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This week too, the stock market witnessed a considerable amount of volatility. Both ASPI and the MPI declined during the first half of the week registering a drop of 10.5 on the ASPI and 30.2 points on the MPI. Despite emergence of positive sentiment during the latter part of the week the market ended lower week-on-week. ASPI declined 5.5to close at 1,082.6 while the MPI declined 22 points to close the week at 2,093.5.

Light trading volumes dominated this week's activity with total turnover notching Rs.963.3 million with a daily average of Rs. 192.7 million. Foreign activity too remained moderate accounting for an inflow of Rs. 103.0 million.

Hotels stocks came back into to limelight with the hotel sector closing 3.5 points higher despite the negative sentiment in the overall market.

During the week, investor Dhammika Perera sold 3 million shares of Hotel Reefcomber amounting to Rs. 22 million. Further 1.7 million shares of Asian Hotels were traded with a turnover of Rs. 29 million.

Printcare, Hotel Reefcomber, Hunters, Bairaha farms and Sri Lanka Telecom remained amongst the heavily traded stocks.

Point of view: Lack of positive news - reason for the volatile market Despite the commencement of the Paris meeting LTTE is yet to make a statement on the proposed interim administrative structure.

However they expressed their reluctance to remove the Kiniya camp, thus making it one of the key obstacles towards resuming the talks.

Provincial elections could be a feeler

The outcome of the upcoming provincial council elections can be viewed as one of the crucial factors towards the political stability of the country. If the opposition parties manage to dominate the provincial elections, we feel that the chances of a parliamentary election would be high.

At present the opposition is not confident about a people's mandate if parliament is dissolved.

We believe this is because the general population is partially satisfied with the peace process and economic growth in the country, despite the high cost of living, which has come under severe criticism.

Therefore the Government needs to address the cost of living issue sooner than later, as it is a threat to its survival, and consequently the political stability of the country.

We feel that the market would continue to fluctuate in a narrow range in the coming weeks. The next upside movement would depend on the resumption of the peace talks, which we expect towards the later part of the month.

Sampath Bank results for 1H 2003:

Earnings up 63%

Sampath Bank released results for the first half of FY2003 recording a 63% growth in profitability compared to the corresponding period of FY2002. Interest rates decline, loan book grows positively

The growth in total interest income is significant compared to most other banks, as Sampath, despite a low interest rate scenario has recorded an increase of 15% compared to the first half of 2002. Sampath's loan book has also recorded a considerable growth during the period under review, as net loans grew by 16% since 30th June 2002.

Income from treasury operations shown under interest income

Unlike other banks, Sampath has shown the profits from treasury operations under interest income, resulting in the above growth in interest-based income. We believe that Sampath's 56% growth in net interest income cannot be compared with the net interest income recorded by other banks, as most banks show the income from treasury operations under the other income category. Therefore we have analysed the growth in net interest income excluding the profits from the treasury, which is approximately Rs.585 million.

This indicates that Sampath's growth in interest income was largely due to treasury operations and in fact the low interest rate regime has affected growth in total interest income.

However the Bank has managed to maintain an almost similar level of interest spreads as in 2002, despite the low interest rates in the market, since retailers dominate its client base. The interest expense declined by 5.9% to Rs.1,436 million, and the considerable interest spreads and income from treasury operations resulted in a 56% growth in net interest income.

Fee based income is a potential area for growth

Other income grew by 17%, as Sampath showed a 25% growth in fee & commission based income. This is inline with our expectation that Sampath has scope to improve fee income, especially through its Internet Payment Gateway and credit cards. The lower depreciation in the rupee was the main cause for the 20% decline in foreign exchange income.

Provisions up 294%: a strict policy While recording growth in turnover, Sampath Bank has increased its provisions from Rs.53 million to Rs.210 million, up by 294% in 1H2003 compared to the corresponding period of 2002. This, we believe is an effort to clean up the loan book, to meet any changes to the provisioning policy of the Central Bank, in the future.

Currently Sampath Bank pays Rs.119 million in income tax and with the introduction of the Value Added Tax (VAT) an additional burden of Rs.63 million has come into effect. Thus the effective rate has increased to 30% from 24% last year. We believe that Sampath could further reduce its effective tax rate, once the tax-planning issues with regard to off-shore profits, which are taxed at a rate of 0%-5%, are considered.

