NATIONS TRUST BANK PLC

UPDATE

Highlights Interest Rates & Quarterly Net Interest

% Income SLRs. Mn
:: FY2007 Net Interest Income surpass SLRs. 2
billion. 21 700.00

:: NTB record highest ever Net Profit of SLRs. 505 20

600.00
million.
19
:: Total Deposits increase by 38% as compared to 500.00
28% increase in Loans and Advances. 18

:: Capital Adequacy of the bank on a decline. 17 400.00

:: Rights issue of 01 for 03 at SLRs. 25 to bring in

16 300.00
SLRs. 1 billion.
:: Capital infusion of SLRs. 3 billion planned for 15
200.00
the following 4 year period. 14
:: Net Interest income growth momentum 13
100.00
forecasted to decline.
12 0.00
:: NTB forecasted to make SLRs. 646 million for
FY2008 (28% YOY increase) 3/ 07
2/ 07

3/ /07
4/ /07
5/ /07
6/ /07
7/ /07
8/ /07
9/ /07
/1 7

12 /07
1/ 07
2/ 08
08
11 /07
10 4/0
5/
2/

/
4/
1/
3
30
27
25
22
20
17

2
/9
/7
1
1/

Commercial Bank Prime Lending Rate

T-Bill 12 months
Quarterly Net Interest Income
Linear (Quarterly Net Interest Income)
Financial Performance FY2007

NTB continued its successful growth momentum in
FY2007, which saw the group post it’s highest ever
numbers in history. Growth in loan book and
deposit base and the significant increase in non-
interest revenue were among the top contributors.
Interest income of the group was at SLRs. 7.83
billion with loans and advances contributing 64%.
Interest expenses were at SLRs. 5.71 billion
resulting in net interest income of SLRs. 2.12
billion. YOY increase of interest income was 57%
as opposed to a 74% YOY increase of interest
expenses. Net interest income increased 24% in
FY2007 over FY2006.
The growth in interest income was a direct result of
the current high interest environment aided by a
28% YOY growth in net loans and advances. The
increases in interest expenses were significantly
higher than that of interest income as a result of a
38% growth in the total deposit base.
Interest margins fell to 4.26% from 4.70% in 2006.
Competition to source funds is becoming fierce
with other banks and finance companies offering
highly attractive deposit rates. This has forced
banks like NTB to narrow margins in order to
maintain deposit growth.
Non-interest income surpassed the SLRs. 1 billion
mark with a contribution of SLRs. 1.32 billion to
net income. This was mainly as a result of
favorable forex income of SLRs. 329 million
indicating a 72% YOY growth.
Costs increased 24% fueled by growing
inflationary pressure. Despite the increase in costs,
the group managed to post pre tax profit of SLRs.
974 million (58% YOY growth) and Net profit of
SLRs. 505 million (56% YOY growth). Quarterly
Capital booster…
Inadequacy of capital has been viewed as a
significant constraint hindering the growth of NTB.
Although the bank has been able to meet the
statutory limits set by Central Bank of Sri Lanka
the capital adequacy ratios have been on a
declining trend.

