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Transcript of UNION BANK OF COLOMBO PLC - candor-holdings.com · Union Bank of Colombo (“UBC”) was...
INITIATION REPORT
UNION BANK OF
COLOMBO PLC
OCTOBER 2015
BY CANDOR EQUITIES LTD
Candor Research
Expert Analysis & Insight
Candor Equities Limited Level 8, South Wing Millennium House, 46/58, Nawam Mawatha, Colombo 02, Sri Lanka.
© Candor Equities Limited - Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
RECOMMENDATION
ONE YEAR TARGET PRICE
CSE CODE
BLOOMBERG CODE
ACCUMULATE
LKR 24.50
UBC
UBC SL Equity Analyst Dushan Virantha [email protected] T: +94 112 359 138
key statistics
Key data
Price at Evaluation (LKR) 22.20
Market Capitalization (LKR m) 24,010.94
Market Capitalization (USD m) 170.23
Company as a % of Total Market Cap (%) 0.87
52-week High (LKR) 30.30
52-week Low (LKR) 21.00
Average Daily Volume (6 Months) 332,628.90
Number of Shares in Issue (m) 1,091.41
Free Float (%) 7.66
Foreign Holding (%) 80.13
Source: Bloomberg, Candor Research
Return analysis (%)
3M 6M 12M
UBC SL Equity -9.84 -12.70 -7.56
ASPI -1.82 -0.68 -1.29Source: Bloomberg, Candor Research
LKR.Mn 2013 2014 2015E 2016E
Net Interest Income 1286 1971 2967 3398
Net Profit 99 78 196 339
PEX 55.33 421.67 137.69 79.37
PBVX 1.18 1.71 1.48 1.45
Source: Company Data, Candor Research
5,000.00
5,500.00
6,000.00
6,500.00
7,000.00
7,500.00
8,000.00
10.00
12.00
14.00
16.00
18.00
20.00
22.00
24.00
26.00
28.00
30.00
12/10/2012 12/10/2013 12/10/2014 12/10/2015
UBC SL Equity CSEALL Index
UBC & ASPI Price Chart
Sector Classification
CSE Banks Finance & Insurance
GICS Financials
Name of shareholders No. of Voting Shares Stake
Culture Financial Holdings Ltd 763,984,374 70.00%
Vista Knowledge Pte Ltd 64,677,973 5.90%
Associated Electrical Corporation Ltd 29,237,387 2.70%
Mr. A.I. Lovell 22,743,780 2.10%
Mr.C.P.A Wijeyesekera 18,508,468 1.70%
Source: Company Data, Candor Research
Top 5 Shareholders
Source: Bloomberg, Candor Research
Source: Bloomberg, Candor Research
Source: Bloomberg, Candor Research
PE (x)
PBV (x)
- 22/10/2015
A Prominent Business Turnaround Ahead in Sri Lanka
We initiate coverage on Union Bank of Colombo PLC
with an Accumulate recommendation with one year price
target of LKR 24.50. We are of the view that UBC’s
price will remain sluggish over medium term horizon due
to its thin ROE levels. However, over the long term
horizon we expect the counter will gain noteworthy
investor attraction through the value catalysts illustrated
in our report.
Banking penetration levels still remain low in Sri Lanka
Despite Sri Lanka operating as a bank based economy it
has exhibited low banking penetration (M2/GDP),
limited sophistication in the banking sector (M0/M1) and
low dependency on formal finance (Private sector
credit/GDP) compared to regional counterparts.
Therefore, we are optimistic that the country’s banking
sector is poised for growth in time to come.
Basel 3 Capital and Liquidity reforms ║ UBC resilient
over peers
The Basel committee on banking supervision introduced
the Basel 3 framework with improved measures to
establish a resilient global banking system. Over the long
term horizon, we believe the Sri Lankan Commercial
banks will experience noteworthy pressure on their ROEs
and NIMs due to the improved capital and RWAs under
Basel 3. However, UBC stands well above the regulatory
requirements compared to its peers.
This indicates the bank’s ability to achieve superior ROEs
over long term horizon whilst preserving a strong lending
growth momentum. From the shareholder perspective, UBC
will be an attractive investment as the bank consistently
maintains its capital adequacy levels above the capital
conservation buffers. This confirms the absence of any
restrictions on the bank’s capital redistribution.
TPG’s proven track records ║ Eminent business turnaround
ahead
TPG revamped the Shenzhen Development Bank (SDB) from
a bankrupt creditor to one of China’s most trusted lenders
over a 6 year period. Under TPG’s control, SDB’s net profit
grew at a 5Y CAGR of 72% from RMB 331Mn in 2004 to
RMB 5031Mn in 2009, its NPL ratio improved from 11.40%
to 0.68% (best in China), and its total CAR increased from
2.30% to 8.88%. Following the UBC acquisition, TPG has
restructured the entire management team and Board of
Directors of UBC. The bank is now equipped with proficiency
from TPG and McKinsey & Company, a leading global
consultation firm to mark a legendary business turnaround in
Sri Lanka.
Strong Technological Platform ║ ‘Silverlake’ Core Banking
system
UBC invested heavily on technological innovations including
an advanced core banking system of ‘Silverlake’. ‘Silverlake’
allows a bank to deliver a superior business experience to
its customer across all channels consistently. Operational
excellence is also increased through centralizing of business
processes. The technological improvement places UBC in a
strong position to capitalize on growth opportunities across
its banking mediums including mobile banking, digital
banking etc. Especially considering the long term horizon the
new core banking system will improve the bank’s
operational performance as this is the first time the bank has
unveiled an advanced core banking system.
Valuation
We believe the Sri Lankan banking sector is poised for
growth in time to come and UBC will be able to exploit the
opportunity amidst strong capital buffers & international
proficiency. We have valued UBC using PBV multiple
valuation technique, the primary valuation parameter and
the Residual Income Valuation model, the secondary
valuation parameter. Accordingly, the counter is trading at a
discount to the intrinsic value. However, we are of the view
that UBC’s price will remain sluggish over 1 to 2 year
horizon due to the thin ROE levels. But considering TPG’s
proven track records and expected concerns in terms of
growth in the banking sector peers amidst Basel 3 capital
reforms; we believe the counter would be an attractive stock
over a longer term horizon.
contents Table of
Business Description
06
Industry Overview
08
Investment Overview
10
Investment Risks
15
Valuation
16
Financial Analysis
19
Appendix
22
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
BUSINESS DESCRIPTION
UBC’s operations
Union Bank of Colombo (“UBC”) was established in 1995 as the 8th indigenous bank
in Sri Lanka. Currently UBC holds 1% market share on lending and deposits within
the Commercial Banking space. In 2014, Texas Pacific Group (TPG), one of the
leading global private equity firms, through its affiliate, Culture Financial Holdings
Ltd., acquired 70% of the equity in UBC. This investment marked as one of the
largest foreign direct investments to Sri Lanka whilst making UBC as the 5th largest
Commercial Bank in Sri Lanka in terms of market capitalization. In addition, UBC’s
growth is further augmented with its subsidiaries including National Asset
Management Limited (51% holding) and UB Finance Company Limited (66%
holding).The bank operates with 63 branches and 83 ATMs while providing a range
of financial solutions under following segments:
Corporate banking- This segment is UBC’s largest market segment, representing 50%
of the total lending book. UBC offers a wide array of corporate financial solutions
from trade finance to working capital management to treasury services covering
multiple business sectors. Going forward with new systems and processes, UBC will
focus on the high yield trade segment (Import & Exports) and working capital
solutions amidst intensive price competition within the corporate segment. In
addition, this will lead to a substantial fee base income as well.
SME banking- UBC was initially positioned as a preferred bank for SME financing
with nearly 70% of the total lending book. Subsequent to TPG’s investment and
business process revamping, the SME segment receded to nearly 40%. Currently, the
bank offers SME financial solutions from project financing to working capital
solutions with free SME advisory service ‘Viyaparika Saviya’. Going forward UBC will
put new processes and expertise to continuously cater the SME segment with a
more balanced approach comparative to other segments.
Retail banking- The customer base within the retail segment grew by 23.4% during
2014 and currently represents nearly 10% of the total lending book. Continuous
branch expansion coupled with new products contributed to the expansion of the
retail banking segment. We expect a similar growth momentum for the sector in the
future as well. UBC currently offers a wide array of lending products, CASA
products, fixed deposit products and Elite Banking services to cater masses as well
as high net worth individuals.
UBC’s business strategies
Improving the low cost franchise: UBC aims to enhance its CASA ratio from 25% to
46% over long term horizon through a continuous branch & offsite ATM expansion
strategy. The integration with LankaPay common ATM switch provides UBC’s
customers greater accessibility to accounts from over 1500 ATMs across Sri Lanka.
These strategies will improve the bank’s visibility and customer accessibility.
Additionally, UBC’s continuous product innovations together with product & branch
revamping and remodeling strategies will further improve the demand for CASA
deposits. As a strategy UBC introduced ‘Salary Power’ and ‘Salary Select’ savings
products. Going forward the bank expects to set different thresholds and value
additions to these two savings products in order to cater to two different segments.
Finally the bank centralized direct sales team apart from branch sales team which
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INITIATION REPORT | UNION BANK OF COLOMBO PLC
will establish relationship with multiple organizations to carter their staff accounts.
Going forward these strategies will complement the expansion of UBC’s retail
banking segment.
Superior assets quality: With the expertise from TPG capital, UBC is able to bring
McKinsey & Company to revamp and reorganize the bank’s entire credit
management system which enables better management of credit risk. McKinsey &
Company is involved in establishing internal risk rating models and in-house training
programs on credit management. Going forward the bank expects to integrate these
processes with the ‘Kalypto’ risk management system to automate the entire credit
risk management process whilst reducing human intervention in the process.
Currently the bank’s credit approval and underwriting processes is conducted via a
centralized team with expertise on credit management. With these initiatives under
new management, the bank was able to enhance its gross NPL ratio from 8.25% to
4.87% during 1H2015.
Improving operating efficiency: UBC expects to improve the cost to income ratio
from 80% to 40% over long term horizon. Currently, the bank’s operating efficiency
remains subdued due to the investment in core banking system (‘Silverlake’) and
ancillary systems (Kalypto risk management system, ALCO system etc.). However,
with these new systems, UBC will be able to centralize its entire back office
functions within 1 year horizon. Hence, going forward the bank will be able to
maintain minimum staff numbers whilst solely focusing on marketing & sales
functions. In addition, the bank expects to streamline the branch & offsite ATMs
expansion strategy in order to optimize visibility and customer satisfaction.
Union Bank’s corporate governance & risk management
UBC has a sound corporate governance structure and is fully compliant with the
CBSL’s regulations. To ensure that UBC meets high levels compliance standards, a
number of committees have been established, including the nomination, audit, risk
management, credit, human resource and remunerations committees. In addition,
the bank has established a comprehensive risk governance and risk management
structure. UBC’s risk management consists of three lines of defense as follows.
1st line defense: the front line staff members fall under this level. They are
considered to be the risk takers as they deal with customer transactions on a day to
day basis. Hence, they have been delegated the adequate level of powers and
responsibilities.
2nd line defense: the Risk Management Department (RMD) of the bank is composed
of this level where it operates as an independent unit. The unit’s functions include to
assess, identify, measure and control risk arising from all business/service units
across the bank.
3rd line defense: internal and external audit functions constitute this line of defense.
Risk governance structure
Board of
Directors
Integrated Risk
Management Committee
(IRMC)
Executive Risk
Management
Committee
(ERMC)
Internal Credit
Committee (ICC)
Assets Liability
Committee
(ALCO)
Operational Risk Management Committee (ERMC)
Source: Company Annual report
(ORMC)
07
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
COMMERCIAL BANKING INDUSTRY OVERVIEW
AND UBC’S COMPETITIVE POSITIONING
Banking: The dominant sector of the Sri Lankan financial system
The banking sector, comprising of 25 Licensed Commercial Banks (LCBs) including
12 foreign banks, 9 Licensed Specialized Banks (LSBs) and the Central Bank
dominates the Sri Lankan financial system with a 70% share of the total financial
sector assets. The Commercial Banking sector is the prime component of the
Banking sector which accounts for 70% of the total banking sector assets and
registers 48.9% of the total financial sector assets. The sector assets grew at a CAGR
of 17% over the last 5 years to record LKR 8.4Tn in assets. Banking density has also
seen an improvement from 16.8 per 100,000 persons to 17 during 2014.
Banking penetration levels still remain low in Sri Lanka
Even though Sri Lanka is a bank based economy, it exhibits a low banking
penetration compared to regional counter parts. The penetration of the banking
sector which is measured by M2 (broad money) to GDP ratio stands at 42% which is
well below to the regional peers such as Indonesia (71%), Singapore (528%), Thailand
(220%), South Korea (154%). Sri Lanka is also ranked relatively low in the degree of
sophistication in the banking sector which is measured by currency (M0) to narrow
money (M1) ratio in comparison to the regional peers, apart from Indonesia and
Thailand. Higher the ratio, lower the level of sophistication in the country’s financial
system. In addition, Sri Lanka is ranked low for country’s intensity for formal finance,
which is measured through the ratio of private sector credit to GDP. Given the low
financial penetration, limited sophistication in the banking sector and lower
dependency on formal finance, we feel the Sri Lankan banking sector has room to
develop compared to regional peers. This is further exhibited through the low LCB’s
lending to GDP and LCB’s deposits to GDP ratios in Sri Lanka compared to regional
counter parts. Therefore, we are optimistic that the country’s banking sector is
poised for growth in time to come.
