Seylan Bank shares to return nearly 48% by 2018: FC Research

As interest rates rise, the listed bank’s earnings could grow five times faster over the next two years compared to 2016 by adjusting lending interest rates faster than deposits

Listed Seylan Bank’s voting and non-voting shares will return up to 48% by the end of 2018 as rising interest rates accelerate the bank’s annual profit growth rate by more than five times over the next two years, according to forecasts by FC Research, a unit of First Capital Equities, a stockbroker firm.

Seylan’s voting shares will gain 34% in the 18 months to end-2018, and deliver a dividend yield of 9% for a total return of 44% (27% annualised). Non-voting shares will gain 34%, but with a higher dividend yield of 14%, with the forecast return at 48% (30% annualised), FC Research predicts.

Typical of most banks, “Seylan Bank is benefitting from rising interest rates by re-pricing its loans at a faster rate than deposits,” FC Research says. Net interest income (NII), the difference between interest income earned from borrowers and interest paid to depositors—which is the equivalent of the gross revenue of a business—increased 12% in 2016 to Rs13 billion. FC Research forecasts NII will grow 16.5% annually over the next two years to Rs20.5 billion in 2018. Profits, which grew at 4% to Rs4 billion in 2016, will improve 22% each year over the next two years to Rs6 billion.

Return on average equity will increase to 16.6% in 2018 from 14.6% two years ago.

However, when deposit interest rates are eventually adjusted, margins will begin to tighten. Seylan Bank’s net interest margin, which will peak at 5.53% in 2017, will decline to 5.19% the following year. Bad loan provisioning—which is not a write-off, but a prudential measure—will also eat into profits, as borrowers struggle to service their loans as interest rates rise. In 2016, Seylan Bank made statutory provisioning for bad loans amounting to Rs954 million. Over the following two years, the bank is forecast to provide Rs2.9 billion in bad loan provisions.

The bank’s loan book growth will slow from 22% to 15%. However, FC Research believes Seylan Bank’s ability to lend to construction companies and large firms will drive lending growth and profitability beyond 2018.