The net profit grew by 63% to Rs.391 million during the first half, resulting in an annualised EPS of Rs.17.68. We do not expect Sampath to maintain the same level of earnings growth throughout the year, as the low interest rate scenario should have an impact towards the latter part of the 2003. Further tight provisioning and the VAT surcharge would impact the profit growth of the Bank.

Our forecasted net profit for FY2003 for Sampath stands at Rs.578 million, with an EPS of Rs.13.10. However, the forward multiples still remain attractive at 6.9x. We expect a further 20% jump in profits during FY2004 to Rs.692 million to yield a PER of 5.8x.

Sampath - still attractive

Sampath is expected to record a growth in ROE over the next two years. Employees holding on to almost 20% of the bank could well create a dedicated work force. Furthermore, new markets in the North East and the growth in leasing business should contribute towards an improvement in earnings. The share has under performed the market making it undervalued relative to the rest of the sector. We recommend the stock as a Buy.

Commercial Bank results for 1H 2003

Earnings up 7.9%

Commercial Bank released results for the first half of 2003 with a 7.3% increase in Profit attributable to ordinary shareholders.

Total interest income showed a marginal decline of 1% to Rs.3.7 billion, due to the continuous decline in interest rates. A 20% growth (YoY) in the loan book has enabled the bank to maintain its total income. However the loan book grew by just 3% since 31st December 2002, despite Commercial raising new funds through debenture and preference share issues. The Bank benefited from the low interest rate regime as the net interest income jumped up by 29% to Rs.1.76 billion, as a result of an 18% reduction in interest expense.

Foreign Exchange profit down

As expected, foreign exchange profit declined by 32% to Rs.168 million, as the rupee depreciated at a lower rate compared to the same period last year. Other income, which comprises of fee-based income, commissions and recovery of bad debts, increased by 254% to Rs.529 million compared to the corresponding period of 2002. As a result of such growth, the Group recorded a 25% growth in total revenue to Rs.2.46 billion.

Operating expenses grew by 19%, largely due to a 122% increase in retirement benefits. Personnel costs grew by 15% and this resulted in a 31% jump in operating profits before provisions.

Provisions up 179%

The Bank provisioned Rs.302 million during the first half of FY2003, 179% more than what it provisioned during the first half of 2002. According to the management, the bank recovered some of the loans that they provided for in FY2002. In FY 2002 Commercial Bank wrote off Rs.401 million, described as a measure of prudence by the management.

VAT curtails profit growth

Profit before tax was up by 12% during the first half of 2003 but as a result of the additional burden of Rs.113 million due to the newly introduced Value Added Tax, net profit was up by only 7.2% to Rs.697.6 million. While other commercial banks such as Seylan, HNB, Nations Trust etc. showed considerable profit growth during the first half of FY2003, Commercial recorded a moderate growth of 7% for the same period.

This we believe is a result of Commercial's policy to be focused on core business activities, limiting other opportunities, such as capital gains from equity markets.

We maintain our profit forecasts, as per the last revision, and expect an 8.8% growth in Profit attributable to ordinary shareholders during FY 2003. We have factored the bonus, preference share and debenture issues in our forward forecasts and the fundamentals still look positive. We project a diluted EPS of Rs.26.6 for FY2003 resulting in PER of 7.1x. The earnings for FY2004 are expected to grow by 21% to Rs.1.57 billion, reducing the PER to 6.7x.

Rights issue to further improve capital adequacy

Commercial Bank recently announced a 1 for 4 rights issue to raise Rs.1.9 billion to strengthen it's equity capital. The Bank also disclosed its plans to acquire Credit Agricole Indosuez's operations in Bangla desh. We believe that the rights issue would help the Bank strengthen its capital adequacy requirements and also help raise funds for the proposed acquisition.

We believe Commercials clean loan book will grow at 18% during FY2003 and the debenture and preference share issues would provide additional funds for such growth.

Therefore we maintain our Buy recommendation at the current price levels.

Disclaimer

The views based herein are expressed with no malified intention to any party Whatsoever based on already published data and from the information obtained by the research team. No matter published as above creates any liability of any kind whatsoever on HNB Stock Brokers Pvt Ltd or its associates. The views cannot be reproduced in any form without the explicit (written or otherwise and photocopied) permission from HNB Stock Brokers (Pvt) Ltd.

HNB Stokbrokers Weekly, Market Review

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