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Join date : 2014-02-23
“Multiple Shocks Dampen Beat”
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FC Research expects the banking sector to have a slow phase during 2016E-18E with slow GDP growth, tax attacks, sluggish credit growth and rising non-performing loans. Hence we expect our banking sector universe to provide 15% average return over 1-Year period slightly slower than the expected market return.
Slow GDP growth and Tax Attack: The current tight monetary policy and tax increase are unlikely to help the GDP growth numbers to improve. We expect 2Q & 3Q2016 GDP also to remain weak while growth is likely to pick up towards 4Q2016 amidst the rise in the construction led by Government starting off most of the stalled projects. VAT has been increased to 15% resulting in an incremental impact for the banking sector.
Credit growth to slow down to 16%: We expect private sector credit growth to slow down to 16% during 2016E gradually slowing down while 1H2016 continuing to remain on the high side. CBSL is comfortable with credit growth of 12%-15% in the sector. However, private sector credit growth shot up to 25% for 2015 amidst lose monetary stance.
NPLs to be on the rise in 2H2016 onwards: We expect Banking sector non-performing loans to increase with increase in the interest rate and weak economic condition: Non-performing loans and GDP always have a negative relationship. Downturn in the economy growth, real exchange rate appreciation and the rise in real interest rate contributes to increase in the Non-Performing loans.
Banking Sector on a HOLD with 15% avg. return over 1-Year Period: With Average sector return at 15%, current interest rates make valuations unattractive on expected return (Refer 5.1) despite comparatively cheap frontier market valuations. Banking Sector HOLD. We recommend a STRONG BUY on SAMP and NTB, BUY on COMB.X, HOLD on COMB.N, HNB.X, SEYB.N and SEYB.X. HNB.N and NDB are recommended as a SELL.