Below average banking penetration in Sri Lanka
0%
100%
200%
300%
400%
500%
600%
Australia China Indonesia South Korea Singapore Thailand Sri Lanka
M2/GDP
Source: Bloomberg, Candor Research
Sri Lanka has a low intensity for formal finance
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Singapore Australia Japan India South Korea Malaysia Thailand Sri Lanka
Private Sector Credit/GDP
Source: Bloomberg, Candor Research
Below average banking contribution for GDP
0%
50%
100%
150%
200%
250%
Singapore Australia Japan India South Korea Malaysia Thailand Sri Lanka
LCB Lending/GDP LCB Deposits/GDP
Source: Bloomberg, Candor Research
Sri Lanka has a low degree of sophistication in
banking sector
0%
20%
40%
60%
80%
100%
120%
Australia China Indonesia South Korea Singapore Thailand Sri Lanka
Currency/M1
Source: Bloomberg, Candor Research
08
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INITIATION REPORT | UNION BANK OF COLOMBO PLC
UBC’s competitive positioning
UBC caters to the corporate, retail & SME segments whilst providing a range of
financial solutions. Price competition amongst the banking peers has intensified
amidst the recent low interest rate regime. Hence, UBC as an emerging player
follows a product differentiation strategy in order to gain a competitive advantage.
The bank “Viyaparika Saviya’ free advisory service and multiple value additions have
aided to gain a competitive advantage within the SME & retail segments. In addition,
the “Elite banking service” assists to cater to the high net worth individuals.
Furthermore, through National Asset Management Limited (NAMAL), the bank
provides an inclusive financial solution to the masses and high net worth individuals
whilst gaining a noteworthy competitive edge over their peers. UBC’s competitive
advantage lies on TPG’s expertise and management competencies. Therefore, going
forward with prudent cost management structures we expect the bank to
implement a hybrid strategy by incorporating cost leadership and product
differentiation.
Porter’s Generic Strategies
Cost Leadership Differentiation Focus
Siz
e o
f M
ark
et
Larg
e
Commercial Bank of
Ceylon
Bank of Ceylon
People's Bank
Nations Trust Bank
Union Bank of Colombo
Hatton National Bank
Pan Asia Banking Corporation
Seylan Bank
Sampath Bank
NDB Bank
Sm
all
Nations Trust Bank
HSBC
Standard Chartered Bank
Citi Bank
Habib Bank
MCB Bank
Amana Bank
UBC’s lending book grew by 38% during 2Q2015
compared to industry average of 22%
Only 4 commercial banks managed to improve their
market share during 1H2015, & UBC is one of them.
COMB & NTB follow a cost leadership strategy
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
COMB AWPR (%) HNB AWPR (%) NDB AWPR (%) NTB AWPR (%)
SAMP AWPR (%) SEYB AWPR (%) UBC AWPR (%) PABC AWPR (%)
Source: CBSL, Candor Research
Source: Candor Research
Industry growth rates & UBC’s market share
2012 2013 20141Q2015 (YoY) 2Q2015 (YoY)
Lending growth (LCB) 22% 9% 12% 19% 22%
UBC's lending growth 17% 23% 13% 17% 38%
Deposits growth (LCB) 20% 16% 12% 11% 13%
UBC's deposits growth 20% 24% 3% 6% 9%
Net profits growth (LCB) 34% -7% 12% 18% 19%
UBC's net profits growth 54% -80% -21% 64% 27%
UBC's Market Share
Lending 0.77% 0.88% 0.89% 0.94% 1.02%
Deposits 0.78% 0.83% 0.76% 0.79% 0.79%
Source: CBSL, UBC, Candor Research
Competitor analysis- market share (lending)
2011 2012 2013 2014 1H2015
BOC 24.80% 25.92% 25.26% 23.21% 23.13%
PB 25.00% 26.17% 25.11% 22.65% 22.59%
COMB 13.99% 13.65% 13.86% 14.92% 14.24%
HNB 11.34% 11.01% 11.77% 11.95% 11.97%
SAMP 7.76% 7.81% 9.02% 9.23% 9.33%
NDB 4.12% 3.98% 4.58% 5.22% 5.00%
SEYB 5.01% 4.70% 4.68% 4.69% 4.54%
NTB 2.73% 2.69% 2.76% 2.92% 2.85%
PABC 1.57% 1.59% 1.53% 1.83% 1.93%
UBC 0.81% 0.77% 0.88% 0.89% 1.02%
Source: Bank’s Annual Reports, Candor Research
09
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
INVESTMENT OVERVIEW
We initiate coverage of Union Bank of Colombo with an Accumulate
recommendation. Notably, we recommend UBC for investors with a long term
investment horizon. Over medium term, we do not see an impetus for the counter
amidst thin ROE levels. However, over long term horizon we expect the counter will
attract noteworthy investor attraction through following value catalysts.
Basel 3 capital and liquidity reforms ║ UBC resilient over peers
The Basel committee on banking supervision introduced the Basel 3 frame work in
2010 with improved measures to establish a resilient global banking system. Basel 3
comprised with revised capital frame work, which aims at developing a higher
quality and quantity capital base within the banking system. In addition, it aims at
improving the liquidity requirements and risk absorption capabilities of the banking
system as well.
The new capital and liquidity reforms under Basel 3
Higher quantity and quality of capital - Banks are required to hold more
common equity in order to ensure higher quality and quantity of capital as
reflected in Appendix 2.
Regulatory leverage ratio - With effect from 2018, the core capital should
range between 3% to 4% of the total balance sheet assets including on-
balance sheet and off-balance sheet assets. This ratio was introduced to
curtail excessive expansion of a bank’s balance sheet.
Liquidity coverage ratio - banks are required to maintain high quality
unencumbered liquid assets compared to cumulative net cash outflows
for a 30 calendar day time horizon. Basel committee will implement this
ratio on a progressive basis up until 2019.
Net stable funding ratio - this is aimed at coping with possible structural
mismatches in the composition of balance sheet assets and liabilities over
a one year horizon. The ratio compares the total sources of funds with
maturity greater than one year with the portion of stable non maturity
deposits and the less liquid assets. This ratio must at least be 100% and
implement from 2018 onwards.
Capital conservation buffer will be implemented from 2016 onwards
comprising common equity in order to protect the depositors against
shareholders in periods of stress. Basel committee will impose restrictions
on return distribution for banks with less capital conservation buffers.
Countercyclical buffer - Imposed within a range of 0%-2.5% comprising
common equity, when authorities’ judge an excessive credit growth is
existed, resulting in an unacceptable build up of systematic risk.
Regional peers including India, Singapore & Malaysia have already issued directions
for the Basel 3. Hence, we believe the CBSL will issue necessary directions
(directions have already been issued on Liquidity Cover Ratio) over 1 year horizon in
line with international standards. Basel 3 initiatives will undoubtedly impact the
profitability of the Sri Lankan banking system through its range of new and more
strict regulations. The probability of an increased intensity is high as the CBSL has
historically imposed capital buffers above the Basel requirements. Thus in the long
term horizon banks will experience pressures on their ROEs and NIMs due to the
stringent capital and RWAs under Basel 3. Given the more stringent capital
10
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
requirements, banks with thin capital adequacy levels need to plan on capital
infusion initiatives whilst restructuring their lending & investment strategy.
UBC’s lending growth will flow without any distortion as opposed to its peers
We estimated the capital adequacy levels of key industry peers by assigning
different lending book growth targets. Relative to peers we have assigned higher
risk weighted assets levels on UBC amidst forecasted excessive lending growth.
Even under such circumstances UBC stands well above the regulatory requirement
compared to its peers. This indicates the bank’s ability to achieve superior ROEs over
long term horizon whist preserving strong lending growth momentum. In addition,
we believe the counter will be able to cater different market segments including
high yield segments amidst strong capital buffers. From a shareholder perspective,
UBC will be an attractive investment as the bank always maintains the capital
adequacy levels above the capital conservation buffers. This confirms the absence of
any restrictions on the bank’s capital redistribution over long term horizon.
UBC’s lending strategy – Focusing more on Retail & Corporate with balanced SME
Over the long term horizon we expect the bank to establish a balanced credit
portfolio with a 40% exposure for corporate and 30% each for retail & SME segments
respectively. As such the UBC’s lending growth will primarily be driven through the
retail segment whilst managing the corporate lending segment at a healthy level.
Notably, we expect this will generate a substantial fee base income since the retail
focus lending strategy would increase the bank’s transaction volumes. Presently, the
entire branch network and product portfolio is being revamped since the retail
segment is embedded with high transaction cost and credit risk compared to
corporate and SME segments. Therefore, we presume the bank will cater to
creditworthy retail and corporate clientele despite the strong capital buffers. The
term loans will dominate the credit portfolio by providing multiple lending solutions
to retail and corporate segments. With respect to the corporate segment, over long
term horizon the bank’s strategic focus areas would be tourism and power sectors.
Further, we are of the view that Sri Lanka’s tourism sector has a room to grow
further due to the prevailing weaker accommodation capability in Sri Lanka. Thus,
the industry players will implement strategic investments over long term horizon to
uplift the service offerings and customer satisfaction. Going forward the proposed
lending strategy will intensify the bank’s lending growth and fee base income whilst
minimizing the credit risk.
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC
2015E 2016E 2017E 2018E 2019E
Core CAR Tier 2 CAR Core CAR 1 (Basel 3) Total CAR (Basel 3) Total CAR + Capital Conservation Buffer (Basel 3)
UBC resilient over peers in terms of Capital Adequacy
Source: Basel 3 framework, Banks’ Annual Reports & Candor Research
Well balanced portfolio over long term horizon
70%
30% 40%
50%
10%30%
40%
30%
SME Banking Corporate banking Retail banking
Lending Book (before TPG)Current
Lending Book
Lending Book (over next 5Y)
Source: UBC, Candor Research
11
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
TPG’s proven track records in Asian region banking industry ║ Eminent
business turnaround ahead in Sri Lanka
TPG capital, formerly Texas Pacific Group, is an American based leading global
private equity firm with USD 74.3Bn of capital under management. The firm’s
investments span across a range of industries including financial services, travel &
entertainment, technology, industrials, retail, consumer products, media &
communications, and healthcare. TPG’s investment philosophy ranges from
traditional steady buyouts to turnarounds to strategic partnerships. Currently the
firm has a presence in 10 countries with an extensive track record in management
turnarounds.
A Case Study- Success stories in private equity literature
TPG revamped the Shenzhen Development Bank (SDB) from bankrupt creditor to
china’s one of the trusted lender from 6 year period
Shenzhen Development Bank (SDB) was established in 1987 as a regional state
owned commercial bank. At end of 2002, 72.4% of the SDB’s shares were held by the
public and 27.6% were held by Shenzhen government controlling entities. As a result,
local entities owned most of the SDB’s non tradable shares and they were also the
bank’s own borrowers. This led to biased lending practices while lending to risky
borrowers as well. As a result the NPL ratio surged to 11.6% compared to the
industry average of 7.3%. However, the bank’s extensive national network in China
(225 Branches) attracted the attention of Newbridge capital (A joint venture created
by TPG to invest in emerging markets) despite the depressed assets quality. In 2004,
Newbrigde capital acquired 17.89% of non tradable shares in SDB with an
investment of USD 150Mn. Consequently TPG gained the right to appoint 8 of 15
board members. SDB was bought at roughly 1.6x the book value when it was trading
at 4x in the market mainly due to its poor assets quality coupled with TPG’s proven
track records in Banking Industry.
Newbridge capital appointed
Mr. John Langlois, a Morgan
Stanley executive in China,
and Mr. Jeffrey Williams, the
former CEO of Standard
Chartered Bank in Taiwan as
the new chairman and
president of the SDB. However,
Mr. Frank Newman, a former
US deputy treasury secretary,
became SDB’s chairman and
CEO after Mr. Langlois
resigned a year later.
Newbridge capital was able to
strengthen the SDB’s branch
network, cultivated a strong
credit culture, and improved its
balance sheet with the TPG’s
global expertise and strategic
initiatives from top
management.
