monirul@bracepl.com Md. Ashfaque Alam (Associate) ashfaque@bracepl.com EASTERN BANK LIMITED EASTERN BANK LIMITED January 2010 January 2010 Rating: OUTPERFORM Rating: OUTPERFORM Target Price: BDT 800 Target Price: BDT 800
Eastern Bank Limited (EBL) is fully online, modern private commercial Bank. EBL took over the businesses, assets and losses of erstwhile Bank of Credit & Commerce International (Overseas) Limited (hereinafter called BCCI) in 1992. The Bank commenced its business with four branches from 1992 and at present has 37 branches all over Bangladesh.
EBL has managed impressive growth in lending and deposits, capital adequacy and asset quality. It has a sound management, effective internal control systems and impressive profitability. Although focused on corporate lending, EBL has diversified its consumer banking business over the years. In 2010 it has added merchant banking and brokerage business in their investment banking wing.
EBL has achieved five years Cumulative Annual Growth Rate (CAGR) of 28.57% in loans & advances and 28.31% growth in deposits. The bank achieved average ROE and ROA of 18.38% and 1.87% respectively in the last five years. We expect the bank to improve on these levels in future years. Currently EBL has 37 branches and a off -shore banking unit in Bangladesh. It also has 876 foreign correspondents to facilitate inward foreign remittance to Bangladesh.
We initiate coverage of Eastern Bank Limited with an OUTPERFORM rating and a 12-month target price of BDT 800. This target price implies a P/E of 12.50x with 2010E EPS of BDT 72.57.This rating takes into account the impressive lending and deposit growth, adding new lines of businesses, diversified consumer and corporate loan product and well diversified loan portfolio.
Table 1: 10 largest banks by M cap, BDT MM Source: Company Annual Report and DSE web, as at 26 Jan 2010 Source: BRAC EPL Research and DSE web Graph 1: Close price and volume traded over a year 0 20000 40000 60000 80000 100000 120000 140000 0 100 200 300 400 500 600 700 Volume Close Company Summary 52-week Price Range (BDT) 280 - 659 Current Price 616.5 12-month Target Price 800.0 Cash Dividend 0.0 Total Return 30% Number of Shares MM 24.90 Market Cap BDT MM 15,340.5 Float (% of shares) 96% Revenue BDT 2008A 2009E 2010E Interest Income 5,233.7 6,301.0 7,057.0 Investment Income 862.9 1,138.2 1,758.4 Commission, fees, brokerage 770.9 886.6 1,081.6 Other operating income 519.0 581.2 697.5 Total revenue 7,386.4 8,907.0 10,594.5 Margins & Efiiciency 2008A 2009E 2010E Net margin 4.04% 4.50% 3.65% Operating efficiency 35.60% 33.61% 32.00% ROE 18.64% 26.13% 23.74% ROA 1.68% 2.36% 2.33% Loan/Deposit 95.40% 95.40% 99.55% Growth 2008A 2009E 2010E Assets growth 35.80% 20.42% 16.08% Loans and advances growth 28.10% 22.00% 20.00% Deposits growth 39.12% 22.00% 15.00% Earning growth 90.33% 78.29% 16.58% Per Share 2008A 2009E 2010E EPS 57.52 62.25 72.57 DPS .0 .0 .0 BVPS 341.25 269.38 341.95 EASTERN BANK LIMITED (DSE, CSE: EBL)
Source: Company Annual Report Source: Company Annual Report Source: Company Annual Report Products and Services snapshot
EBL markets a wide range of depository, loan & card products. These products include different types of Savings & Cur- rent Accounts, Personal Loans, Auto Loan, Debit Card, Pre-paid Cards, Internet Banking, Treasury, Syndication, Corpo- rate Banking and SME Banking services through a network of branches & centers countrywide. Eastern Bank has its presence in major cities/towns of the country. Highly diversified loan portfolio EBL is specialised in corporate lending. However, it has a well diversified loan portfolio. Currently it has exposure to 12 sectors such as textile, agriculture, pharmaceuticals, telecom and service industries, etc. Retail and SME together consti- tute about 23% of the loan portfolio Deposits: Modest growth as interest rates decline The bank achieved a five-year CAGR of 28.31% in deposits. Deposit growth slowed down to 24.83% in 2008. Deposit growth is still better compared to industry average (23%- 25%) deposit growth. In 2008 deposit taking rate was 39.12%.We are expecting 22% deposit growth in 2009 due to central banks pressure in interest rate reduction. Core cus- tomer deposits continued to increase. We expect 16%-18% growth of total deposits in next three years. Currently about 32% of total deposits is low cost (CASA). About 70% of EBLs total deposit are in the form of Fixed deposits which is a good source of fund.
