NTB - 31.12.2011

http://www.cse.lk/cmt/upload_report_file/387_1330080740515.pdf

Good results, Atractive undervalued share

Gaja wrote:http://www.cse.lk/cmt/upload_report_file/387_1330080740515.pdf

Current PER 8.64

I don't see anything impressive in the results or the future outlook in the bank sector to say it's undervalued.

As I mentioned elsewhere and as expected there is QoQ drop but YoY growth. Actually their quarter Eps of 1.6 and annual Eps of 6.73 is a bit more than I expected. Thanks to vat and tax benefits.

Their operating profit before taxes is almost flat but for a emerging bank with lot of expansion going on it is acceptable I think. Their branch expansion and tapping into SME sector will take some time to reap benefits. Overhead cost must be high also.

Overall I think NTB is on the right track with 2 giants ( JKH and CFIN) backing them. In the longer run NTB is heading off to be a big league bank ( apart from any unforeseen event). Maybe in 15-20 years we might look at NTB like now how we look at COMB.

Also I liked they gave a marginally growing dividend ( RS 2.1) but not too much ( unlike PABC). Iti s best to invest profits for shareholder wealth creation and expansion than giving short term candy.

I had calculated NTB profit in one of my previous post/reply.... Though my Profit before tax number is off by LKR4.4 million (423mn-419mn), Profit after tax number is off by 91mn. This is I guess due to over provision of taxes in previous quarters which has resulted in a lesser tax for the last quarter. Refer below quarterly profit before tax and tax amounts....

Q1 2011 PBT 574,297K Tax 198,443K Tax % 34.55%
Q2 2011 PBT 550,162K Tax 189,763K Tax % 34.49%
Q3 2011 PBT 662,242K Tax 228,539K Tax % 34.66%
Q4 2011 PBT 423,179K Tax 59,242K Tax % 14.00%

The above shows how profit from previous quarters shifted to last quarter through tax provisions. It is only a 14% tax provision in the last quarter but a 35% provision in previous quarters!!!

http://forum.srilankaequity.com/t15334-jkh-results-out#106644

Share Dividend Mkt Price
2009 2010 2011

NTB 1.50 2.00 2.10 58

HASU 1.50 1.80 2.10 50

HASU has had a rights issue and capitalisation and still declared a rs. 2.10 dividend.

Just the facts before ppl get too impressed by NTB. Good share though.

raa wrote:Share Dividend Mkt Price
2009 2010 2011

NTB 1.50 2.00 2.10 58

HASU 1.50 1.80 2.10 50

HASU has had a rights issue and capitalisation and still declared a rs. 2.10 dividend.

Just the facts before ppl get too impressed by NTB. Good share though.

Raa, what you say is okay if we only look at dividend yield. But for longer term investment we should look at other factors as the strength of the company and future growth potential. Giving out big dividends in the growing stage is not too great as the money could be used for better wealth creation. Having said that HASU is not doing too bad either. It still in the bottom half it sector with market share but is growing. But really if we compare these two are in different sectors. One is a bank other an insurance company. But both companies are decent.

Depend of you investment goals and plans.

BTW if one looks at Dividend yields JINS is the way to go I think. At around Rs 12.5 with a possible ( not guranteed) Rs 1 dividend it beats all of them with dividend yield.

Ya sorry, your very correct slstock.

HASU is a much smaller mkt cap than NTB.

Both sectors have pretty good prospects but insurance penetration is a lot smaller and has a greater growth potential. HASU is a smaller country backed by HNB so I'm very optimistic about its prospects.

@greedy, slstock: can you kindly explain why the tax provisions for the last quarter has dramatically decreased? was there a tax benefit for the banking sector for the last quarter?

Thanks in advance.

Cheers!

@slstock: you have mentioned this in a previous thread:

"I am not sure whether NTB will show a QoQ growth as its december quarter usually is less productive.
We should not expect eps as last quarter. Greedy also calculated this somewhere."

I'm dying to know why the last quarter is usually less productive. I noted that their "Non interest expenses" have dramatically increased in this quarter. Mainly "Personnel Costs" (year end bonuses for big bosses?) and "Loss on trading / investment securities (they also trade in CSE?).

In any case, slstock and greedy seems to have a lot of understanding + experience in the stock market. Many thanks for your generous contributions

Cheers!

anubis wrote:@greedy, slstock: can you kindly explain why the tax provisions for the last quarter has dramatically decreased? was there a tax benefit for the banking sector for the last quarter?

Thanks in advance.

Cheers!

Answer is in my reply... My guess is that first 3 quarters have been provided for a higher tax and those over provisions reversed in the final quarter... thereby a lesser tax provision in the final quarter.

@greedy: what I did not get is, I always thought "tax" is some fixed rate decided by the government.

So, is it that the actual tax rate is something less than 34% for the entire year but the bank has provisioned at 34% for the first three quarters and at a lower rate for the last quarter? (may be to cover up for the increases in non-interest expenses which are usually higher in the last quarter?)

I don't understand why they have to do this, I mean why not just provision at a constant tax rate? the final result would be the same.

Thanks for the explanation.