TPG revamped SDB within a 6 year period
Source: Bloomberg, Candor Research
SDB capitalized the Chinese banking space
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2004 2005 2006 2007 2008 2009 2010 2011
SDB TA/ LCB TA
Source: Bloomberg, candor Research
SDB’s share price grew at a 5Y CAGR of 37%
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
1/2/2004 1/2/2005 1/2/2006 1/2/2007 1/2/2008 1/2/2009
SDB Share Price (CNY)
Source: Bloomberg, candor Research
RMB. Mn 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Interest Income 2,428 3,315 3,498 5,342 5,322 7,099 9,807 13,024 13,565 16,058
Net Income 380 387 425 331 286 1,412 2,650 614 5,031 6,247
EPS 0.07 0.07 0.07 0.06 0.05 0.24 0.42 0.09 0.70 0.82
NAV 0.72 0.74 0.75 0.74 0.87 1.13 1.89 2.29 2.86 4.13
Total Loans 70,072 112,613 131,370 126,195 156,103 182,182 221,814 283,741 359,517 407,391
Loan Growth 79.00% 60.71% 16.66% -3.94% 23.70% 16.71% 21.75% 27.92% 26.71% 13.32%
Total Deposits 86,464 113,219 141,157 165,703 200,812 231,140 280,142 359,359 452,866 560,691
Deposits Growth 67.00% 30.94% 24.68% 17.39% 21.19% 15.10% 21.20% 28.28% 26.02% 23.81%
Profitability & Efficiency
ROE 9.43% 9.06% 9.76% 7.57% 6.08% 24.19% 27.04% 4.18% 27.29% 23.28%
ROA 0.41% 0.27% 0.24% 0.17% 0.14% 0.58% 0.86% 0.15% 0.95% 0.95%
NIMs 3.16% 2.69% 2.07% 2.90% 2.80% 3.24% 3.67% 3.66% 2.98% 2.89%
Cost to Income 65.95% 65.44% 61.73% 50.54% 52.27% 48.49% 46.56% 43.93% 49.72% 48.39%
Revenue per Employee 0.84 1.04 1.02 1.35 1.34 1.68 2.26 2.75 2.15 2.35
Liquidity & Credit Quality
Loans to Deposits 81.04% 99.46% 93.07% 76.16% 77.74% 78.82% 79.18% 78.96% 79.39% 72.66%
NPA/ Assets Ratio N/A N/A 5.77% 7.28% 6.55% 5.58% 3.54% 0.41% 0.42% 0.33%
Gross NPL Ratio N/A N/A N/A 11.40% 9.30% 7.98% 5.62% 0.68% 0.68% 0.58%
Capital Adequacy
Core CAR N/A N/A 3.24% 2.32% 3.71% 3.68% 5.77% 5.27% 5.52% 7.10%
Total CAR N/A N/A 6.96% 2.30% 3.70% 3.71% 5.77% 8.58% 8.88% 10.19%
Multiples
PER 61.25 52.45 38.68 38.77 40.93 20.10 30.39 47.30 15.04 8.31
PBV 5.65 4.73 3.77 2.95 2.35 4.27 6.81 1.79 3.70 1.66
No. of Employees 5,089.00 5,834.00 6,471.00 6,999.00 7,142.00 7,737.00 8,573.00 10,381.00 11,308.00 12,203.00
Before TPG’s investment TPG exited
from SDB
12
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
The bank established strategic partnership with various firms (China National
Foreign Trade Transportation Corporation, China Southern Airlines, Air China, etc) to
penetrate the market whilst promoting cross- selling as well.
Through the collaboration with Bain & Company, a leading management
consultation firm, the bank restructured its business flow in order to further
streamline the processes. In addition, the bank remodeled their branch outlets to
upgrade the customer service. Further, the back office functions including
accounting clearance, retail, treasury and inter-bank business have been integrated
whilst minimizing operational risk. As a result in 2008, the bank has successfully
prevented 11 cases which could have caused a potential loss of RMB 53.51Mn.
The bank has also implemented the ‘Project Excellence’ program in 2008 with a
partnership of McKinsey & Company to restructure the management processes,
credit management and internal controls since the TPG’s prime objective was to
build a resilient credit portfolio. The bank has established rigorous credit rating
systems and early warning systems. In addition, SDB has initiated centralized
independent credit approval centers by streamlining the credit approval process.
The professional NPL collection and disposal team was developed in order to create
a strong credit portfolio. With these prudential initiatives, the bank was able to
successfully endure against the global financial crisis in 2008. The Bank had no
investments related to subprime mortgages or similar assets in overseas financial
institutions. This ensured that SDB was not directly affected by the global crisis in
subprime mortgages or the underperformance of institutions carrying them.
However, SDB had made large special provisions worth of RMB 7.3Bn in 2008
compared to RMB 2.05 in 2007 as per the request made by China’s regulatory
authority amidst global head winds. As a result, the bank’s net profit dipped to RMB
614Mn despite strong core business operation. Due to the strong risk mitigating
initiatives, the bank was awarded as the best risk management bank in China in
2008 at the 2nd annual conference for institutional investors and China times
selection awards.
Over the six years under TPG’s control, SDB’s net profit grew with 5Y CAGR 72%
from RMB 331Mn in 2004 to RMB 5,031Mn in 2009. Its NPL ratio dropped down from
11.40% to 0.68% (best in China), and its total CAR went up from 2.30% to 8.88%.
Furthermore, SDB’s share price grew at a 5Y CAGR of 37% from 2004 to 2009. TPG’s
success in enhancing SDB’s financial performance enabled the firm to exit its
investment with a highly lucrative stake sale. In 2010, TPG was able to sell its entire
stake in SDB to Ping An Insurance Group a leading Chinese Insurer for a total of USD
2.41Bn, which was 16 times its original investment. TPG is one of the few US private
equity firms which recorded such lucrative exits.
TPG revamped the Korea First Bank (KFB) within 6 years period
Adding further to the TPG’s track records, in 1999, Newbridge bought a 51% stake in
Korea First Bank (KFB) for USD 417Mn, becoming the first foreign owner of a South
Korean bank. By redesigning the bank’s branch network, centralizing its credit
approval system, and revamping its operational practices, Newbridge was able to
transform Korea First Bank to a South Korea’s one of the most superior commercial
banks. TPG has managed to reduce the gross NPL ratio from 7.31% to 1.50% while
improving the cost to income ratio from 109% to 67%. Six years later, KFB was sold to
Standard Chartered for USD 3.25Bn, a near seven fold return. These two cases were
recognized as prominent success stories in private equity literature.
Strategic initiatives by TPG in Korea First bank
Centralization of the back office functions
Waiver on all ATM fees for customers to uplift the transactions
New investment products with the strategic alliance with
Templeton Investment Management Company
Initiate a media campaign with a tag line of "Where I am the
First"
Moody's and S&P's upgraded the credit system and bank
lending practice shifted from collateral basis to credit ratings
and future cash flow analysis
Introduction of “SellStation” which combined diverse functions
including platform, lending and teller functions. This aids in
customer-related inquiries, cross-selling and results
management.
Customer relationship management system has introduced in
order to mapping customer needs by establishing a central
data warehouse.
A revamp of the Bank's web site and promote online banking to
improve the customer interaction
Introduction of premier banking unit called “Platinum Banking
Group”
Introduction of Business Continuity Planning (BCP) Disaster
Recovery System, a first in the banking industry for Korea
Introduction of “First BankOn” mobile service. This service uses
a mobile phone with an embedded IC Card to provide speedy,
easy and secure financial transactions anytime and anywhere.
13
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
Eminent business turnaround ahead in Sri Lanka
In 2014, TPG, through its affiliate, Culture Financial Holdings Ltd., acquired 70%
equity in UBC with a consideration of LKR 15.30 per share. TPG has restructured the
entire management team and board of directors of UBC. TPG appointed Dr. P.J
Nayak, formerly chairman & CEO of Axis Bank Ltd, as a new chairman who
renowned as a visionary banker in India. Currently, 6 board members out of 15 were
appointed from TPG capital. Notably, Mr. Ranvir Dewan, former executive vice
president & CFO of Korea First Bank (KFB) and Mr. Michael J O’Hanlon, formerly
independent director of Shenzhen Development Bank (SDB), also in the UBC’s
Director Board. Further, the entire top management team has been reorganized by
recruiting diverse industry experts from different leading Commercial Banks (NDB,
SEYB, SAMP, HSBC etc). The bank is now equipped with proficiency from TPG and
McKinsey & Company to mark a legendary business turnaround in Sri Lanka. Given
TPG’s above average exit multiples (SDB-16 folds, KFB-7 folds), we believe the UBC
will be a sensible investment for investors with a long term investment horizon.
Strong technological platform ║ ‘Silverlake’ core banking system
UBC has invested heavily on technological innovations including an advanced core
banking system. The ‘Silverlake’ system allows a bank to deliver superior business
experience to its customer across all channels in a consistent manner. In addition, it
facilitates a centralized customer data base allowing customer loyalty programs and
cross-selling. Furthermore, it improves the operational efficiency by centralizing all
the business processes. ‘Silverlake’ will also assist the bank in reducing transaction
costs by providing enterprise level efficiencies. Hence, this places UBC in a stronger
position to capitalize on growth opportunities across its channels including mobile
banking, digital banking etc. Over the long term horizon the new core banking
system will improve the bank’s operational efficiency as this is the first instance
where the bank has unveiled an advanced core banking system. Therefore, going
forward, we believe this may positively impact on UBC’s currently depressed cost to
income ratio.
Prospects on prudential credit risk management ║ McKinsey & Company will
drive the credit culture
UBC’s current assets quality is subdued with a reported Gross NPL ratio of 4.87% and
nearly 48% of the bank’s lending book categorized under a BBB rating. The SME
focused lending strategy would be the main factor for weaker assets quality.
However, with the expertise from McKinsey & Company we expect prudent
initiatives on credit risk management to be put in place over longer term horizon.
Considering the McKinsey & Company’s proven track records in Shenzhen
Development Bank (SDB), we expect a healthy lending book over long term horizon.
Furthermore, the proposed quality retail and corporate focus lending strategy will
aid to achieve a healthy lending book as well. Therefore, we believe this will
positively affect the UBC’s weaker assets quality whilst minimizing the impairment
charges over long term horizon.
Weak credit quality but promising outlook
21%
2%
2%
24%
48%
3%
A
AA
AAA
B
BB
BBB
Others
Source: UBC, Candor Research
14
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
INVESTMENT RISKS
Upside risks
Economic ║ Thriving private sector credit growth (E1)
Credit extended to private sector by Commercial Banks accelerated to 21% (YoY) in July 2015, up
from 1% (YoY) on corresponding period 2014. The CBSL is expected to continue the same
momentum through maintaining all time low level policy rates and healthy excess liquidity levels.
In addition, going forward we expect an expansion in construction and housing sectors with
stable political environment which further accelerate the private sector credit growth. As such, if
these developments persist, our forecast lending growth on UBC can be slightly higher than
expected.
Economic ║ Capital market development (E2)
Capital market development creates a mixed impact on UBC compared to peers due to the bank’s
unit trust operations. Total unit trust investments grew by 109% during 2014. Hence, going
forward this will create an immense opportunity for the bank’s unit trust operations. However, we
do not expect a significant impact on the bank’s deposit growth amidst UBC’s market penetration
strategies coupled with growing national savings. In 2014, national savings to GDP ratio surged
to 27% from 25% in 2013.
Downside risks
Industry ║ Increased ICT banking services (I1)
Sri Lanka’s total internet connection grew by 68% (YoY) during 2014 supported by a sizable 85%
(YoY) growth in mobile connections. This has led to an increasing usage of ICT services such as
E-banking, mobile banking etc. Thus, this creates a greater challenge to the Sri Lankan
commercial banks in terms of customer retention and technological innovations. However, in line
with the industry trend, UBC has introduced internet banking and mobile banking with greater
customer convenience. We therefore do not believe this represents a material risk to the bank.
Economic ║Possible restrictions on vehicle importation (E3)
Sri Lanka recorded a BOP deficit of USD 791.7Mn during 1H2015 compared to a surplus from 2012
to 2014. This is primarily due to the favorable vehicle importation policies through the interim
budget 2015 coupled with subdued export performances. Hence, over the medium term horizon
we expect tightening measures on vehicle imports to provide a cushion for BOP crisis. In addition,
the newly introduced cap on loans & advances for motor vehicles with a maximum LTV ratio of
70% will further discourage the vehicle importation whilst negatively affecting the leasing
segment. Since UBC’s exposure on leasing & hire purchases is at 9%, this possess a sizable risk to
the bank.
Economic ║ Local currency depreciation (E4)
The CBSL has stopped quoting reference on exchange rate and allowed market to determine the
exchange rate from 4th September 2015. However, LKR/USD rate is fairly stable, trading within a
range of LKR 137/- to LKR 141/- from 04/09/2015-16/10/2015 with a standard deviation of 0.44%.
Since Sri Lanka is an import dependent country we believe the CBSL will control any excessive
volatilities and execute necessary interventions. The bank has managed the exchange rate risk
through net open position limits, trading limits, dealer limits etc. Hence, we do not believe this
creates a material risk to the bank amidst the bank’s thin off-shore operations.
E1
Mediu
m
E2 E3
I1
E4
Medium
S
ignific
ance o
f Ris
k
Probability of Risk
Low High
H
igh
L
ow
Source: Candor Research
Risk Matrix
15
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
VALUATION
No major catalyst over one year horizon
Our one year target price of LKR 24.50 has been derived by using two valuation
measures, the PBV multiple analysis & Residual Income Valuation. The methods
were weighted at 70% and 30% respectively. We have assigned a higher weight on
Price to Book Value considering the industry dynamics. We are of the view that
UBC’s share price will remain sluggish over 1 to 2 year horizon due to thin ROE
levels. However, considering TPG’s proven track records together with expected
muted growth in the banking sector peers amidst Basel 3 capital reforms; we believe
the counter would be an attractive stock over long term horizon. Furthermore, at
current market price of LKR 22.20/- the counter may generate a 10% upside over one
year horizon with a target price of LKR 24.50.
