1. 1.1 1.2 1.3 1.4 1.5 2 2.1 2.2 2.3 2.4 3 3.1 3.2 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 5 5.1 5.2
Bangladesh Economic Outlook .................................................................................... 2 Annual Indicators: .......................................................................................................... 2 Country Information: ..................................................................................................... 2 GDP Analysis: .................................................................................................................. 3 Monetary Policy: ............................................................................................................. 3 Capital Market (DSE) Performance: ............................................................................. 4 Bangladesh Banking Sector .......................................................................................... 5 Structure of Industry: .................................................................................................... 5 Savings and Deposits: .................................................................................................... 5 Loans and Advances: ...................................................................................................... 5 Interest Rate Trend: ....................................................................................................... 6 Peer Group Comparison ................................................................................................ 7 Key Indicators as at 2007 .............................................................................................. 7 Key Indicators as at 2008 .............................................................................................. 7 Company Analysis: AB Bank Ltd .................................................................................. 8 Investment Indicator ..................................................................................................... 8 Share Price Performance: ............................................................................................. 9 Organizational Profile ................................................................................................... 9 Management: ................................................................................................................ 10 Key Functional Areas: ................................................................................................... 10 The Year 2009 in perspectives: .................................................................................. 10 Financial Performance: AB Bank Ltd ......................................................................... 11 SWOT Analysis .............................................................................................................. 12 Valuation .......................................................................................................................... 14 Free Cash Flow to Equity Method: .............................................................................. 14 Relative Valuation: ....................................................................................................... 15
1.
1.1
Bangladesh Economic Outlook
Annual Indicators:
Table I: Major Annual Macroeconomic Indicators for Bangladesh
FY 2004 FY 2005
266,974 5.96 441 63.75 5.9 11.25 3,023.60 23,646.97 35,404.10 151,446.40 6.48 53,961.40 72,945.20 (18,983.80)
P
FY 2006
284,673 6.63 447 69.67 6.98 12.99 3,483.80 32,274.63 42,652.30 180,674.20 7.16 69,900.80 89,321.20 (19,420.40)
FY 2007
302,971 6.43 487 68.80 6.77 12.75 5,077.20 41,298.54 50,168.00 211,504.20 7.20 83,205.10 107,234.30 (24,029.20)
FY 2008
321,786 6.21 554 68.52 7.31 12.31 6,149.00 54,295.16 59,314.40 248,795.00 9.94 98,160.00 133,794.30 (35,634.30)
FY 2009
5.00 69.03 -
P
GROSS DOMESTIC PRODUCT GDP Growth GDP per capita (PPP) FINANCIAL INDICATORS Exchange Rate (end-period) Sch. Bank Deposits Rate (w.ave) Sch. Bank Lending Rate (w.ave) Foreign Exchange Reserves Workers Remittance MONEY SUPPLY & INFLATION M1 (end-period) M2 (end-period) Average General Inflation-CPI FOREIGN TRADE Exports (FOB) Imports (FOB) Trade Balance
BDT (cr) (%) USD (BDT:USD) (%) (%) USD (mn) BDT (cr) BDT (cr) BDT (cr) (%) BDT (cr) BDT (cr) BDT (cr)
251,968 6.27 418 60.43 5.56 10.83 2,705.00 19,869.80 30,448.00 129,721.70 5.83 45,534.70 57,816.50 (12,281.80)
7,937.60 58,192.52 61,519.00 274,310.30 8.10 124,941.40 171,971.16 (47,030.20)
Source: Monthly Economic Trends, March 2009, Bangladesh Bank ; = Projected;
1.2
Country Information: Bangladesh is the world’s 48th largest economy (USD 225 billion) based on GDP derived from the Purchasing Power Parity calculation. It also accommodates the world’s 7th largest population (162 mn) within its paltry 144,000 sq. km land mass. Despite encountering frequent natural disasters, poor governance and political instability, Bangladesh’s economy has continued to show paradoxical resilience over the years. Its geographic location close to the world’s two fastest growing economies, China and India, is supposed to act as the main driving force towards Bangladesh’s economic progress. In most part of this decade, Bangladesh has managed to maintain a GDP growth in and around the 6% mark. Till to date, Bangladesh’s economy appears to be well insulated from the global economic meltdown, as the IMF projects a 5.0 % GDP growth for Bangladesh in 2009, despite the world’s economy contracting by 1.3% (World Economic Outlook, Apr 2009). In long term outlook, however, growth potential for this country is extremely promising. This can be inferred from the inclusion of Bangladesh in Goldman Sachs’ “Next-11” countries (2005) and in JP Morgan’s “Frontier Five” countries (2007). According to JP Morgan, Bangladesh ranks fourth in growth in economically active population. Bangladesh’s return to a democratic system of governance in Dec 2009 will definitely enhance economic activity and its image in the outer world. The recent anti-corruption drive has also made Bangladesh to substantially improve in Transparency International Bureau’s Corruption Perception Index. Bangladesh now scores a CPI of 2.0 which is much better than the embarrassing 0.4 score back in 2000. However, political instability still remains the inherent
risk in the economy and the current government needs to address this issue with utmost importance.
