capital Gain) and dividend yield of 3% will provide a 1-year total return of 32%.

Earnings Update

FC Research Analyst: Atchuthan Srirangan

SRI LANKA

Statement of Financial Position 2014 2015 2016E 2017E 2018E

Assets

Cash and Cash Equivalents 6,900 6,392 7,607 6,763 6,930

Balances with Central Bank of Sri Lanka 3,992 5,284 9,259 11,950 14,101

Reverse Repurchase Agreements 11,014 302 4,572 5,532 6,528

Derivative Financial Instruments 128 554 287 339 403

Financial Assets - Held for Trading 15,700 2,044 3,048 5,532 7,616

Financial Assets -Avalable for Sale 4,329 16,533 - - -

Financial Assets - Held to Maturity 9,653 12,744 15,241 16,597 14,144

Other Financial Assets 3,821 6,511 6,096 7,376 8,704

Loans and Advances to Customers 98,347 121,143 143,360 169,592 201,697

Other Assets 2,506 1,386 5,734 6,784 8,068

Property, Plant and Equipment 2,194 2,144 2,264 2,783 3,317

Intangible Assets 1,284 1,224 1,260 1,267 1,244

Total Assets 159,869 176,261 198,729 234,517 272,753

Liabilities

Due to Banks 2,923 2,276 2,458 2,655 2,867

Repurchase Agreements 15,047 10,406 8,602 13,567 12,102

Derivative Financial Instruments 166 53 61 71 81

Due to Customers 111,010 129,158 152,407 184,412 217,606

Debt Issued and Other Borrowed Funds 10,189 12,974 10,503 6,141 9,020

Current Tax Liabilities 666 426 1,113 1,114 1,114

Other Liabilities 5,559 5,064 5,267 5,477 5,696

Deferred Tax Liabilities 413 733 769 808 848

Total Liabilities 145,973 161,090 181,180 214,244 249,334

Equity Attributable to Equity Holders of the Parent

Stated Capital 5,101 5,101 5,101 5,102 5,103

Statutory Reserve Fund 538 661 863 1,098 1,373

Retained Earnings 8,151 9,336 10,983 12,857 15,012

Other Reserves 105 73 602 1,214 1,931

Total Equities 13,896 15,171 17,549 20,272 23,419

Total Liabilities and Equity 159,869 176,261 198,729 234,517 272,753

NAVPS 60 66 76 88 101

Income Statement 2014 2015 2016E 2017E 2018E

Interest Income 17,452 16,628 22,075 23,691 26,562

Interest Expense (8,513) (7,523) (12,027) (12,405) (13,995)

Net Interest Income 8,940 9,105 10,048 11,286 12,567

Fees and Commission Income 3,008 3,438 4,547 5,375 6,370

Fees and Commission Expense (225) (236) (359) (425) (503)

Net Fees and Commission Income 2,783 3,201 4,188 4,951 5,867

Net Trading Income 111 (94) 188 252 172

Other Operating Income 282 307 352 395 503

Total Operating Income 12,116 12,519 14,775 16,884 19,108

Impairment Charge / (Reversal ) for Loans and

Advances1,157 985 1,165 1,124 823

Net Operating Income 10,959 11,534 13,610 15,760 18,285

Personnel Expenses 2,700 2,883 3,302 3,858 4,468

Depreciation of Property, Plant and Equipment 324 375 383 437 513

Amortization of Intangible Assets 171 242 243 274 305

Other Operating Expenses 3,192 3,362 3,866 4,446 5,113

Total Operating Expenses 6,388 6,862 7,794 9,015 10,399

Operating Profit Before Value Added Tax (VAT) 4,571 4,673 5,816 6,745 7,886

Value Added Tax (VAT) on Financial Services 744 767 1,368 1,590 1,853

Profit Before Income Tax 3,827 3,906 4,448 5,155 6,033

Income Tax Expense 1,290 1,291 1,512 1,753 2,051

Profit for the Year 2,536 2,614 2,936 3,402 3,982

EPS 11.0 11.3 12.7 14.7 17.1

347 1/1, Dr. Colvin R. De Silva Mawatha, Sales Desk: +94 11 2145 000

Colombo 2 Fax: +94 11 2145 050

HEAD OFFICE BRANCHES Disclamer

347 1/1, Dr. Colvin R. De Silva Mawatha, Matara Negombo

Colombo 2 No. 24, 1/3, 2nd Floor, No.72A, 2/1,

Sales Desk: +94 11 2145 000 Lakshman Cooray Building, Old Chilaw Road,

Fax: +94 11 2145 050 Anagarika Dharmapala Mw, Negombo

Matara

Tel: +94 41 2237 636 Tel: +94 31 2233 299

SALES BRANCHES

CEO Jaliya Wijeratne +94 71 5329 602 Negombo

Priyanka Anuruddha +94 76 6910 035

Colombo Priyantha Wijesiri +94 76 6910 036

Damian Le Grand +94 77 7383 237

Nishantha Mudalige +94 76 6910 041

Isuru Jayawardana +94 76 7084 953 Matara

Anushka Buddhika +94 77 9553 613 Sumeda Jayawardana +94 76 6910 038

Kapila Weerasinghe +94 71 5329 615

Gamini Hettiarachchi +94 76 6910 039

Thushara Abeyratne +94 76 6910 037

RESEARCH

Dimantha Mathew +94 11 2145 016 Amanda Lokugamage +94 11 2145 015

Atchuthan Srirangan +94 11 2145 017 Michelle Weerasinghe +94 11 2145 018

FIRST CAPITAL GROUP

HEAD OFFICE BRANCHESKurunegala Kandy

No. 2, Deal Place, No. 6, 1st Floor, No.213-215,

Colombo 3 Union Assurance Building, Peradeniya Road,

Tel: +94 11 2576 878 Rajapihilla Mawatha, Kandy

Kurunegala

Tel: +94 37 2222 930 Tel: +94 81 2236 010

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