Capital market operation: new line of business The banks investments, during the year 2009 (upto Q3), were made mostly in government securities which stood at BDT 8,149 million. In 2009 EBL started capital market op- eration. It has obtained Merchant Banking License and formed a separate subsidiary company . Recently it has ac- quired 60% stake of a securities trading house to operate securities trading business. The bank is also the sponsor of EBL 1st Mutual Fund of BDT 1,000 Million. Redemption of this portion after lock in period will add a significant amount in their bottom line. 10% 3% 2% 5% 2% 14% 4% 13% 12% 6% 2% 10% 17% Sectorwise loan portfolio Commerce and Trading Commodity Import Construction Edible Oil Refinery Electronic Goods Individuals 11% 1% 18% 70% 0% Deposit mix Current deposit Bills payable Savings bank deposits Fixed Deposit Bearer certificates of deposits 92% 8% Investment mix Government Others EASTERN BANK LIMITED (DSE, CSE: EBL)
Source: Company Annual Report Source: Company Annual Report Operating performance Operating income per employee has been increasing for the last five years and it was 3.8 Million in 2008. We are expect- ing EBL to increase this in the next years. EBL has plan to open few branches, booth and unit office. Operating expenses per employee is also increasing because of recruiting of new employees, opening up new branches, units, booths etc. Operating expenses as a percentage of total revenue remained stable at a level of 32%-35%. We expect that EBL will improve this ratio in next three years.
EBL shows their operating efficiency at a level of 33%-36%. This ratio is improving.
Non-funded income as a % of total operating income Non funded income arises mainly from commission, exchange, brokerage and other operating income. EBL has been earning 30%-45% level of non funded income. We are expecting that EBL will keep this percentage because of adding up new lines of business in Capital Market Operation. Earnings growth EBL achieved a CAGR of 28.52% in operating income in the past five years. In the first nine months of 2009, total operating income increased by 24.95% and total operating expenses increased by 21.29% (compared to the same period in previous year). However, EPS increased during first three quarters of 2009 by 48% from the same period in 2008. EPS for the first half and third quarter 2009 were BDT 27.17 & 46.00 respectively. We expect EBL to achieve this level of EPS in Q4,09. We are expecting 78.27% earnings growth in 2009. We expect significant improvement in ROE for the years 2009 and 2010. Expected ROE for the years 2009 and 2010 is 26.13% and 23.74% respectively. 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 M i l l i o n Operating income and Operating exp per employee Operating expense per employee, MM Operating income per employee, MM 0% 10% 20% 30% 40% 50% 2004 2005 2006 2007 2008 2009E 2010E 2011E Non funded income as a % of total op. income 30% 31% 32% 33% 34% 35% 36% 2006 2007 2008 2009E 2010E 2011E Operating ratio Operating efficiency EASTERN BANK LIMITED (DSE, CSE: EBL) Source: Company Annual Report
Allowance for classified loans The provision against classified loans of EBL decreased during the year 2008. Ratio of total provision for classified loans to required provision maintained was more than 100% in the year 2008. Segment analysis EBL generates more than 40% of total revenue from pure lending, 23% from investment income and 35% from fees, commission & other income Corporate banking division generates significant portion of total revenue. The following pie charts will give an overview of its segments. Source: Company Annual Report Global network EBL has global reach in terms of foreign exchange business. Currently it has more than 800 foreign correspondents that gives it easy access to foreign currency. Also, the off-shore banking units (located in the export processing zones) allows the bank to increase its export-related financing in Bangladesh. Table 2: Allowances for classified loans 42% 23% 21% 14% Nature wise revenue diversification Net Interest Income Investment Income Fees & Commission Income Other income 0 200 400 600 800 1000 1200 1400 1600 1800 Corporate Consumer SME Treasury M i l l i o n s Segment wise revenue diversification Asset Quality EBL had an NPL ratio of 3.30% at the end of 2008. EBLs NPL ratio is improving (reducing) over the years. Management is efficiently managing to improve their asset quality. Significant exposure to corporate sector added advantages to their objective. Allowances for classified loans 2006 2007 2008 Classified loans and advances MM 1,333.6 1,333.7 1,308.8 Provisions for classified loans MM 1,175.6 1,175.6 1,419.5 Provision adequacy 88% 88% 108% % NPL/ total loans and advances 3.79% 4.31% 3.30% Industry average NPL 12.34% 13.00% EASTERN BANK LIMITED (DSE, CSE: EBL)
Capital adequacy position and Basel II: a shift in risk management Basel II accord to be implemented from 2010 (parallel 2009), places heavy reliance on the internal risk assessment and manage- ment technique for the purpose of quantifying and allocating capital for credit, market and operational risks. EBL has formed BASEL II Implementation Unit (BIU) to implement and monitor the BASEL II Capital Accord. As at 31 December 2008, EBL had BDT 131.5 million surplus capital from the minimum requirement set by the Central Bank of BDT 4,000 million by August 2010.
