Setting Up Coverage: National Development Bank [NDB: LKR124.0] – BUY
Posted on the March 5th, 2012 under Analysts View by Softlogic Equity Research 
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NDB, currently is the fourth largest private sector listed commercial bank in the country with an asset strength of LKR142 bn (as at 31.12.2011), representing a market share of circa 4%.
Loan book CAGR 20% 2012 – 2013E, amidst above average asset quality: We expect NDB to maintain a CAGR of circa 20% 2012 – 2013E in its loan book. This is on the back of the substantial upturn anticipated in the country’s SME & retail financing. Given the NDB’s strong footing in the above segments, the bank is in a superior position to outperform the industry. Despite of the aggressive growth experienced in the loan book, NDB has witnessed its asset quality improving over the years registering 1.35% as at 31.12.2011.
Deposit base expected to grow by a CAGR of 23% 2012 – 2013E: We expect NDB’s deposit base to grow by a 23% CAGR 2012 – 2013E. The growth is expected to emerge primarily from the strong retail & SME deposit drive assisted by the improved franchise to now stand with a total of 62 branches.
Cost – to – Income ratio, best among the peers (average 41% 2006 – 2010): NDB has maintained its Cost – to – Income ratio (excluding provisions) relatively lower compared with the industry peers, as it registered circa 41% on average during the last five year period. However, we expect the ratio to remain above historical average over the next 2 years, yet gradually improve as the new branches break even (the ratio increased during 2011 due to NDB’s expansionary efforts, where it registered circa 50% for 2011).
Valuations and Dividends: We expect NDB to post earnings of LKR2.9 bn in 2012E (up 9.8% YoY). In terms of PER; the share is valued at 6.9X 2012E net earnings and 6.0X 2013E net earnings. The counter currently trades at a PBV of 1.0X 2012E book value. We expect NDB to generate a total return of circa 40% (including dividends) over a one year time horizon. Assuming the bank maintains a dividend payout ratio of 32%, we forecast a Dividend Yield of 4.7% 2012E based on current prices.
Interest Margins on a declining trend: NDB’s Net Interest Margin witnessed a downward movement during 2010 in line with its peers. It recorded 3.86% for 2010, down 290 basis points. The margins were further squeezed during 2011 amidst tight liquidity conditions, as it recorded 3.7% as of 31.12.2011. With NDB’s lower CASA base, we expect the margins to decline slightly over the next few quarters as well.
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