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Saturday, December 15, 2012

Commercial Bank of Ceylon (Voting & Non Voting) - Buy

(click image to enlarge)

COMB’s 3Q2012 core banking profits* were LKR3.9bn (+22% YoY), with profit
attributable to equity holders growing 13% YoY to LKR2.3bn due to increased
loan loss provisioning (+LKR222mn from Jun 2012). The bank’s NIMs
marginally improved to 4.5% in Sep 2012 (from 4.4% in Dec 2011), while its loan
book grew 14% from Dec 2011. COMB’s 9 month earnings of LKR7.6bn are inline
to meet CAL’s 2012E profit of LKR9.9bn (+22% YoY).

CAL maintains a BUY on COMB for a total 1-year return of 34% (voting) and 27% (non-voting).

Steady growth in Net Interest Income (+21% YoY) – COMB’s 3Q2012 NII grew
21% YoY to LKR5.6bn on the back of marginally improving NIMs (4.4% in Dec 2011
to 4.5% in Sep 2012) due to its higher CASA base (46% in Sep 2012 vs. industry
average of c.30%) and moderate loan book growth of 14% from Jan-Sep 2012.

LKR3.6bn (+38% YoY) in core banking profits excluding forex income – A 51%
YoY decline in forex income (LKR277mn in Sep 2012 vs. LKR571mn in Sep 2011)
was mainly due to a one-off forex translation loss resulting from the 5% LKR
appreciation (from June-Sep 2012) as COMB has higher foreign assets compared to
foreign liabilities. Excluding forex income, core profits grew 38% YoY to LKR3.6bn.

Effective cost management (cost-to-income ratios improved to 45% in Sep 2012 vs.
48% in Sep 2011) and rapid increase in fee based income (+34% YoY) contributed to
the growth.

Profit to equity holders grew 13% YoY– COMB’s gross NPL’s increased from 3.4%
in June 2012 to 3.7% in Sep 2012, leading the bank to increase its loan loss
provisioning by LKR222mn (vs. a LKR231mn provision reversal in Sep 2011). As a
result, profit attributable to equity holders grew 13%YoY to LKR2.3bn. For the nine
months ended Sep 2012, COMB recorded profits of LKR7.6bn, in-line to meet CAL’s
2012E LKR9.9bn (+22% YoY) profit target.

BUY for a 34% total 1-year return – CAL maintains its 2012E core banking profit at
LKR15.9bn (including forex gains) and net profit at LKR9.9bn.

BUY COMB Voting for a 1-year total return of 34% (includes a 5% dividend yield) and COMB Non-Voting for a total 1-year return of 27% (includes a 6% dividend yield).

source - CAL Research