EBLs total Risk Weighted Assets (RWAs) and core capital stood BDT 41,315 and BDT 4,270 million respectively as at 31 December 2008. The bank attained adequate capital level of 12.71% (regulatory requirement is 10%) as at 31 December 2008. This ratio was a little bit lower than 2007 because of increase in RWAs in 2008. Table 3: Capital adequacy Source: Company Annual Report
Corporate Governance, Risk Management
EBLs corporate governance philosophy encompasses not only regulatory and legal requirement but also various inter- nal rules procedures and practices based on the best practices of local and global banks. EBL has a group of efficient management personnel having proven track records. EBLs Internal control and Compliance (ICC) Department has its unique acceptability in the industry. ICC department is equipped with highly experience management team. . Most of the members of the board have decades of banking and business experiences .
Shareholding pattern
Sponsored Directors 3.43% , Institute 10.83% and general public hold 85.74% of total shares.
Capital position (under Basel I) 2006 2007 2008 Capital Adequacy ratio (Held) 14.00% 13.53% 12.71% Capital Adequacy ratio (Required) 9.00% 10.00% 10.00% Core capital 11.93% 11.07% 10.34% Supplementary capital 2.09% 2.46% 2.37% Surplus/(deficit) over BDT 4,000 MM in capital 131.5 EASTERN BANK LIMITED (DSE, CSE: EBL)
Table 4: Residual Income
Table 5: Comparative Information Residual Income Method Our residual income method of valuation estimates a value of BDT 807. We assume 22% ROE for the years of 2012-2016 (based on historical ROE), risk free rate of 9 % (average Gov. Securities rate), cost of equity of 16% and a terminal growth rate of 7%. VALUATION Relative valuation In valuing Eastern Bank, we compared ten largest banks listed on the DSE and found average trailing P/E and P/B ratios of 15.32x and 3.02x respectively. At current price, Eastern Bank trades at 9.90x P/E (trailing) and 2.29x (trailing). Using a 12.5x P/E multiple over 2010E earnings of 72.57, we deter- mine a price target of BDT 907.1. Using a 2.50x P/B multiple over 2010E book value of 342.00, we calculate a target price of BDT 854.9. We set a target price of BDT 800.00 for EBL that implies forward P/E and P/B ratios of 12.5x and 2.5x respectively. Table 6: Relative valuation Year 2009 2010 2011 2012 2013 2014 2015 2016 ROE 24% 24% 22% 22% 22% 22% 22% EPS 62 73 95 96 117 143 175 213 BVPS 269 342 437 533 650 794 968 1181 EQUITY CHARGE 0 43 55 70 85 104 127 155 RESIDUAL INCOME 29 40 26 32 39 48 58 TERMINAL VALUE 726 CASH FLOWS 29 40 26 32 39 774 Residual Income RF 9% Implied Beta 1 ERP 6% Cost of Equity 16% Terminal Growth 8% Value/Share 807 Domestic banks Price* EPS P/E BVPS P/B 2009E 2009E City Bank 829 37.29 22.22x 306.00 2.71x Islami Bank BD 599 53.34 11.23x 266.89 2.24x National Bank 667 38.03 17.54x 253.24 2.63x Dhaka Bank 480 45.67 10.52x 217.66 2.21x Social Islami Bank 321 16.57 19.39x 80.61 3.99x Prime Bank 663 61.11 10.84x 249.82 2.65x Brac Bank 784 57.99 13.52x 322.05 2.44x NCC Bank 603 63.30 9.53x 239.58 2.52x Eastern Bank 617 62.25 9.90x 269.38 2.29x Dutch Bangla Bank 2202 62.87 35.02x 278.00 7.92x EXIM Bank 378 32.87 11.48x 181.00 2.09x Bank Asia 496 39.13 12.66x 194.52 2.55x Average 15.32x 3.02x *As at Jan 25, 2010 Eastern Bank EPS BVPS 2010 estimates 72.57 342 Multiple 12.50x 2.50x Target price 907.1 854.9 Average Target price 856 12-month Target price 800 Dividend 0.00 Dividend yield 0 Total return 30% EASTERN BANK LIMITED (DSE, CSE: EBL)
Table 7: Comparative Information of 10 South East Asian Banks Source: Business week and Google finance In conducting a valuation for EBL, we have looked at the trading prices of some of the leading banks in the region. These banks are in mid-income countries with mostly mature banking markets, and have a slower growth prospect. Whereas Bangladeshi banks routinely achieve 30% growth in assets and deposits, growth rate in these markets have stabilized at around 10%. On the other hand, these banks are also better managed with superior asset quality and risk management practices.