Cheers!

anubis wrote:@greedy: what I did not get is, I always thought "tax" is some fixed rate decided by the government.

So, is it that the actual tax rate is something less than 34% for the entire year but the bank has provisioned at 34% for the first three quarters and at a lower rate for the last quarter? (may be to cover up for the increases in non-interest expenses which are usually higher in the last quarter?)

I don't understand why they have to do this, I mean why not just provision at a constant tax rate? the final result would be the same.

Thanks for the explanation.

Cheers!

Income tax rate for banks on profits earned on Sri lankan operations is 28% and not 34%. But the calculation of tax is not a straight forward one. That means tax provisions are not made on accounting profits but it is made on taxable profits.

Accounting profits and taxable profits are different because.... certain expenses and income are excluded from accounting profits to arrive at taxable profits.

So if you calculate tax as a percentage of Profit before tax, it wont be exactly 28% but it would be an approximation to that. It is due to difference in accounting and taxable profits. PM me if you need further explanation.

But in the NTB's case, the fluctuation from 34% tax in first three quarters to 14% in the final quarter is due to excess provisions made in the previous quarters (My guess).

If you look at NTB's 12 months numbers, effective tax rate is 30.58% (676mn/2,210mn*100) which closer to the tax rate of 28%.

The reason for the difference between 30.58% and 28% is differences between accounting and taxable profits.


P.S. I'm not negative on NTB.... it has good long term potential.

@greedy: Thanks a lot for the very clear explanation.

So, tax is not calculated on the "profits before tax" amount directly - even though that's how it appears on the income statement. And that's why the "visible" tax rate is not exactly 28% (as it should be).

One other possibility I derived from your explanation is that it might be the case that "taxable profits" reduced vastly in the final quarter. Thus, resulting in an even smaller tax rate when calculated on the "accounting profits" directly.

I held NTB shares sometime back but then I realized there are better banking counters. However, this is one of those shares I'm keeping an eye on - I feel the current price is OK but not "attractive" enough. I want to enter around 50 - 52 (if it comes to that level ever again).

Cheers!

anubis wrote:@greedy: Thanks a lot for the very clear explanation.

So, tax is not calculated on the "profits before tax" amount directly - even though that's how it appears on the income statement. And that's why the "visible" tax rate is not exactly 28% (as it should be).

One other possibility I derived from your explanation is that it might be the case that "taxable profits" reduced vastly in the final quarter. Thus, resulting in an even smaller tax rate when calculated on the "accounting profits" directly.

I held NTB shares sometime back but then I realized there are better banking counters. However, this is one of those shares I'm keeping an eye on - I feel the current price is OK but not "attractive" enough. I want to enter around 50 - 52 (if it comes to that level ever again).

Cheers!

Highlighted in red & bold.... My guess is different.... they made a excess provision in first three quarters.. so they reduced tax provision for final quarter.

You are welcome!

greedy wrote:

anubis wrote:@greedy: Thanks a lot for the very clear explanation.

So, tax is not calculated on the "profits before tax" amount directly - even though that's how it appears on the income statement. And that's why the "visible" tax rate is not exactly 28% (as it should be).

One other possibility I derived from your explanation is that it might be the case that "taxable profits" reduced vastly in the final quarter. Thus, resulting in an even smaller tax rate when calculated on the "accounting profits" directly.

I held NTB shares sometime back but then I realized there are better banking counters. However, this is one of those shares I'm keeping an eye on - I feel the current price is OK but not "attractive" enough. I want to enter around 50 - 52 (if it comes to that level ever again).

Cheers!

Highlighted in red & bold.... My guess is different.... they made a excess provision in first three quarters.. so they reduced tax provision for final quarter.

You are welcome!

I think all the banks and financial institutions will have benefit from the taxation this time, reduction in income tax rates, removal of SRL, and the reduction of V.A.T on financial services.

Even other companies also will report a considerable saving on the tax due to reduction in Income Tax Rate and removal of SRL. But will the finance cost will go up once again!!!!

Feb 25, 2012 (LBO) - Profits of Sri Lanka's Nations Trust Bank rose 54 percent in the December 2011 quarter to 363 million rupees from a year earlier, helped by non-interest income and a lower tax bill, despite narrower interest margins.

The bank reported earnings of 1.60 rupee per share for the quarter. In the year to December 2012 the bank reported earnings of 6.73 rupees per share on profits of 1.53 billion rupees, which grew 41 percent from a year earlier.
The bank's net interest income grew 8.0 percent in the quarter to 2.66 billion rupees and interest expenses grew at a faster 16 percent to 1.54 billion rupees forcing net interest income down by a marginal one percent to 1.16 billion rupees.

"Whilst lending rates were driven down by lower market interest rates and revival of loan growth, funding costs trended upwards as competition increased and liquidity diminished alongside credit growth," NTB said in a statement.

NTB said its countered falling net interest margins by shifting assets to more high yielding areas.

An interest rate cap on credit card lending had also reduced interest income, but the card business model had been reconfigured to improve yields on the second half of the year, the bank said.