PBV multiples
At the current market price of LKR 22.20, the counter is trading at 137.69x earnings
and 1.48x book value on FY2015E. The counter is trading between 0.8x to 1.2x book
value from 1Q2012 to 4Q2013, however subsequently the counter was trading at 1.2x
to 1.8x despite higher earnings multiples. Therefore, given the continued
consolidation of the market share & promising outlook in CASA, Asset Quality, ROE,
Cost to Income, Capital Adequacy etc, it is our view that UBC ought to trade at a
premium to the historical book value multiples; this suggests a one year target price
of LKR 27.00.
Residual Income Valuation
We have utilized the Residual Income Valuation as the secondary valuation method.
The valuation considers a forecast period up to FY2022E. A relatively long explicit
forecast horizon was applied, such that the effects of Basel 3 reforms and positive
outlook on the industry could be adequately imputed in to the model. We have
utilized a cost of equity of 14.0% and terminal growth of 5% in deriving the one year
target price of LKR 18.75. A relatively high terminal growth rate has assigned
considering the long term prospect of the counter.
Interest income assumptions
UBC’s interest income predominately depends on the average lending rates
and UBC’s lending book growth. Through FY2012 to FY2014 the average
lending rates have been ranging from 10.8% to 14%. However, over long term
horizon we expect the CBSL will maintain the low interest rate regime in order
to stem the GDP growth. As such, we expect the average lending rate will drop
to 9.7% by FY2022E. UBC’s lending book growth assumption depends on the
LCB’s lending to GDP ratio and UBC’s market share (Lending). From FY2017E
onwards we expect the country’s GDP will grow at an average rate of 7.10% till
FY2022E. Given the low penetration levels, we expect the LCB’s lending to
GDP ratio will increase to 90% in FY2022E from 49% in FY2015E which is par
with the regional counter parts. Finally, we take a positive view on UBC’s
market share in lending in light of strong capital buffers and the bank’s
Method Value (LKR) Weight
PBV 27.00 70%
Residual Income 18.75 30%
Price 24.53
Valuation Methodology
13.0% 13.5% 14.0% 14.5% 15.0%
3% 20.32 18.66 17.17 15.82 14.60
4% 21.38 19.53 17.88 16.40 15.07
5% 22.70 20.60 18.75 17.11 15.65
6% 24.41 21.96 19.84 17.99 16.35
7% 26.68 23.75 21.24 19.09 17.23
Cost of Equity
Term
inal G
row
th
Sensitivity to TGR & Cost of Equity
Historical PBV Band
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
FQ
1 2
011
FQ
2 2
011
FQ
3 2
011
FQ
4 2
011
FQ
1 2
012
FQ
2 2
012
FQ
3 2
012
FQ
4 2
012
FQ
1 2
013
FQ
2 2
013
FQ
3 2
013
FQ
4 2
013
FQ
1 2
014
FQ
2 2
014
FQ
3 2
014
FQ
4 2
014
FQ
1 2
015
FQ
2 2
015
Share Price 2x 1.8x 1.6x 1.4x 1.2x 1x 0.8x
Source: Bloomberg
Source: Candor Research
16
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
aggressive market penetration strategies through product revamping, branch
expansions etc. As such, market share expect to increase from 0.89% in FY2014
to 1.61% in FY2022E. Thus, we expect the bank’s interest income will grow at a
7Y CAGR of 21% from FY2015E to FY2022E.
Warrant conversion
For modeling purposes, we expect the TPG will exercise 218.28Mn warrants at
price of LKR 16/- during FY2019E. As a result, the cash infusion will amount to
LKR 3.5Bn. Therefore, in our valuation we have factored the warrant
conversion from FY2019E onwards.
Minimal downside risk over one year horizon, possible entry point at current market
price
Our one year valuation on UBC is derived predominately considering the prospects
of the industry curtsey of a positive outlook on the GDP growth and thin banking
industry penetration levels. In addition, UBC’s continuous consolidation of the
market share amidst strong capital buffers also affects on our valuation. We expect
the CBSL will maintain a low interest rate regime over long term horizon to stem the
GDP growth. Further, the bank’s continuous improvement in the assets quality
through the support of McKinsey & Company will provide a strong buffer against
volatilities in credit quality.
With respect to the UBC’s consolidation of market share, the major concern is with
respect to the subdued operating efficiency since this can negatively impact the
bank’s earnings. However, through the bank’s strategic investments on advanced
systems & processes coupled with the branch cost optimization strategies, we
believe the cost to income ratio will curtail up to 39% from 81% levels over long term
horizon.
To analyze the robustness of our analysis, we performed a series of sensitivity
analyses on cost of equity and terminal growth rate, as well as macroeconomic and
industry factors (Appendix 5). However, as sensitivity analyses are not probability
weighted, we complemented this study with a Monte Carlo simulation for Residual
Income Valuation. In examining changes in average lending & deposits rates,
lending book & deposits growth rates, LCB’s lending to GDP ratio, UBC’s market
share, risk weighted assets and GDP growth assumptions within 10,000 trials, and
the resulting distribution provides a tight price range of LKR 18.31 to LKR 19.18 with
95% probability. This confirms that the major downside risk of the counter over one
year horizon is minimal. Thus, considering the positive long term outlook on the
counter, we believe the current price levels present a possible entry point.
Probability Target Price (LKR)
5% 18.31
15% 18.48
25% 18.57
35% 18.65
45% 18.72
55% 18.79
65% 18.85
75% 18.93
85% 19.02
95% 19.18
Source: Candor Research
Monte Carlo Simulation
Source: Candor Research
--- Value per ordinary share
17
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
Sturdy Long Term Valuation Fundamentals – Sound
investment for an investor with a long-term
investment horizon
Our long term target price ranges between LKR 41.00 to LKR 45.00 in long term horizon, expecting
the counter to be priced at 11x on forward earnings and 2x on forward book value, backed by strong
fundamentals under conservative assumptions as depicted in table below.
2015E 2016E 2017E 2018E 2019E 2020E 2021E
Multiples
EPS 0.16 0.28 0.50 1.03 1.58 2.64 3.73
NAV 14.99 15.27 15.77 16.59 17.71 19.82 22.81
PER 137.69 79.37 44.46 21.57 14.01 8.41 5.95
PBV 1.48 1.45 1.41 1.34 1.25 1.12 0.97
Forecasted DPS - - - 0.21 0.32 0.53 0.75
Dividend Yeild 0.00% 0.00% 0.00% 0.93% 1.43% 2.38% 3.36%
Underlying Fundementals
ROE 1.08% 1.85% 3.22% 6.36% 10.05% 14.07% 17.50%
CASA Ratio 24.05% 27.16% 29.47% 32.53% 35.67% 38.94% 42.34%
NIMs 4.23% 3.98% 3.95% 3.88% 3.73% 3.76% 3.74%
Lending Book Growth 49.32% 23.43% 22.24% 28.00% 24.15% 26.52% 22.49%
Tier -1 Capital 27.27% 22.71% 20.63% 18.30% 16.91% 16.07% 15.91%
Cost to Income 78.67% 76.69% 72.05% 64.13% 54.68% 46.38% 40.94%
Target Price
PBV Basis
Target Price @ 2x PBV 39.65 45.62
Target Price @ 1.9x PBV 37.67 43.34
Target Price @ 1.8x PBV 35.68 41.06
Target Price
PER Basis
Target Price @ 11x PER 29.05 41.04
Target Price @ 10x PER 26.41 37.31
Target Price @ 9x PER 23.77 33.58 Source: Candor Research
(LKR)
(LKR)
(x)
(x)
(LKR)
18
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
FINANCIAL ANALYSIS
Bank’s NIMs will remain under pressure
UBC was initially positioned as a preferred bank for SME financing with an exposure
of 70% of the total lending book to SME financing. This has led for a superior NIMs
(2011- 4.56%, 2012-4.31%) from FY2011 to FY2012. In addition, the bank’s substantial
exposure on high yielding pawning segment (2011- 8.40%, 2012- 11.17%) also
contributed for superior NIMs. However, despite the sizeable exposure on high
yielding segments the bank’s NIMs has fallen to 3.51% during FY2013 due to the
accumulation of non-performing loans (Gross NPL- 8.24%). With TPG’s strategic
acquisition the bank’s lending book has been revamped to build a quality lending
book with a 50% exposure to the corporate segment. This has narrowed the bank’s
NIMs to 3.97% in 2Q2015, down from 4.20% in FY2014. In addition, downside re-
pricing of the lending book (90% floating rate lending book) compared to deposits
base (CASA ratio- 24.65%) amidst low interest rate environment further dragged
down the bank’s NIMs. Going forward we expect the bank’s NIMs will remain under
pressure due to the prevailing competition within the corporate segment coupled
with the bank’s sluggish penetration on subprime segment in order to maintain a
quality lending book. However, notably the bank’s net interest income grew at a 3Y
CAGR of 24.4% from FY2011 to FY2014 whilst industry growth was 11%. We expect
the bank’s net interest income to grow at a 7Y CAGR of 20% from FY2015E to
FY2022E amidst the bank’s continues expansion strategies and product innovations.
Further, we expect any short term interest rate hike may positively impact on net
interest income amidst positive re-pricing gaps due to 90% loans are in floating rate
basis.
CASA ratio at moderate levels but outlook promising
The bank’s CASA ratio peaked at 27.06% in FY2011. However the ratio was stagnant
since FY2012 with a CASA ratio to fall at 18.59% during 2Q2014. Lack of product
innovations coupled with SME focused business model dragged down the bank’s
low cost funding ability. However, from 3Q2014 onwards the CASA ratio regained
the growth momentum and currently stands at 24.65%. The bank‘s aggressive focus
on corporate & retail segments together with product innovations (Salary Select,
Salary Power) following the TPG’s acquisition contributed for slightly improved
CASA ratio. Going forward, we expect the CASA ratio will surge to 46% in FY2022E
due to the bank’s continuous branch & offsite ATMs expansion strategy.
Subdued operating efficiency but favorable direction
Currently the bank maintains a subdued operating efficiency with a depressed cost
to income of 81.2% (Industry Average- 52.3%) due to the bank’s investments on core
banking system (‘Silverlake’) and ancillary systems (Kalypto risk management
system, ALCO system etc.). However, with the new systems, UBC will be able to
centralize their entire back office functions over 1 year horizon. Therefore, together
with branch optimization strategies we expect the cost to income ratio to improve
from 79% in FY2015E to 39% in FY2022E. Notably, the branch productivity measured
by revenues per branch improved from LKR 39.5Mn in FY2013 to LKR 44.9Mn in
FY2014.
Bank’s NIMs remained under pressure
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
2011 2012 2013 2014 2015E 2016E 2017E
NIMs (Bank)
Source: UBC, Candor Research
Promising outlook on CASA
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2012 2013 2014 2015E 2016E 2017E
CASA
Source: UBC, Candor Research
Centralization will improve the operating efficiency
62%
64%
66%
68%
70%
72%
74%
76%
78%
80%
2012 2013 2014 2015E 2016E 2017E
Cost to Income
Source: UBC, Candor Research
19
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
Lending growth to accelarate due to strong capital buffers
The bank’s core CAR dropped down to 14.39% in 2Q2014 from 21.32% in FY2011. The
bank’s exposure on risky corporate and SME segments together with contraction in
zero weighted pawning portfolio dragged down the bank’s capital buffers. However,
through the TPG’s capital infusion, the bank’s core CAR surged to 54.24% in 3Q2014
and currently stands at 33.20%. We forecast the bank’s core CAR will dip to 15.88% in
FY2022E due to UBC’s aggressive lending plans. However, the capital buffers will
remain well above the Basel 3 requirements and will provide a substantial
competitive edge for the bank over its peers. Further, the bank’s continuous focus on
quality retail & corporate clientele will also enhance the capital buffers.
Impairment charges to gross loans ratio to improve further
The bank’s total impairment charges to gross loan ratio peaked at 6.32% in FY2013
due to the poor assets quality with a gross NPL ratio of 8.24%. However, under new
management the bank was able to curtail the ratio to 3.31% whilst successfully
improving the gross NPL ratio to 4.87% in 2Q2015. We expect the gross NPL ratio will
dip to 1.27% in FY2022E curtsey of McKinsey & Company and ‘Kalypto’ risk
management system.
ROE to reach at 14% in FY2020E
The bank’s ROE and ROA were depressed over the years amidst lackluster
performance of the bank. Currently, the bank’s ROE and ROA stands at 0.29% and
0.17% amidst LKR 11.4Bn equity infusion from TPG. However, we expect the bank’s
ROE and ROA will surge to 14% and 2% respectively in FY2020E which is relatively
par with the industry average. We believe TPG’s expertise will drive UBC’s bottom
line resulting in a 7Y CARG of 66% from FY2015E to FY2022E.