These group of peer banks trade at an average of 17.22x P/E and 2.13x P/B (trailing). Consequently, we feel that the group of Bangladeshi banks in Table 5 are trading at a fair valuation. Regional banks Country Currency Price EPS P/E BVPS P/B ICICI India INR 831.6 32.07 25.93x 423 1.96x HDFC India INR 1,657.45 38.86 42.65x 355 4.67x State Bank of India India INR 2,093 200.80 10.43x 1140 1.84x Habib Bank Pakistan PKR 120 17.06 7.03x 82 1.47x Bank Alfalah Pakistan PKR 32.03 1.45 22.09x 13 2.47x Bangkok Bank Thailand THB 113.508 10.51 10.80x 88 1.30x Bank of Ayudhaya Thailand THB 22.3 0.81 27.53x 14 1.59x PUBLIC BANK Malaysia MYR 10.96 71.50 0.15x 4 2.71x Hatton Sri Lanka LKR 171 12.02 14.23x 112 1.52x Commercial Bank of Ceylon Sri Lanka LKR 185 16.23 11.40x 105 1.77x Average 17.22x 2.13x As at Jan 26, 2010 EASTERN BANK LIMITED (DSE, CSE: EBL) Table 8: Balance Sheet Source: BRAC EPL estimates and company annual reports Source: BRAC EPL estimates and company annual reports Table 9: Income Statement Balance Sheet, MM BDT 2006 2007 2008 2009E 2010E 2011E Cash 2,167.4 2,353.8 3,518.5 1,069.5 699.6 193.9 Balance with Other Banks & F.I 929.2 1,546.7 3,418.0 3,418.0 3,418.0 3,418.0 Investment 5,850.1 3,457.0 5,324.8 9,850.8 10,835.9 11,919.5 Loan & Advance 26,007.9 30,961.8 39,662.2 48,387.8 58,065.4 72,581.8 Fixed Assets 580.0 871.3 1,246.1 1,592.4 1,873.4 2,138.2 Other Asets 436.1 543.1 728.7 728.7 728.7 728.7 Total Assets 35,970.6 40,203.7 54,598.3 65,747.3 76,321.0 91,680.0 Liabilities & Equitites: Liabilities: Borrowing from other banks and F.I 4,405.4 3,793.5 4,948.0 4,948.0 5,442.8 6,531.4 Deposits 25,734.3 29,882.1 41,572.8 50,718.8 58,326.6 69,408.6 Other Liability 2,681.4 2,699.5 3,344.7 3,925.4 4,738.3 5,754.4 Total Liabilities 32,821.1 36,375.1 49,865.5 59,592.2 68,507.7 81,694.4 Shareholder's Equity: Paidup 828.0 1,035.0 1,386.9 2,284.9 2,284.9 2,284.9 Statutory reserve 828.0 1,035.0 1,386.9 1,386.9 1,386.9 1,386.9 Other Reserve 1,200.3 1,306.7 1,413.1 1,413.1 1,413.1 1,413.1 Bonus Shares .0 .0 .0 .0 .0 .0 Retained Earning 193.3 351.9 445.9 970.2 2,628.4 4,800.7 Total Equity 3,149.5 3,828.6 4,732.8 6,155.1 7,813.3 9,985.6 Total Liabilities & Equities 35,970.6 40,203.7 54,598.3 65,747.3 76,321.0 91,680.0 Income Statement, MM BDT 2006 2007 2008 2009E 2010E 2011E Interest Income 2,829.8 3,814.8 5,233.7 6,301.0 7,057.0 8,629.6 Interest Expense 2,160.2 2,502.5 3,682.4 4,137.0 4,965.7 5,807.9 Net Interest Income 669.6 1,312.3 1,551.2 2,164.1 2,091.3 2,821.7 Income from Investment 459.2 506.9 862.9 1,138.2 1,758.4 2,161.8 Commmission, Exchange & Brokerage 693.5 637.2 770.9 886.6 1,081.6 1,352.0 Other Income 289.0 365.7 519.0 581.2 697.5 837.0 Total Operating Income 2,111.3 2,822.0 