1.3 GDP Analysis: Bangladesh’s robust growth is mainly accounted by its recently booming service sector and manufacturing sector. The service sector now comprises near about 60% of the total economy. The financial intermediation sector marks an 8.52% average growth, being the second fastest growing sector in the economy.
Table II: Sector Wise GDP Composition of Bangladesh
Sector
MANUFACTURING AGRICULTURE & FORESTRY WHOLESALE & RETAIL TRADE TRANSPORT, STORAGE & COMMUNICATION CONSTRUCTION REAL ESTATE, RENTING & BUSINESS ACTIVITIES COMMUNITY, SOCIAL & PERSONAL SERVICES FISHING PUBLIC ADMINISTRATION & DEFENCE EDUCATION HEALTH & SOCIAL WORKS FINANCIAL INTERMEDIATION ELECTRICITY, GAS & WATER SUPPLY MINING & QUARRYING HOTEL & RESTAURANTS GDP at constant market price Source: Bangladesh Bureau of Statistics
FY2004
16.2% 18.0% 14.0% 9.8% 8.8% 8.3% 7.6% 5.1% 2.6% 2.4% 2.2% 1.6% 1.6% 1.1% 0.7% 100.0%
FY2005
16.5% 17.3% 14.1% 10.0% 9.0% 8.1% 7.5% 5.0% 2.7% 2.4% 2.3% 1.7% 1.6% 1.1% 0.7% 100.0%
FY2006
17.1% 17.0% 14.1% 10.1% 9.1% 7.9% 7.2% 4.9% 2.7% 2.5% 2.3% 1.7% 1.6% 1.2% 0.7% 100.0%
FY2007
17.5% 16.6% 14.2% 10.2% 9.2% 7.6% 7.1% 4.7% 2.7% 2.5% 2.3% 1.8% 1.6% 1.2% 0.7% 100.0%
FY2008
17.8% 16.2% 14.4% 10.4% 9.1% 7.5% 7.0% 4.6% 2.8% 2.6% 2.3% 1.8% 1.6% 1.2% 0.7% 100.0%
Ave Growth
8.64% 3.92% 7.13% 7.77% 7.56% 3.66% 4.27% 3.77% 7.76% 8.30% 7.30% 8.52% 6.53% 8.45% 7.34% 6.43%
1.4 Monetary Policy: During FY08, the monetary policy stance of BB pursued a growth supportive monetary policy in line with other policies to achieve targeted growth and facilitate rehabilitation of the economy from the losses due to flood and cyclone (Sidr). Price stability and adequate credit flow was also considered as important. Money supply growth (14.7%) was slightly increased as compared to the preceding year. Inflationary figures are now going down, as point to point CPI measures for January 2009 are 6.83% and 4.88% for food and non-food items respectively. In its Monetary Policy Stances for HY FY09, Bangladesh Bank has urged to maintain a growth facilitating monitory policy with prime focus on unhindered flow of private sector credit to the economy’s productive sectors. The central bank has increased the repo rate, for the first time in 3 years, to discourage undue expansion of private sector credit to less productive sectors. Lately, the Bangladesh Bank has asked the Commercial Banks to slash the interest rate on deposits and also fixed a ceiling on lending interest rate (for certain loans) at 13%. In accordance with this issuance, the Association of Bankers in Bangladesh (ABB) has decided to lower the deposit rate to below 10% to reduce their cost of fund. The country's commercial banks are now offering interest rates ranging from 5.25% to 13.50% on fixed deposit schemes, while the rates for saving accounts vary between 2.50% and 8.00%, according to the central bank statistics.