ADR will remain weak but minimal liquidity risk
We expect the bank’s lending book will grow at a 7Y CAGR of 24% from FY2015E to
FY2022E due to the bank’s aggressive market penetration strategies. Furthermore,
we expect the bank’s deposits growth also to stand at a 7Y CAGR of 24% to fund the
forecasted lending growth. Further, we believe the CASA deposits will dominate the
deposits growth over long term horizon amidst the bank’s CASA product innovations
and branch expansion strategies. However, over long term horizon we expect the
prevailing depressed ADR will maintain amidst healthy lending book growth. But we
do not expect this to intensify the bank’s liquidity risk since the UBC is in a position
to raise funds via debentures due to the available capacity in Tier 2 capital.
ROE to grow gradually
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
2012 2013 2014 2015E 2016E 2017E
ROE ROA
Source: UBC, Candor Research
ADR will remain weak but minimal liquidity risk
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
2012 2013 2014 2015E 2016E 2017E
ADR
Source: UBC, Candor Research
COMB HNB SAMP NDB NTB SEYB
ROE (FY2015E) 16.61% 15.67% 16.82% 14.03% 19.03% 13.82%
Industry peer ROEs
McKinsey & Company will pay dividends
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
2012 2013 2014 2015E 2016E 2017E
Total impairment to gross loans Bank Gross NPL Bank Net NPL
Source: UBC, Candor Research
Strong capital buffer to continue
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2012 2013 2014 2015E 2016E 2017E
Core CAR
Source: UBC, Candor Research
Source: Banks, Candor Research
20
© 2015 Candor Research
INITIATION REPORT | UNION BANK OF COLOMBO PLC
LCB’s contribution from fee based income continuously edging up
The contribution from fee & commission income has exhibited a continuous growth
over the last 3 years. The development of multiple payment channels, expansion in
the external sector, improved corporate advisory services and prevailing low interest
rate regime have fostered the fee & commission income growth. In addition, recently
customer convenience emerged as a key differentiator within the Sri Lankan
banking sector. As a result, the banking institutions have introduced new products
including credit cards, debit cards, e-banking, mobile banking etc which bring fee
base income. Nations Trust Bank has achieved the highest fee & commission 3Y
CAGR growth of 18% compared to their peers. The bank’s aggressive penetration of
credit cards & leasing segments aided for the considerable fee & commission income
growth. UBC as an emerging player recently launched a VISA international shopping
debit card in order to accelerate their fee & commission income. Going forward the
bank will focus on the offsite ATMs & credit card strategies to boost the fee based
income.
Contribution from fee based income continuously
rise
12.00%
12.50%
13.00%
13.50%
14.00%
14.50%
15.00%
15.50%
16.00%
16.50%
2011 2012 2013 2014 1Q2015 2Q2015
LCB's Fee income/Total Income
Source: Companies, Candor Research
21
Appendix
UBC
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
APPENDIX 01 KEY FINANCIAL DATA
Profit & loss (LKR Mn)Year ended December 2012A 2013A 2014A 2015E 2016E 2017ENet interest income 1,410.43 1,285.93 1,970.54 2,966.78 3,397.98 3,981.60 Net Fees & Commission Income 165.11 192.86 263.93 382.70 612.33 979.72 Net Trading Gain/Loss 3.70 120.95 96.05 110.46 132.55 159.07 Other Operating income 339.92 416.48 413.07 433.72 498.78 558.63 Total banking income 1,919.15 2,016.22 2,743.59 3,893.67 4,641.64 5,679.03 Total operating expenses 1,298.61 1,575.68 1,983.93 3,063.11 3,559.73 4,092.01 Provisions 71.93 292.43 526.53 442.62 493.02 535.73 Operating profit 548.61 148.11 233.14 387.94 588.89 1,051.29 Earnings from associates - - - - - - VAT 98.79 42.88 72.61 116.38 117.78 210.26 Tax expense (35.08) 6.16 82.33 76.04 131.91 235.49 NPAT- Recurring 484.89 99.07 78.20 195.52 339.20 605.54 NPAT including non recurring 484.89 99.07 78.20 195.52 339.20 605.54 Net profit attributable to equity holders 430.13 103.93 31.06 175.97 305.28 544.99
Basic EPS -Recurring 1.23 0.30 0.06 0.16 0.28 0.50 Book value per share 14.13 14.09 14.83 14.99 15.27 15.77 DPS 0.50 0.25 - - - -
Balance sheet (LKR Mn)Year ended December 2012A 2013A 2014A 2015E 2016E 2017EASSETSCash and Balances with central banks 2,469.68 2,182.00 2,689.34 3,148.53 1,923.65 1,746.82 Trading capital 433.04 990.66 2,588.62 3,622.41 4,346.15 5,214.70 Loans, advances & leases 20,907.22 25,347.78 29,217.86 44,463.57 54,952.78 67,286.82 Other assets 7,821.89 8,304.30 18,062.55 14,748.83 15,190.03 15,469.15 TOTAL ASSETS 31,631.83 36,824.75 52,558.37 65,983.34 76,412.61 89,717.49 LIABILITIESDeposits 23,725.60 29,462.27 30,323.85 39,356.60 48,091.19 58,227.33 Other liabilities 2,695.93 2,168.76 5,737.49 9,934.19 11,289.67 13,852.86 TOTAL LIABILITIES 26,421.52 31,631.03 36,061.34 49,290.79 59,380.86 72,080.19 EQUITYSHAREHOLDERS' FUNDS 4,936.05 4,920.19 16,184.67 16,360.63 16,665.92 17,210.90 Minorities 274.26 273.53 312.37 331.92 365.84 426.39 TOTAL EQUITY 5,210.31 5,193.72 16,497.03 16,692.55 17,031.75 17,637.30
Source: Company Data, HBSLKey perfomance indicatorsYear ended December 2012A 2013A 2014A 2015E 2016E 2017EEarnings and profitabilityBank Net interest margin (NIM) (%) 4.31 3.51 4.20 4.23 3.98 3.95 Non-interest income margin (%) 1.75 2.13 1.73 1.56 1.75 2.04 Cost to income ratio (%) 67.67 78.15 72.31 78.67 76.69 72.05 Norm'd NPAT growth (%) 53.92 (79.57) (21.07) 150.04 73.49 78.52 Norm'd EPS growth (%) 36.67 (75.61) (80.00) 168.72 73.49 78.52 Operating profit margin (%) 28.59 7.35 8.50 9.96 12.69 18.51 Tax rate (%) (7.80) 5.86 51.29 28.00 28.00 28.00 Total assets yield (%) 2.13 1.29 1.70 1.40 1.52 1.91 ROE (%) 9.09 2.11 0.29 1.08 1.85 3.22 ROA (%) 1.66 0.29 0.17 0.33 0.48 0.73
Capital adequacyTier 1 ratio (%) 17.73 14.15 35.95 27.27 22.71 20.63 Tier 2 ratio (%) 0.23 (0.04) (0.01) (0.01) (0.01) (0.01) Total capital Ratio (%) 17.96 14.11 35.94 27.26 22.70 20.62 Leverage ratio (x) 0.17 0.14 0.36 0.28 0.23 0.21
Asset qualityGross NPL ratio (%) 5.43 8.24 8.25 4.04 3.21 2.67 Net NPL ratio (%) 4.45 7.80 7.44 3.31 2.63 2.19 Individual impairment to gross loans (%) 1.51 3.86 2.49 1.50 1.41 1.30 Collective impairment to gross loans (%) 3.19 2.47 2.18 1.35 1.31 1.25 Total impairment to gross loans (%) 4.70 6.32 4.67 2.84 2.72 2.55 Loan growth (%) 16.73 23.34 13.27 49.32 23.43 22.24
LiquidityDeposit growth (%) 19.55 24.18 2.92 29.79 22.19 21.08 Loans to deposit ratio (%) 88.12 86.03 96.35 112.98 114.27 115.56
Valuation multiplesP/E (x) 11.22 55.33 421.67 137.69 79.37 44.46 P/BV (x) 0.98 1.18 1.71 1.48 1.45 1.41 Mcap/risk weighted assets (x) 0.18 0.19 0.67 0.43 0.35 0.30 Mcap/deposits (x) 0.20 0.20 0.91 0.62 0.50 0.42 Dividend yield (%) 3.62 1.51 - - - -
Source: Company Data, Candor Research
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
APPENDIX 02 BASEL 3 CAPITAL AND LIQUIDITY REFORMS
4.0% 4.5% 4.5% 4.5% 4.5% 4.5%
1.5%1.5% 1.5% 1.5% 1.5% 1.5%
2.5% 2.0% 2.0% 2.0% 2.0% 2.0%
0.6% 1.3% 1.9% 2.5%
0-2.5%
2014 2015 2016 2017 2018 2019
Core Tier 1 Capital Non-core Tier 1 Capital Tier 2 Capital Capital Conservation Buffer Countercyclical Buffer
Tier 1 Capital
2015 2016 2017 2018 2019
Liquidity Cover Ratio 60% 70% 80% 90% 100%
Source: Basel 3 framework, Candor Research
Stricter capital definition
Increased quality of Tier 1 capital through improving
the transparency of the capital base
Simplification and reduction of Tier 2 capital
Limits for capital components under Tier 1 capital
Increased RWAs
Higher capital requirements for trading book &
(re)securitizations
Higher capital requirements for counterparty credit
risk exposures arising from derivatives, repos and
securities financing activities
Increased risk weights on exposures to financial
institutions in order to address systemic risk within the
financial sector
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
UBC has maintained a fairly good concentration risk with HHI index of 0.1690 compared to the industry average of 0.1451.
APPENDIX 03 MINIMAL CONCENTRATION RISK
7%0%
27%
29%
9%
18%
10%
Financial Services
Government
Consumer
Retail & Wholesale
Construction
Manufacturing
Service
Well balanced lending portfolio – Industry wise
Source: UBC Annual Report
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
Competitive rivalry within industry- Moderate
The Sri Lankan commercial banking industry is highly concentrated with 74% of total assets and 82% of total gross loans captured by the 5
largest commercial banks. Competitive imitation by established rivals is high, which creates a lack of differentiation in products and
services. However, amidst advanced technology and customer empowerment, Sri Lankan commercial banks appear to have reached an
understanding not to compete on price but rather focus on seeking differentiation on other factors such as product features, brand image
and customer service, which are less likely to erode profitability. But, the competitive intensity is strong within retail and corporate lending
segments. This combined with the higher liquidity requirements under Basel 3 and places intense pressure on profitability. In addition, low
switching cost and barriers to exit from the industry creates a rivalry within the industry. Nevertheless, superior market growth rates
amidst thin market penetration levels have tamed the industry competition to an extent. But, going forward the industry players’ growth
momentum is questionable due to the stringent capital requirements under Basel 3. As a result, UBC is in a position to exploit the industry
growth opportunities owing to resilient capital adequacy levels and is able to withstand against the competition from large players.
LCBs- Highly concentrated industry
Threat of new entrants: Low
The commercial banking industry is highly concentrated with the top 5 banks making up more than 70% of the market. These banks
control the distribution channels through extensive national branch networks and the offering of sophisticated internet and mobile
banking tools. These banks benefit from economies of scale, which is why we believe the new entrants do not pose a meaningful threat.
The Sri Lankan commercial banking industry is highly regulated through various regulations including the Banking Act, Monetary Law
Act, Basel Committee directions and Companies Act. These rules and regulations have been imposed on risk management, branch
expansion, shareholding, financial reporting etc. The minimum capital requirement for domestic licensed commercial banks and branches
of foreign banks amounted to LKR 10Bn and LKR 5Bn respectively. The nature of the business and the strong positioning and track record
of the larger Sri Lankan commercial banks provides added benefits to existing players and further deters new entrants, as new entrants
cannot match the level of trust provided by the large commercial banks. The Sri Lankan commercial banks also enjoy strong brand
recognition within the country, which further deters new players from entering the market. Foreign banks can operate in Sri Lanka but
they must be separately incorporated and capitalized. This is an important entry barrier, as new entrants cannot easily get access to
distribution channels through acquisitions. In addition, strict guidelines for anti money laundering and the ‘know your customer’ (KYC)
processes require banks establish sophisticated and expensive transaction monitoring systems. Product differentiation is not a threat to
the industry as the large Sri Lankan commercial banks are multi product, multi service powerhouses, which over the years have pursued
to differentiate its product and service offering from competitors through improved customer service, bundled product offerings and other
differentiating attributes. This leaves only limited room for new entrants to establish a space through product differentiation.