3,704.0 4,770.0 5,628.8 7,172.4 Operating Expense 753.2 951.6 1,318.5 1,603.3 1,801.1 2,206.7 Profit Before Provision 1,358.1 1,870.4 2,385.5 3,166.8 3,827.7 4,965.8 Provision 223.7 584.7 454.5 580.7 812.9 1,016.1 Pre-Tax Profit 1,134.4 1,285.7 1,931.0 2,586.1 3,014.8 3,949.6 Tax 621.2 866.5 1,133.2 1,163.8 1,356.7 1,777.3 PAT 513.2 419.1 797.8 1,422.4 1,658.1 2,172.3 EASTERN BANK LIMITED (DSE, CSE: EBL) Table 10: Cash Flow Statement Source: BRAC EPL estimates and company annual reports Source: BRAC EPL estimates and company annual reports Table 11: Growth indicators Table 12: Margins and Efficiency Table 13: Other information Cashflow statement, MM BDT 2006 2007 2008 2009E 2010E 2011E Operating Cash Flow Net income .0 .0 .0 1,422.4 1,658.1 2,172.3 Non-cash items .0 .0 .0 773.0 1,029.0 1,280.9 Operating cashflow 412.7 1,237.0 1,561.8 2,195.4 2,687.2 3,453.2 Increase/decrease in ops assets and liab Investments .0 .0 .0 -4,526.0 -985.1 -1,083.6 Loans and advances .0 .0 .0 -8,725.7 -9,677.6 -14,516.4 Deposits and other accounts .0 .0 .0 9,146.0 7,607.8 11,082.1 Operating cashflow 72.5 -1,212.7 3,006.5 -4,105.7 -3,054.8 -4,517.9 Investing cashflow Investment in fixed and intangible assets -538.7 -497.1 -529.6 Investing cashflow -1,014.9 -187.8 -2,293.3 -538.7 -497.1 -529.6 Financing cashflow Increase/(reduction) in debt .0 .0 .0 .0 494.8 1,088.6 Dividend payment .0 .0 .0 .0 .0 .0 Financing cashflow -85.8 1,426.1 987.1 .0 494.8 1,088.6 Beginning cash balance 1,333.5 2,167.4 2,353.8 3,518.5 1,069.5 699.6 Change in cash -615.5 1,262.6 3,262.0 -2,449.0 -370.0 -505.7 Ending cash balance 2,167.4 2,353.8 3,518.5 1,069.5 699.6 193.9 Indicators 2006 2007 2008 2009E 2010E 2011E Growth Assets growth 31.28% 11.77% 35.80% 20.42% 16.08% 20.12% Loans and advances growth 46.46% 19.05% 28.10% 22.00% 20.00% 25.00% Deposits growth 32.68% 16.12% 39.12% 22.00% 15.00% 19.00% Earning growth -6.10% -18.33% 90.33% 78.29% 16.58% 31.01% Equity growth 14.94% 21.56% 23.62% 30.05% 26.94% 27.80% Margins and Efficiency 2006 2007 2008 2009E 2010E 2011E Loan/Deposit 101.06% 103.61% 95.40% 95.40% 99.55% 104.57% Return on investments 8.46% 10.89% 19.65% 15.00% 17.00% 19.00% Net interest Margin (rate of int inc - rate of int exp) 2.85% 4.38% 4.04% 4.50% 3.65% 4.06% Interest spread (lending rate - borrowing rate) 4.97% 5.91% 5.54% 5.58% 4.53% 4.69% Other information 2006 2007 2008 2009E 2010E 2011E Operating efficiency (Ops exp/Ops income) 35.67% 33.72% 35.60% 33.61% 32.00% 30.77% Operating income / employee (MM BDT) 3.4 4.1 4.9 5.7 6.2 7.2 Operating income/ branch (MM BDT) 84.5 100.8 108.9 119.3 102.3 113.8 EASTERN BANK LIMITED (DSE, CSE: EBL) IMPORTANT DISCLOSURES
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