ComBank to preserve positive growth momentum in its loan book

Impairment provisioning also noticed a significant drop of 41.9% YoY

ComBank is expected to keep up the positive momentum in its loan book while maintaining growth within a range of 11% – 12% in the coming years, according to the Bank’s earnings update released by First Capital Research.

“Commercial Bank of Ceylon plc., has posted exceptional results for 3Q2021 with earnings improved by 78.4%YoY to LKR 6.6 billion compared to LKR 3.7 billion recorded in 3Q2020. Improvement in NII, Fee and Commission Income and Other Operating Income have largely contributed towards the outstanding results of the quarter. Moreover, impairment provisioning also noticed a significant drop of 41.9% YoY despite recording a rise of 7.6%YoY for 9M2021,” First Capital said.

The update further said,” ComBank recorded a gross loan growth of 10.9% to LKR 1.1 trillion for 9M2021 with a net loan growth of 9.9% year-to-date. Increased appetite for credit by corporate as well as individuals is expected to stimulate the gradual economic recovery and thereby enable ComBank to persevere the positive growth momentum in the loan book.”

“Thus, we are upgrading our earnings forecast for 2021E and 2022E to LKR 25.1Bn and LKR 27.3Bn, respectively. However, considering the higher risk-free rate stemming from the increased interest rates, we are almost rolling over our previous target price for 2021E of ComBank for 2022E at LKR 115.0 together with a total upside potential of 55.0%.”

“Improvement in NII, Fee and Commission Income and Other Operating Income have largely contributed towards the outstanding results of the quarter. Interest expense displayed a notable reduction owing to the low interest rate regime and the considerable lag in terms of repricing of deposits, thereby improving the NII by 16.7%YoY to LKR 16.4Bn. Fee and Commission Income also posted a sizable expansion by 24.6%YoY promoted by the extensive use of card transactions and online payment platforms during the lockdown period. Net Other Operating Income posted an enormous growth of 644.7%YoY to LKR 2.6Bn on account of the higher foreign exchange gains. Moreover, impairment provisioning also noticed a significant drop of 41.9%YoY despite recording a rise of 7.6%YoY for 9M2021. Considering more than expected earnings delivered during 9M2021, we have enhanced our NII target for 2021E to LKR 60.3Bn (+23% from the previous target) and for 2022E to LKR 64.0Bn (+16% from the previous target). We have also restated our earnings targets for 2021 and 2022 to LKR 25.1Bn and LKR 27.3Bn, respectively.”

“Revival in private sector credit advanced the Gross Loan Book by 10.9%.”

“COMB has achieved a gross loan growth of 10.9% to LKR 1.1Tn during the 9M2021 while recording a net loan growth of 9.9% year-to-date. A notable improvement witnessed in private sector credit growth during Oct – Nov 2021 which exhibited an increased appetite for credit by corporate as well as individuals propels the gradual economic recovery, thereby it is expected ComBank to keep up the positive momentum in the loan book while maintaining the growth within a range of 11% – 12% in the coming years.”

“We have accounted for proposed surcharge tax of 25% (LKR 4.3Bn) through the retained earnings while no adjustment made in terms of the turnover levy of 2.5% (Social Security Contribution), assuming it can be passed on to the customers. Considering the gradual rise in risk free rate and thereby the increase in expected return, we have ascertained the fair value of COMB.N to reach LKR 115.0 (previous TP – LKR 125.0) in 2022E for a total return of 55.0% at the current market price, and the share is trading well below its current book value of LKR 139.0 with a PBV of 0.6x. COMB.X is valued at LKR 95.0 by 2022E assigning a 15% discount to the voting share.” First Capital said.