APPENDIX 04 PORTER’S FIVE FORCES ANALYSIS: SRI LANKAN BANKING SECTOR CONTINUES TO REMAIN ATTRACTIVE
23%
19%
14%
10%
5%
3%1%
4%
8%
1%
12%
Bank of Ceylon
Peoples Bank
Commercial Bank
Hatton National Bank
National Development Bank
Nations Trust Bank
Pan Asia Bank
Seylan Bank
Sampath Bank
Union Bank
Others
23%
23%
15%
12%
5%
3%2%
5%
9%1%
2% Bank of Ceylon
Peoples Bank
Commercial Bank
Hatton National Bank
National Development Bank
Nations Trust Bank
Pan Asia Bank
Seylan Bank
Sampath Bank
Union Bank
Others
Assets Distribution Loan Distribution
Source: CBSL, Companies & Candor Research Source: CBSL, Companies & Candor Research
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
Threat of substitutes: Moderate
Competition from the non-banking financial sector (Finance companies) is increasing rapidly. This sector comprised with 47 finance
companies. The competition from finance companies has intensified amidst improved per capita income and subprime segment. These
companies create an immense competition for commercial banks in market segments such as leasing & hire purchases. In addition, they
have attracted the depositors whilst providing a higher return over commercial banks, but the perceived risk by depositors is high.
However, the commercial banks have outperformed in corporate lending segment and high end retail segment by providing a low interest
rate and multiple value additions. Adding further, key products including credit cards, mobile banking & e-banking coupled with extended
branch network have provided a superior competitive advantage for commercial banks over finance companies. In addition, the recently
introduced cap on loans & advances for motor vehicles has exploded the prime differentiation factor for finance companies within the
leasing segment. Hence, we believe the threat of substitutes is relatively moderate.
Bargaining power of suppliers: Low
Key supplier segment for banks are its depositors. These are individuals who have excess money and prefer regular income and safety. In
the banking industry suppliers have low bargaining power. Following are the reasons for low bargaining power of suppliers:
Nature of suppliers: Suppliers of banks are generally those people who prefer low risk and those who need regular income and
safety as well. Banks are best place for such individuals to deposit their surplus money. They believe that banks are safer than
other investment alternatives and high risk finance companies. Therefore, they do not consider alternatives, which lower their
bargaining power.
Limited alternatives: Suppliers are risk averse and want regular income. Hence, they have few alternatives available for them to
invest such as treasury bills, government bonds etc. Therefore, few alternatives lower their bargaining power.
CBSL’s rules and regulations: Banks are subject to CBSL’s rules and regulations. Thus, CBSL takes all decisions relating to
interest rates. This reduces suppliers bargaining power.
Suppliers are not concentrated: the banking industry’s suppliers are not concentrated. There are numerous suppliers with
negligible portion to offer. Hence, this reduces their bargaining power.
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
2013Dec 2014Mar 2014Jun 2014Sep 2014Dec 2015Mar
NBFI's NIM (%) LCB's NIM (%)
400bps
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
2013Dec 2014Mar 2014Jun 2014Sep 2014Dec 2015Mar
Total Assets (LKR.Mn) Gross Loans (LKR.Mn)
Assets +21% (YoY)
Source: CBSL, Candor Research Source: CBSL, Candor Research
NBFIs maintained high NIMs NBFIs assets grew by 21% (YoY)
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
Bargaining power of customers- Moderate
Customers of the banks are those who take loans, advances and use other services of banks. Following are the reasons for relatively
strong bargaining power of customers:
Large number of players: Customers have very large number of alternatives. There are number of players, which compete for the
same share. There are many non-financial institutions which have also into this business. There are foreign banks and cooperative
banks together with specialized financial companies that provide finance to customers.
Undifferentiated service: Banks provide similar services. There is not much difference in service offering by different banks.
Hence, bargaining power of customer’s increases. Banks cannot be charged for differentiation.
Full information about the market: Customers have full information about the market. The Internet has increased customer’s
access to information. As a result, banks have to be more competitive and customer friendly to serve them.
However, retail customers do face some switching costs, mostly involving moving fees and other costs associated with changing over to
another bank. Corporate customers are similar as their lending relationship with a bank may be bundled with other products and services,
which makes price comparisons difficult and limits the flexibility to move the business to a competitor. In addition, reduced customer
concentration minimizes the customer’s bargaining power. UBC has attempted to increase customer switching cost by implementing
augmented services like “Elite Banking centers’. Hence, we believe the customer bargaining power is relatively moderate.
0: No threat | 1: Insignificant Threat | 2: A Low Threat Level
3: Moderate Threat Level | 4: Material Threat | 5: Substantial Threat
0
1
2
3
4
5Competition in the industry
Bargaining power of suppliers
Threat of new entrantsThreat of substitutes
Bargaining power of customers
Source: Candor Research
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
No major down side risk persist from current market price for UBC
The sensitivity analysis focused on key inputs affecting the intrinsic value of UBC. Simulations determining how these inputs independently
affect the intrinsic value are shown below.
9.0% LKR 15.02
9.1% LKR 15.55
9.2% LKR 16.08
9.3% LKR 16.62
9.4% LKR 17.15
9.5% LKR 17.68
9.6% LKR 18.22
9.7% LKR 18.75
9.8% LKR 19.29
9.9% LKR 19.82
Average Lending Rate
5.5% LKR 20.01
5.6% LKR 19.59
5.7% LKR 19.17
5.8% LKR 18.75
5.9% LKR 18.33
6.0% LKR 17.91
6.1% LKR 17.49
6.2% LKR 17.07
6.3% LKR 16.65
6.4% LKR 16.23
Average Deposits Rate
6.3% LKR 18.57
6.4% LKR 18.59
6.5% LKR 18.62
6.6% LKR 18.64
6.7% LKR 18.66
6.8% LKR 18.68
6.9% LKR 18.71
7.0% LKR 18.73
7.1% LKR 18.75
7.2% LKR 18.77
7.3% LKR 18.80
7.4% LKR 18.82
7.5% LKR 18.84
7.6% LKR 18.86
7.7% LKR 18.89
7.8% LKR 18.91
7.9% LKR 18.93
8.0% LKR 18.95
GDP Growth
70.0% LKR 13.41
73.0% LKR 14.21
76.0% LKR 15.01
79.0% LKR 15.81
82.0% LKR 16.61
85.0% LKR 17.42
88.0% LKR 18.22
91.0% LKR 19.02
94.0% LKR 19.82
97.0% LKR 20.62
100.0% LKR 21.42
LCB's Lending/ GDP
1.0% LKR 9.64
1.1% LKR 11.13
1.2% LKR 12.63
1.3% LKR 14.12
1.4% LKR 15.62
1.5% LKR 17.11
1.6% LKR 18.60
1.7% LKR 20.10
1.8% LKR 21.59
1.9% LKR 23.08
2.0% LKR 24.58
2.1% LKR 26.07
UBC's Market Share-Lending
25.5% LKR 19.69
26.0% LKR 19.50
26.5% LKR 19.31
27.0% LKR 19.13
27.5% LKR 18.94
28.0% LKR 18.75
28.5% LKR 18.56
29.0% LKR 18.38
29.5% LKR 18.19
30.0% LKR 18.00
Tax Rate
Impact: HIGH Impact: HIGH
Impact: MEDIUM Impact: HIGH
Impact: MEDIUM
Impact: HIGH
Source: Candor Research Source: Candor Research
Source: Candor Research
Source: Candor Research
Source: Candor Research
Source: Candor Research
APPENDIX 05 RESIDUAL INCOME VALUATION: SENSITIVITY ANALYSIS
| UNION BANK OF COLOMBO PLC
© 2015 Candor Research
INITIATION REPORT: APPENDIX
Strengths
UBC is the 5th largest Commercial Bank in Sri Lanka in terms of market capitalization with a strong proficiency from TPG Capital
and McKinsey & Company
UBC currently operates with related diversification strategies with both UB finance & NAMAL, which provides a strong competitive
advantage over peers
UBC resilient over Basel 3 capital and liquidity reforms with a industry best total CAR of 32.59%
Strong penetration on SME segment. In 2014, UBC awarded as the best SME bank in Sri Lanka by capital finance international and
UBC is the principal sponsor of the ‘2015 Industrial Excellence Awards’.
The bank’s current off-site ATM expansion strategy will improve the bank visibility and accessibility across the country.
Technological superiority: First bank to launch Microsoft cloud technology
Weaknesses
High cost of funding with a subdued CASA ratio of 25% compared to industry average of 42%
Poor operating efficiency with a cost to income ratio of 81% compared to industry average of 52%
Moderate diversification of product portfolio compared to peers
UBC has less number of branches and ATM network compared to other major players
Opportunities
Amidst low banking penetration levels, the Sri Lankan banking sector has a room to grow further
With a positive outlook on Sri Lankan construction and housing sector, there is a room for noteworthy private sector credit growth
With the bank resilient capital adequacy levels, the bank is in a position to support growing SME and subprime segments
The prevailing low interest rate and low inflationary environment
Threats
Increasing competition within the corporate lending segment will pressure the bank’s NIMs
Growing concerns on ICT banking services will create a substantial treat to the bank in terms of customer retention and product
innovations
Enormous competition from non-banking financial services
Exchange rate environment volatilities will negatively affect on the bank’s treasury functions
Competition from other leading banks.
APPENDIX 06 SWOT ANALYSIS
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 07 CORRELATION ANALYSIS- DOMESTIC KEY ECONOMIC INDICATORS VS UBC SHARE PRICE
UBC SHARE PRICE SLFR TRADE BALANCE SDFR INFLATION GDP GROWTH FOREIGN RESERVES EXCHAGE RATE AWPR AWLR AWFDR AWDR 1Y TB RATE 10Y T-BD RATE
UBC SHARE PRICE 1.00
SLFR -0.83 1.00
TRADE BALANCE 0.00 -0.28 1.00
UNEMPLOYMENT RATE 0.62 -0.50 0.06
SDFR -0.73 0.96 -0.43 1.00
INFLATION -0.89 0.94 -0.26 0.87 1.00
GDP GROWTH 0.09 -0.53 0.31 -0.55 -0.42 1.00
FOREIGN RESERVES 0.68 -0.70 0.19 -0.69 -0.56 0.13 1.00
EXCHAGE RATE 0.21 -0.30 0.25 -0.34 -0.34 0.11 0.06 1.00
AWPR -0.92 0.96 -0.18 0.89 0.94 -0.36 -0.73 -0.41 1.00
AWLR -0.87 0.74 0.00 0.60 0.84 -0.11 -0.47 -0.45 0.87 1.00
AWFDR -0.83 0.74 -0.03 0.58 0.81 -0.18 -0.51 -0.46 0.86 0.98 1.00
AWDR -0.81 0.70 0.00 0.53 0.78 -0.13 -0.48 -0.46 0.83 0.98 1.00 1.00
1Y T-BILL RATE -0.85 0.98 -0.26 0.95 0.91 -0.46 -0.76 -0.28 0.97 0.75 0.73 0.70 1.00
10Y T-BOND RATE -0.87 0.94 -0.20 0.91 0.88 -0.45 -0.71 -0.30 0.95 0.76 0.75 0.71 0.95 1.00
Source: Eviews statistical package, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 08 CORRELATION ANALYSIS- COMMERCIAL BANKING SECTOR INDICATORS VS UBC SHARE PRICE
UBC SHARE PRICE SLAR (DBU) TOTAL ASSETS GROWTH TOTAL CAR ROE ROA PROVISION COVER NIM LENDING GROWTH GROSS NPL DEPOSITS GROWTH COST TO INCOME CORE CAR CASA ADR
UBC SHARE PRICE 1.00
SLAR (DBU) 0.73 1.00
TOTAL ASSETS GROWTH -0.48 -0.86 1.00
TOTAL CAR 0.47 0.81 -0.91 1.00
ROE -0.63 -0.86 0.72 -0.69 1.00
ROA -0.60 -0.85 0.72 -0.68 1.00 1.00
PROVISION COVER 0.02 -0.55 0.76 -0.66 0.44 0.46 1.00
NIM -0.67 -0.97 0.85 -0.81 0.82 0.82 0.64 1.00
LENDING GROWTH -0.41 -0.85 0.98 -0.88 0.72 0.72 0.74 0.82 1.00
GROSS NPL 0.13 0.69 -0.79 0.69 -0.64 -0.66 -0.95 -0.78 -0.78 1.00
DEPOSITS GROWTH -0.83 -0.86 0.81 -0.78 0.77 0.75 0.32 0.76 0.78 -0.40 1.00
COST TO INCOME 0.50 0.84 -0.73 0.72 -0.97 -0.97 -0.57 -0.84 -0.73 0.75 -0.67 1.00
CORE CAR 0.24 0.55 -0.72 0.91 -0.44 -0.44 -0.55 -0.57 -0.69 0.52 -0.55 0.51 1.00
CASA 0.54 -0.02 0.45 -0.34 -0.05 -0.02 0.71 0.06 0.50 -0.54 -0.06 -0.07 -0.38 1.00
ADR -0.55 -0.96 0.88 -0.82 0.83 0.83 0.71 0.97 0.87 -0.85 0.72 -0.87 -0.60 0.20 1.00