"Trade finance volumes, both on imports and exports picked up significantly compared to the previous year with the resultant income increasing by 34 percent," NTBsaid.

"Credit card related non-fund based income grew by 29 percent.


"With the re-configuration of the cards business model coming into force, greater attention was paid to increase business drivers on spend and card acquisitions."
Deposit Management

NTB said it had started aggressively raising deposits ahead of a rate hike anticipating conditions ahead, resulting in a 39 percent deposit growth to 66 billion rupees which kept pace with 39 percent growth in the loan book to 62 billion rupees.

Deposits grew 66 billion rupees.

“Our bank had its best year ever in 2011, not only were we able to report a significant uplift in earnings but also a stable balance sheet recording a balanced growth in deposits and advances," chief executive Saliya Rajakaruna saiod.

"The Bank’s growth over the recent past and performance in 2011 is a continuation of this progressive growth somewhat mirroring the growth of Sri Lanka."

The growth in credit was driven primarily by retail and SME, leasing and consumer finance.

NTB's non-interest income rose 17 percent to 612 million rupees with unspecified non-operating income rising 32 percent to 532 million rupees, though foreign exchange income fell 34 percent to 79 million rupees.

Loan loss provision reversals increased to 71 million rupees in the quarter from 26 million a year earlier. Non-performing loans fell to 2.3 billion rupees by December 2011 from 3.0 billion rupees in December 2010.

Value added tax on financial services fell steeply to 22 million rupees from 126 million rupees and income tax fell to 59 million rupees from 172 million rupees, helping boost profits.

The bank had gross assets grew 23 percent to 83 percent during the 12 months to December. Net asset grew 27 percent to 8.6 billion rupees.


http://www.lbo.lk/fullstory.php?nid=1866012682

The above article did not mention about the Loss on Trading / Investment Securities LKR222mn for 12 months ended 31/12/2011 and LKR188mn for quarter ended 31/12/2011.

This may not be a recurring item at this magnitude.

@Gaja: you said this:

"I think all the banks and financial institutions will have benefit from the taxation this time, reduction in income tax rates, removal of SRL, and the reduction of V.A.T on financial services."

Did these things happen during the last quarter of 2011? can you kindly point to the sources (news items?) that explain these reductions?

I thought tax reductions happened sometime back and not only applicable for the last quarter. But I'm not aware of the exact dates.

Cheers!

anubis wrote:@Gaja: you said this:

"I think all the banks and financial institutions will have benefit from the taxation this time, reduction in income tax rates, removal of SRL, and the reduction of V.A.T on financial services."

Did these things happen during the last quarter of 2011? can you kindly point to the sources (news items?) that explain these reductions?

I thought tax reductions happened sometime back and not only applicable for the last quarter. But I'm not aware of the exact dates.

Cheers!

Yes friends its happen sometime back, the 1st year of assessment for the March Companies it will be 2011/2012 ( Period from 01.04.2011 to 31.03.2012 ), and for others its December 31st 2011. So what i mean is you can expect the same benefit for the 2012/2013 Y/A or year ended 31st December 2012.

Reduction of V.A.T Rate on financial services happen sometime back

There reduction of V.A.T Rates for the Luxury items effected immediately after the budget presentation, if i am not mistaken with effect from 23rd November, 2010.

@Gaja: Thanks!

Anubis,
To simply just look at the Dec quarter performance for NTB in past year.


As you might know the TAx was reduced for corporates from 35% to 28% after 2011 budget . Banks also benefit from lowering of Vat from 20 to 12%.

So,maybe you can get a general idea why NTB could afford to lowers their Taxes paid in DEC quarter as they have assessed them higher rate in the before 3 quarters.

@slstock: Thanks!

December quarter performance for NTB seems to be comparatively lower in 2010 as well.

I have created a separate thread for tax reduction issue: http://forum.srilankaequity.com/t16369-a-tax-analysis-of-several-banks

Cheers!

Sri Lanka Nations Trust Bank net up 54-pct

Profits of Sri Lanka's Nations Trust Bank rose 54 percent in the December 2011 quarter to 363 million rupees from a year earlier, helped by non-interest income and a lower tax bill, despite narrower interest margins.

The bank reported earnings of 1.60 rupee per share for the quarter. In the year to December 2012 the bank reported earnings of 6.73 rupees per share on profits of 1.53 billion rupees, which grew 41 percent from a year earlier.
The bank's net interest income grew 8.0 percent in the quarter to 2.66 billion rupees and interest expenses grew at a faster 16 percent to 1.54 billion rupees forcing net interest income down by a marginal one percent to 1.16 billion rupees.

"Whilst lending rates were driven down by lower market interest rates and revival of loan growth, funding costs trended upwards as competition increased and liquidity diminished alongside credit growth," NTB said in a statement.

NTB said its countered falling net interest margins by shifting assets to more high yielding areas.

An interest rate cap on credit card lending had also reduced interest income, but the card business model had been reconfigured to improve yields on the second half of the year, the bank said.

"Trade finance volumes, both on imports and exports picked up significantly compared to the previous year with the resultant income increasing by 34 percent," NTBsaid.

"Credit card related non-fund based income grew by 29 percent.