Lanka ORIX RESEARCH


Capital Adequacy Ratios
%
12.00%
11.00%
10.00%
9.00%
8.00%
7.00%
6.00%
Mar-07 Jun-07 Sep-07 Dec-07
Core Capital (Min 5%) Total Capital (Min 10%)
The 01 for 03 Rights Issue at SLRs. 25 approved in
mid January 2008 was a welcome step in boosting
the capital strength of the bank. The rights issue
will bring in approx. SLRs. 1.01 billion of equity
through the issue of 42 million shares. Further this
will facilitate the management in achieving the
target 12% for the Total Capital Adequacy ratio.
The rights contained Warrants in the proportions of
01 Warrant for 01 Right with a exercise price of
SLRs. 30 in 2010 and 01 Warrant for 02 Rights
with an exercise price of SLRs. 35 in 2011. These
warrants will add SLRs. 1.26 billion and SLRs. 733
million to capital in 2010 and 2011 respectively.
Infusion of over SLRs. 3 billion to capital over a 4
year period will add considerable support to the
banks’ expansion plans while helping to maintain
statutory capital adequacy requirements.
Further this may result in a drop in borrowings as
evidenced in FY2007 where borrowings declined
by 4% YOY to SLRs. 19.85 billion. Considering
the current economic conditions where high rates
of interest are expected to continue, shifting away
from debt toward equity funding may be a move in
the right direction.
Tackling the bends…
The current macro economic environment of high
interest rates and fluctuating exchange rates have
had a significantly positive impact on many of the
commercial banks in Sri Lanka. Most banks have
recorded significant YOY gains in interest income
as well as net profit.
However these superior growth rates may prove
deceiving for a long-term investor as it depends
heavily upon the economic environment of the
country.
Lanka ORIX RESEARCH
On one aspect banks are facing severe competition
in sourcing funds. With rates over 25% being
offered for time deposits it is unclear where limits
lie for financial institutions for a profitable mix of
lending and deposit rates. Further at these high
rates loan growth is expected to decline, although it
is not visible as yet when analyzing most of the
banks.
However a decline in net interest margin is visible
and the continuation of the current economic
conditions will further aid in thinning interest
margins.
Therefore in order for NTB to maintain the
stunning performance of FY2007 significant
growth in the loan book as well as deposit base is
imperative while maintaining margins. Further the
introduction of new products such as Money
Market Savings Account and Forex Trading
Accounts will provide NTB with an edge, as banks
will need to diversify traditional products to
overcome competition and mitigate risks.
Looking at current trends it is evident that fee -
based income makes a significant impact on the
overall bank performance. In this regard NTB
appears to be well placed, although being a small
player in the industry.
Interest Income, Interest Expenses &
Interest Margin
9,000 5.00%
8,000 4.50%
7,000 4.00%
3.50%
6,000
3.00%
5,000
2.50%
4,000
2.00%
3,000
1.50%
2,000 1.00%
1,000 0.50%
0 0.00%
2002 2003 2004 2005 2006 2007
Interest Income Interest Expenses
*Net Interest Margins
The risk of default is a common phenomenon in a
high interest environment. However with the
significant growth in the loan book the
management has been able to keep NPL ratios
under check. The Gross NPL ratio of the bank
indicated an improvement from 2006 coming down
to 3.96% while Net NPL ratio edged up 0.32% to
1.64% in FY2007. The risk management and
collection policies in place are to be commended in
this regard.
Share Performance Our forecast places NTB to record Net interest
income of SLRs. 2.3 billion. Boosted by Forex and
NTB share price has been a victim of its own other operating income Net Income of the bank is
success as investors have opted to invest funds in forecasted to increase by 22% YOY to SLRs. 4.2
the bank as opposed to investment in the share billion. This will result in a Net Profit of SLRs. 646
market. million indicating a YOY growth of 28%.

NTB share price performed above the overall EPS of the group will indicate a drop from
market performance for a major part of the year. SLRs.4.01 to SLRs. 3.85 as a result of the addition
However the counter was unable to avoid the of 42 million shares in terms of the Rights Issue. At
negative impact and has declined 17% year to date a price of SLRs. 28 the forward PER will be 7.27x.
as compared to the 16% decline in the ASPI.
Investors are advised to accumulate this stock
However with the market showing signs of picking which is expected to provide positive returns in the
up, investors are presented with a unique long term.
opportunity to accumulate a fundamentally strong
counter at a bargain price.

NTB Share Performance Vs ASPI & MPI

115.00
NTB
110.00

105.00

100.00 ASPI

95.00

90.00

85.00

80.00

75.00 MPI
70.00
2/21/2007

3/21/2007

4/21/2007

5/21/2007

6/21/2007

7/21/2007

8/21/2007

9/21/2007

10/21/2007

11/21/2007

12/21/2007

1/21/2008

NTB ASPI MPI Linear (NTB )

Future Outlook
The outlook for the FY2008 remains positive on
the backdrop of the current economic conditions.
However similar growth rates observed in FY2007
may not materialize.

The main cause for this is related to the expected

drop in interest margins. However if NTB manages
to maintain interest margins along with the loan
book and deposit growth, return to equity holders The information and the opinions contained herein were
complied by Lanka ORIX SECURITIES (Private) Limited, based
will be higher. on information obtained from reliable sources in good faith.
However, such information has not been independently verified
Further the Rights funds amounting to SLRs. 1.01 and no guarantee, representation or warranty, express or
billion will also make a considerable impact on the implied is made by Lanka ORIX SECURITIES (Private) Limited
as to its accuracy or completeness. This report is not and should
bottom line until such funds are utilized for long- not be construed as, an offer to sell or a solicitation of an offer
term investments. to buy any securities. Lanka ORIX SECURITIES (Private)
Limited, nor its employees can be held liable whatsoever for any
direct or consequential loss arising from any use of this report
or the information contained herein.

Lanka ORIX RESEARCH