Source: Eviews statistical package, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 09 CORRELATION ANALYSIS- GLOBAL KEY ECONOMIC INDICATORS VS UBC SHARE PRICE
UBC SHARE PRICE INDIA 1Y TB CHINA INFLATION CHINA GDP BRENT OIL US 10Y BOND YIELD US FED RATE US INFLATION US UNEMPLOYMENT
UBC SHARE PRICE 1.00
INDIA 1Y TB 0.03 1.00
CHINA INFLATION -0.61 0.29 1.00
CHINA GDP -0.76 0.21 0.80 1.00
BRENT OIL -0.71 0.30 0.73 0.74 1.00
US 10Y BOND YIELD 0.19 0.67 0.30 -0.01 0.17 1.00
US FED RATE NA NA NA NA NA NA NA
US INFLATION -0.43 0.26 0.61 0.70 0.74 -0.05 NA 1.00
US UNEMPLOYMENT 0.21 0.51 0.10 0.13 0.14 0.43 NA 0.31 1.00
Source: Eviews statistical package, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 10 CORRELATION ANALYSIS- GLOBAL KEY INDICES VS UBC SHARE PRICE
UBC SHARE PRICE S&P 500 INDEX NIKKEI MSCI INDEX HANG SENG INDEX FTSE 100 DOW JONES DAX INDEX
UBC SHARE PRICE 1.00
S&P 500 INDEX 0.86 1.00
NIKKEI 0.78 0.95 1.00
MSCI INDEX 0.79 0.98 0.94 1.00
HANG SENG INDEX 0.64 0.82 0.85 0.83 1.00
FTSE 100 0.66 0.91 0.93 0.96 0.84 1.00
DOW JONES 0.85 1.00 0.97 0.98 0.81 0.93 1.00
DAX INDEX 0.78 0.94 0.95 0.93 0.89 0.89 0.93 1.00
Source: Eviews statistical package, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 11 UBC’S KEY INDICATORS
Deposits grew at a 3Y CAGR of 15%
2.00%
7.00%
12.00%
17.00%
22.00%
27.00%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2011 2012 2013 2014 1Q2015 2Q2015
Depsoits (LKR.Mn) Deposits growth
Source: UBC, Candor Research
Promising outlook on CASA
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2011 2012 2013 2014 1Q2015 2Q2015
CASA ratio
Source: UBC, Candor Research
Pawing exposure continuously declining
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2011 2012 2013 2014 1Q2015 2Q2015
Pawning exposure
Source: UBC, Candor Research
Bank’s NIMs remained under pressure
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
0.00
500.00
1000.00
1500.00
2000.00
2500.00
2011 2012 2013 2014
Net interets income (LKR.Mn) Bank NIMs
Source: UBC, Candor Research
L&A grew at a 3Y CAGR of 18%
2.00%
7.00%
12.00%
17.00%
22.00%
27.00%
32.00%
37.00%
42.00%
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2011 2012 2013 2014 1Q2015 2Q2015
Gross loans & advances (LKR.Mn) Gross L&A growth
Source: UBC, Candor Research
Relatively weak ADR amidst strong lending growth
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
2011 2012 2013 2014 1Q2015 2Q2015
ADR
Source: UBC, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
UBC to absorb the commercial banking space
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
2011 2012 2013 2014 1Q2015 2Q2015
UBC total assets % LCB's total assets
Source: UBC, Candor Research
Lending book segregation
20%
18%
1%1%46%
9%
4%1%
Overdrafts
Trade finance
Pawning
Staff loans
Term loans
Lease and Hire PurchaseFactoring
Debentures
Trust certificates
Others
Source: UBC, Candor Research
Deposits segregation
8%
17%
68%
7%Demand deposits
Savings deposits
Fixed deposits
Other deposits -(Certificate of Deposits)
Source: UBC, Candor Research
McKinsey & Company’s expertise will drive the
credit culture
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
2011 2012 2013 2014 1Q2015 2Q2015
Gross NPL Net NPL
Source: UBC, Candor Research
Continuous expansion in distribution network
0
10
20
30
40
50
60
70
80
90
2012 2013 2014 1H2015
No of Branches No of ATMs
Source: UBC, Candor Research
Centralization will improve the operating
efficiency
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
2011 2012 2013 2014 1Q2015 2Q2015
Cost to Income
Source: UBC, Candor Research
Segmental analysis
20% 11%
-33%
24%
-26%
4%
139%
62%
-100%
-50%
0%
50%
100%
150%
200%
1H2014 1H2015
Corporate Treasury SME Other Group Companies
Source: UBC, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 12 LCB’S INDUSTRY INDICATORS
L & A grew at a 4Y CAGR of 18%
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
2010 2011 2012 2013 2014 1Q20152Q2015
Loans & Advances (LKR.Mn)
Source: CBSL, Candor Research
Deposits grew at a 4Y CAGR of 17%
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
2010 2011 2012 2013 2014 1Q2015 2Q2015
Deposits (LKR.Mn)
Source: CBSL, Candor Research
Industry CASA to stand at average 40%
0%
10%
20%
30%
40%
50%
2010 2011 2012 2013 2014 1Q2015 2Q2015
CASA ratio
Source: CBSL, Candor Research
Industry profitability remained moderate
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2010 2011 2012 2013 2014 1Q2015 2Q2015
ROA NIM ROE
Source: CBSL, Candor Research
Efficiency remained moderate
46.00%
47.00%
48.00%
49.00%
50.00%
51.00%
52.00%
53.00%
54.00%
55.00%
2010 2011 2012 2013 2014 1Q2015 2Q2015
Cost to income
Source: CBSL, Candor Research
Healthy assets quality levels
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
2010 2011 2012 2013 2014 1Q2015 2Q2015
Gross NPL Net NPL
Source: CBSL, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
Resilient liquidity buffers
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
2010 2011 2012 2013 2014 1Q2015 2Q2015
Liquid Assets Ratio Credit to Deposit Ratio
Source: CBSL, Candor Research
Continuous expansion in the industry
0%
10%
20%
30%
40%
50%
60%
70%
80%
2010 2011 2012 2013 2014
LCB's Total assets to GDP
Source: CBSL, Candor Research
Strong capital buffers
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
2010 2011 2012 2013 2014 1Q2015 2Q2015
Core CAR Total CAR
Source: CBSL, Candor Research
Improved low cost funding in 2014
61% 55%
27% 32%
8% 10%
3% 3%
0%
20%
40%
60%
80%
100%
120%
2013 2014
Time Deposits Savings Deposits Demand Deposits Other Deposits
Source: CBSL, Candor Research
Expansion in the industry segment credits
12% 11%
36% 41%
25%26%
27% 22%
0%
20%
40%
60%
80%
100%
120%
2013 2014
Agriculture and Fishing Industry Services Personal Loans and Advances
Source: CBSL, Candor Research
Low interest rate regime
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
SLFR (%) SDFR (%) AWLR (%) AWPR (%) AWDR (%) AWFDR (%)
Source: CBSL, Candor Research
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 13 SUBSIDIARIES
Union Bank of Colombo PLC
National Asset Management Limited (NAMAL) is the
pioneer Unit Trust management company in Sri Lanka
established in 1991 with over 20 years of
experience and a successful track record of investing
in Sri Lankan equity and fixed income markets.
NAMAL launched the first Unit Trust to be licensed in
Sri Lanka - National Equity Fund and the first listed
Unit Trust -NAMAL Acuity Value Fund.
In 2014 the fund was ranked No. 3 of the 65 unit
trust in the industry with returns of 42.4%. The fund
was also ranked No 2 in the balanced category with
returns of 33.4%.
NAMAL built on the impressive growth in assets
under management (AUM) in 2013 with an increase
of 15% from LKR 13.1 Bn to LKR 14.9 Bn in FY14.
UB Finance (UBF) was formed by Union Bank of
Colombo PLC and its international strategic
investment partner, ShoreCap II Ltd and has become
the latest entrant to the world of finance in Sri Lanka.
UBF currently offers its customers an enhanced range
of products & services including investment solutions
such as fixed deposits and savings; financial solutions
in the form of leasing, hire purchase and mortgage
loans as well as working capital solutions through
factoring.
In 2014, the Management also completely re-
engineered the Company's business operations
including documentation, procedures, processes and
systems. The Company is now geared to offer its
customers a superior level of service due to the
overall efficiency and effectiveness of operations.
Going forward the Board’s decision to move into the
SME sector continued to gather momentum as the
Company increased its presence across the Country
in new geographies.
National Asset Management Limited UB Finance
51% Holding 66.17% Holding
| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX
© 2015 Candor Research
APPENDIX 14 REGIONAL COMPARISON
ROE ROA NIM NPL ratio Total CAR
China 17.59% 1.23% 2.70% 1.25% 13.18%
Korea 4.05% 0.31% 1.79% 1.53% N/A
Indonesia N/A 2.80% 4.23% 2.16% 19.38%
Philippines 10.96% 1.28% 2.99% 1.87% 19.01%
India 13.84% 1.03% 2.79% N/A N/A
Singapore 12.40% 1.00% 1.70% N/A 16.00%
Key Banking indicators of regional countries
Source: Bloomberg, Candor Research
LKR/ Asia (Developed)
Ticker Name Country Mkt Cap (LKR) NIM (%) CIR (%) NPL ratio (%) ROE (%) ROA (%) Total Assets (LKR.Bn) Total Loans (LKR.Bn) Customer Deposits (LKR.Bn) CASA ratio (%) ADR (%) Tier 1 Capital (%)
2388 HK Equity BOC HONG KONG HOLDINGS LTD Hong Kong 4,528,269.75 1.68 47.64 0.30 14.60 1.16 40,845.01 18,687.75 27,814.30 53.32 64.79 12.35 8304 JP Equity AOZORA BANK LTD Japan 604,773.84 1.18 42.76 N/A 11.30 0.90 5,310.61 3,001.46 3,421.07 N/A N/A N/AUOB SP Equity UNITED OVERSEAS BANK LTD Singapore 2,999,266.76 1.86 46.29 1.18 11.65 1.06 30,775.27 20,088.98 23,967.49 41.56 83.80 14.00 1111 HK Equity CHONG HING BANK LTD Hong Kong 207,905.89 1.70 43.57 0.04 10.95 1.12 1,998.03 1,075.31 1,617.73 46.15 N/A 8.65 DBS SP Equity DBS GROUP HOLDINGS LTD Singapore 4,197,288.54 1.76 45.54 0.87 11.23 0.99 43,695.69 28,159.63 30,361.99 56.95 86.90 13.44 2892 TT Equity FIRST FINANCIAL HOLDING CO Taiwan 747,434.90 1.30 52.66 0.20 9.34 0.59 10,330.26 6,263.90 7,923.11 78.49 83.03 N/A23 HK Equity BANK OF EAST ASIA Hong Kong 1,260,776.46 1.84 52.78 0.54 8.65 0.79 14,076.60 8,605.92 10,314.20 28.37 74.80 13.20 2356 HK Equity DAH SING BANKING GROUP LTD Hong Kong 374,298.01 1.82 46.67 0.33 11.12 1.21 3,257.42 1,985.88 2,572.79 34.94 70.80 11.70 440 HK Equity DAH SING FINANCIAL HOLDINGS Hong Kong 262,646.49 1.98 57.53 0.33 9.32 0.89 3,542.69 1,985.88 2,550.40 34.75 N/A 11.70 ANZ AU Equity AUST AND NZ BANKING GROUP Australia 7,774,007.04 2.87 46.32 0.51 15.08 0.93 87,261.43 56,783.39 55,079.42 42.52 N/A 8.70
LKR/ Asia (Emerging)
Ticker Name Country Mkt Cap (LKR) NIM (%) CIR (%) NPL ratio (%) ROE (%) ROA (%) Total Assets (LKR.Bn) Total Loans (LKR.Bn) Customer Deposits (LKR.Bn) CASA ratio (%) ADR (%) Tier 1 Capital (%)
600000 CH Equity SHANGHAI PUDONG DEVEL BANK-A China 6,158,405.95 3.71 28.44 1.06 20.36 1.13 99,323.72 46,912.49 64,483.01 N/A 74.33 8.16 YES IN Equity YES BANK LTD India 651,791.21 3.13 45.80 0.41 21.27 1.63 2,909.94 1,618.93 1,832.10 24.15 N/A N/A600015 CH Equity HUAXIA BANK CO LTD-A China 2,388,062.84 3.21 44.02 1.09 18.34 1.01 41,363.46 21,812.20 28,420.18 N/A 70.65 8.71 DBNK IN Equity DENA BANK India 47,111.19 2.11 63.83 5.49 3.64 0.21 2,776.94 1,709.44 2,245.32 30.58 N/A N/ACRPBK IN Equity CORPORATION BANK India 80,261.74 1.94 47.55 4.85 5.55 0.26 4,830.97 3,135.01 3,770.28 22.28 N/A N/A601009 CH Equity BANK OF NANJING CO LTD -A China 1,079,300.66 4.39 32.42 0.94 17.25 1.01 15,777.52 4,402.28 10,275.03 N/A 3.06 9.41 UNTDB IN Equity UNITED BANK OF INDIA India 39,813.89 N/A 41.65 9.47 N/A N/A 2,590.63 1,388.23 2,284.05 42.06 N/A N/A002142 CH Equity BANK OF NINGBO CO LTD -A China 982,640.76 3.29 35.67 0.89 18.13 1.03 14,181.24 4,998.47 7,727.64 N/A 64.12 9.12 VJYBK IN Equity VIJAYA BANK India 63,225.96 N/A 62.99 2.81 N/A N/A 3,048.88 1,859.72 2,699.16 20.37 N/A N/ABOI IN Equity BANK OF INDIA India 192,892.02 2.05 55.31 5.81 6.36 0.33 13,364.93 8,170.13 10,098.34 25.07 N/A 7.59
Key indicators of regional banks
Source: Bloomberg, Candor Research
INITIATION REPORT: APPENDIX | UNION BANK OF COLOMBO PLC
© 2015 Candor Research
Indrajit Wickramasinghe- Director/Chief Executive Officer
Appointed on the 15th of November 2014
25 years of Management experience
Prior to his appointment at UBC he served as the Chief Operating Officer of NDB Bank where he was responsible for
all business areas
Hiranthi de Silva- Vice President Wholesale Banking
Appointed in February 2015.
Over 27 years of Banking experience extensively covering the branch banking network. Extensive experience in
credit which included more than 10 years experience in Corporate Banking.
Prior to her appointment was associated with Sampath Bank PLC, and served as Deputy General Manager Corporate
Credit.
Malinda Samaratunga- Chief Financial Officer
Appointed in March 2011.
Over 18 years of experience in Banking and Finance
Prior to this appointment Assistant General Manager – Finance & Treasury of Commercial Leasing and Finance PLC
Ravi Divulwewa- Vice President Credit
Appointed in 2010.
Overall 35 years of Banking experience.
Prior to his appointment was the DGM of credit at Seylan Bank PLC
Rajeev Munasinghe- Vice President Information Technology Appointed in July 2008.
Over 17 years of sector experience.
Prior to his appointment was the AGM-IT for LB Finance.
Ravi Jayasekera- Vice President Human Resources Appointed in November 2014
Over 20 years of experience in the banking industry
Prior to his appointment he was the Head of HR HSBC Mauritius
S.Sri Ganendran- Vice President Operations
Appointed in December 2014
Over 17 years of experience
Prior to his appointment was an AVP (Branch Banking) at NDB. Prior to this he was also Program Head, Business
Integration & Process Reengineering and Head of Operational Excellence –Lending at SCB, UAE.
Chaya Jayawardena- Vice President Retail Banking
Appointed February 2015
Over 21 years of experience in the banking industry
Prior to her appointment she was the GM of SME Banking and Consumer Banking Market sales (TRY) & Distribution
for Standard Charted Bank
APPENDIX 15 KEY MANAGEMENT (EXTRACTED FROM COMPANY’S INVESTOR PRESENTATION)
INITIATION REPORT: APPENDIX | UNION BANK OF COLOMBO PLC
© 2015 Candor Research
APPENDIX 16 PRODUCT PORTFOLIO
Personal/ Retail Corporate sector SME sector
Savings accounts Trade Finance Project Financing
· Regular Savings Working Capital Finance Leasing
· Ultra Saver Leasing Factoring
· Salary Power Long term finance Working Capital Solutions
· Salary Select Foreign Exchange Services Trade finance
· Kid's Saver/ Piyawara Treasury Services Bancassurance
· Ruweththi- Ladies Savings account
Current accounts
· Regular Current Accounts
· Easy Plus
Fixed deposits
· Regular fixed deposits
· Super 7 fixed deposits
· 55plus- fixed deposits
· 3 Month Fixed Deposit With Interest Upfront
Overdraft
· Dynamic overdraft facility
Loans
· Loans for executive & professionals
· Educational loan scheme
· Personnel loans
· Homes loans
· Pawning-“Ranone”
· Union Bank leasing
E-banking products
· Internet banking
· Tele Banking
· Cirrus enables ATM cards
· TV banking
Remittances
· Union Bank Remit To Sri Lanka
· Western union
Visa Travel Card
Safety Deposits Lockers
Elite Circle (Elite Banking Services)
Source: UBC, Candor Research
INITIATION REPORT: APPENDIX | UNION BANK OF COLOMBO PLC
© 2015 Candor Research
APPENDIX 17 TOP 20 SHAREHOLDER LIST
Name of shareholders No. of Voting Shares Stake
Culture Financial Holdings Ltd 763,984,374 70.00%
Vista Knowledge Pte Ltd 64,677,973 5.90%
Associated Electrical Corporation Ltd 29,237,387 2.70%
Mr. A.I. Lovell 22,743,780 2.10%
Mr.C.P.A Wijeyesekera 18,508,468 1.70%
Mr.D.A.J Warunakulasuriya 14,842,730 1.40%
EXSAB International Holding Co. for Trading Development 8,902,139 0.80%
Ashyaki Holdings (Pvt) Ltd. 7,792,506 0.70%
Rosewood (Pvt) Ltd - Account No. 1 7,700,698 0.70%
Mr. M.D. Samarawickrama 7,660,582 0.70%
Mr. S.P. Khattar 7,343,365 0.70%
Asian Alliance Insurance PLC - A/C 02 (Life Fund) 6,067,256 0.60%
Commercial Agencies (Ceylon) Ltd. 4,050,833 0.40%
Ajita De Zoysa & Company Limited. 4,050,832 0.40%
Standard Chartered Bank Singapore S/A HL Bank Singapore Branch 2,875,149 0.30%
Dr. T. Senthilverl 2,694,709 0.20%
Anverally and Sons (Pvt) Ltd A/C No 01 2,432,600 0.20%
Rubber Investment Trust Limited A/C No 01 2,078,975 0.20%
Ceylon Biscuits Limited 2,000,000 0.20%
The Ceylon Chamber of Commerce Account No 02 1,948,500 0.20%
Source: UBC, Candor Research
80.13%
19.87%
Foreign SH Local SH
Source: CSE, Candor Research
INITIATION REPORT: APPENDIX | UNION BANK OF COLOMBO PLC
© 2015 Candor Research
APPENDIX 18 PEER COMPARISON
COMB.N HNB.N SAMP.N NDB.N NTB.N SEYB.N PABC.N UBC.N
Current price 158.00 215.00 256.00 220.00 95.40 101.00 28.00 22.20
2014 13.14 7.96 7.54 9.94 8.80 10.31 18.37 421.67
2015E 11.09 7.72 7.27 8.95 7.83 9.61 11.20 137.69
2014 2.08 1.16 1.15 1.48 1.61 1.29 1.61 1.71
2015E 1.75 1.14 1.17 1.21 1.41 1.28 1.51 1.48
Bank Net interest margin 3.70% 4.16% 3.80% 2.74% 5.69% 4.59% 4.49% 3.97%
Net interest income growth ( Y-o-Y) 6.61% 17.49% 16.72% -10.53% 7.99% 7.21% 78.00% 42.59%
Deposit growth (Y-o-Y) 16.71% 15.15% 13.46% 21.90% 15.02% 10.24% 22.74% 8.86%
Deposit growth (4Y CAGR) 19.48% 16.15% 22.60% 26.39% 23.12% 14.05% 31.85% 15.18%
CASA ratio 49.05% 43.53% 49.77% 23.05% 31.62% 38.25% 28.38% 24.65%
Lending book growth (Y-o-Y) 16.80% 22.72% 29.14% 18.17% 23.26% 20.60% 35.29% 37.83%
Lending book growth (4Y CAGR) 24.97% 21.01% 26.34% 27.82% 30.09% 13.84% 31.78% 17.71%
Pawning Exposure 0.38% 4.10% 5.11% 0.14% 0.67% 5.19% 1.78% 1.29%
Bank Gross NPL ratio 3.15% 3.24% 1.71% 2.64% 4.02% 6.53% 5.90% 4.87%
Provision cover (2014) 46.34% N/A N/A N/A N/A 47.00% N/A N/A
Cost to income ratio 40.84% 52.49% 52.33% 57.40% 51.46% 51.98% 52.29% 81.17%
Capital adequacy ratios
Tier 1 12.67% 10.88% 8.47% 12.73% 13.05% 13.33% 7.03% 33.20%
Total capital (Tier 1+Tier 2) 15.50% 13.38% 12.72% 17.43% 16.34% 14.02% 11.49% 32.59%
Bank Liquidity assets ratio (DBU) 27.75% 25.61% 20.89% 24.33% 24.58% 27.91% 23.39% 26.97%
ROE (2015E) 16.61% 15.67% 16.82% 14.03% 19.03% 13.82% 14.23% 1.08%
ROA (2015E) 1.52% 1.81% 1.32% 1.54% 1.75% 1.44% 0.87% 0.33%
Dividend pay out ratio (2015E) 45.00% 34.00% 30.00% 30.00% 15.00% 22.00% 0.00% 0.00%
Dividend Yeild (2015E) 3.21% 3.26% 3.31% 2.58% 1.36% 1.70% 0.00% 0.00%
Risk ratings AA AA- A+ AA- A A- BBB BB+
No of Employees (2014) 4852 4451 4000 1744 2,562 2947 1302 924
No of Branches (2014) 257 249 220 83 89 157 78 61
No of ATMs (2014) 625 450 326 83 124 177 76 62
Revenue per employee (2014) (LKR. Mn) 8.07 8.39 6.04 7.43 4.74 5.53 3.09 2.97
Revenue per branch (2014) (LKR. Mn) 152.38 149.91 109.74 156.22 136.32 103.86 51.63 44.98
Source: Company, Candor Research
* Based on 3Y CAGR
PER
(x)
PBV
(x)
*
*
All the above figures are based on 2Q2015 unless otherwise stated
INITIATION REPORT: APPENDIX | UNION BANK OF COLOMBO PLC
© 2015 Candor Research
ADR- Advance to deposits ratio BOC- Bank of Ceylon BOP- Balance of payment CAGR- Compound Annual Growth Rate CAR- Capital adequacy ratio CASA- Current accounts and savings accounts CBSL- Central Bank of Sri Lanka COMB- Commercial Bank of Ceylon PLC CSE- Colombo Stock Exchange GICS- Global Industry Classification Standard HHI- Herfindahl-Hirschman index HNB- Hatton National Bank PLC KFB- Korea First Bank LTV- Loan to value M0- Currency M1- Narrow money supply M2- Broad money supply NAMAL- National Asset Management Limited NDB- National Development Bank PLC NIM- Net interest margin NPL- Non performing loans NTB- Nations Trust Bank PLC PABC- Pan Asia Banking Corporation PLC PB- People’s Bank ROA- Return on assets ROE- Return on equity RWA- Risk weighted assets SAMP- Sampath Bank PLC SDB - Shenzhen Development Bank SEYB- Seylan Bank PLC
APPENDIX 19 GLOSSARY
INITIATION REPORT: APPENDIX | UNION BANK OF COLOMBO PLC
© 2015 Candor Research
Current Rating
Recommendation Accumulate Rating 6
Historical Rating
Candor Rating System
Recommendation Total Return* Rating
* Total Return includes both capital gain and dividends.
Remarks
Expects the s tock to appreciate/depreciate within the given
return range over the next 12 Months .
Expects the s tock to fa l l by more than 11% over the next 12
months
Stock i s not within regular research coverage
2
1
Sell
Not Rated
> +5%
.-5% to +5%
< -11%
-
Hold
Reduce
Trading Buy
Candor Stock Rating Methodelogy
.+6% to +14% Expects the s tock to appreciate within the given return range
over the next 12 Months .
.-6% to -10%
8
7
6
5
4
3
> +20%
.+15% to +19%
Expects the s tock to fa l l by within the given return range over
the next 12 Months .
Description
Expects the s tock to exceed 5% or more over the next 3 months ,
however the rating does not cons ider any outlook beyond 3
months .
Expects the s tock to appreciate 20% or more over the next 12
Months .
Expects the s tock to appreciate within the given return range
over the next 12 Months .
Strong Buy
Buy
Accumulate
20
21
22
23
24
25
26
27
28
29
30
Oct
-14
No
v-1
4
No
v-1
4
De
c-1
4
De
c-1
4
De
c-1
4
Jan
-15
Jan
-15
Feb
-15
Feb
-15
Mar
-15
Mar
-15
Ap
r-1
5
Ap
r-1
5
May
-15
May
-15
Jun
-15
Jun
-15
Jun
-15
Jul-
15
Jul-
15
Au
g-1
5
Au
g-1
5
Sep
-15
Sep
-15
Oct
-15
Last Price
Target Price
12345678
Oct
-14
No
v-1
4
No
v-1
4
Dec
-14
Dec
-14
Dec
-14
Jan
-15
Jan
-15
Feb
-15
Feb
-15
Mar
-15
Mar
-15
Ap
r-1
5
Ap
r-1
5
Ma
y-1
5
Ma
y-1
5
Jun-
15
Jun-
15
Jun-
15
Jul-
15
Jul-
15
Au
g-1
5
Au
g-1
5
Sep
-15
Sep
-15
Oct
-15
Rating
Our recommendations take into consideration diverse qualitative and quantitaive factors in addition to our ratings crieteria. Further to the fundamental factors we also take into consideration Technical & Sentimental drivers.
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Disclaimer
The report has been prepared by Candor Equities limited (CEL). The information and opinions contained herein are based upon information obtained from sources
believed to be reliable and made in good faith. Such information has not been independently verified and no guarantee, representation or warranty, express or
implied is made as to their accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for
information purposes only, and the description of any company or their securities mentioned herein is not intended to be complete and this document is not, and
should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
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