Based on Bangladesh Bank Statistics, the yield curve (as at 10th May) on BB treasury debts is shown below. Currently the yield from short term deposit in BB has been reduced. Chart XX: Yield Curve
14% 12% 10% 8% Yield 6% 4% 2% 0% 0 5 10 15 Year 20 6.25% 5.43%
3.76%
10.15%
10.23%
12.00% 11.48%
10-May-09 Log. (10-May-09)
1.5 Capital Market (DSE) Performance: Dhaka Stock Exchange’s General Index has performed well over the last period Jul’03 – Mar’09. Its index value rose from 823.26 to 2649.49, with a maximum of 3167.99 reached on May’08. The CAGR of this index is 21% over the study period. Currently there are 280 publicly listed companies in Dhaka Stock Exchange, among which the highest number of companies are from the Banking and Insurance Sector (48). Chart: DGEN performance (70 weeks)
3,500 3,000 2,500 2,000 2,649.49 3,167.99
1,500
1,000 500 Sep-02 Jan-04 May-05 Oct-06 Feb-08 823.26 DGEN Jul-09
The DSE stock market has shown very low correlation with the other developed global stock indices. This indicates that, its movements are not severely influenced by the global market movements. Thus, the DSE returns were much higher during the days when the other markets were collapsing catastrophically in the recent global financial crisis.
2
Bangladesh Banking Sector
2.1 Structure of Industry: Bangladesh’s Banking Sector plays a major role in the financial intermediation, even though most of the population has little or no access to banking facilities. Currently the banking sector comprises of 4 State Owned Banks (SOB), 5 Specialized Banks (SB), 9 Foreign Commercial Banks, 24 Private Commercial Banks and 6 Islamic Banks. The financial sector including the banking sector is supervised by the Bangladesh Bank. The BB has introduced several regulations which are in line with the international standards (based on the Basle Accord) for banking supervision and regulations. As of Dec 2007, the PCBs hold 51.4% of the total banking assets, followed by the SCBs holding 33.1% banking asset share. This report focuses on the market dynamics of the Private Commercial Banking Industry. 2.2 Savings and Deposits: In Bangladesh, deposit money banks (DMBs) act as major intermediaries of savings through using different saving products. Till 2008, PCBs dissolve 56% of the total deposits of the total Bank Deposits, followed by the SCBs dissolving nearly 31%. The nominal growth rate of total banking deposits is 19%, in which the PCBs enjoy an above-normal nominal growth rate of 25%. The highest deposits are dissolved in terms of fixed deposit (43%), which is currently growing at a significant rate. The deposit to GDP ratio now stands at 72.82%, and is growing steadily over the years. In the near-term outlook, considering the recent reduction in deposit rates, it can be suggested that the deposit growth will remain steady in FY2009. 2.3 Loans and Advances: The credit penetration in the Bangladesh banking sector is growing significantly, and it now stands as 66.51% of the total GDP. The market share of credit is increasing for the PCBs and FCBs over the years. The PCBs now account for 60% of the total credit disbursed in the economy. Trend in Credit Facilities: (See Appendix ## for details) Over the last decade (1999-2008) the Private Commercial Banks activities have increased exponentially in loan disbursement. And it is now nearly double than that of the National Commercial Banks. PCBs are responsible for 60% disbursement of loans in the whole banking credit market. The transport and communication and trade purposes are among the fastest growing credit consumers in the economy.
Table ##: Growth of Advances Classified by Economic Purposes
Economic Purpose 2004 2005 2006 18.81% 12.28% 8.56% 16.03% 8.44% 26.14% 19.24% 2007 51.79% 15.29% 23.85% 8.48% 0.32% 6.79% 21.36% 2008 60.35% 36.23% 23.03% 22.59% 16.98% 10.11% 35.00%
Transport and Communication 9.72% 16.40% Trade 0.00% 0.00% Industry 9.02% 6.23% Construction 7.58% 15.75% Agriculture 11.13% 10.83% Working Capital 31.40% 27.86% Others 0.00% 0.00% Source: Financial Sector Review H2 2008, Bangladesh Bank
Consumer Loans: The specific purpose advances to households increased drastically in FY08. The growth of credit for flat purchase was recorded at 35.9% at the end of September 2008 while consumer loans in consumer goods, credit cards, and educational expenses showed a growth of 76.8%. Term Lending: Another thrust item in Bangladesh’s credit disbursement was visible in the form of term lending to the industrial sector. In view of the relatively low but rising share of the industrial sector in GDP, ensuring adequate flow of term lending is important for Bangladesh. Total disbursement of industrial term lending in FY08 was Tk. 201.5 billion as against Tk. 123.8 billion in FY07 showing a robust growth of 62.8%. Of the total amount in FY08, Tk. 136.4 billion (67.7%) was disbursed by the private commercial banks (PCBs) alone. The PCBs have dominated the disbursement of term lending for the past few years. 2.4 Interest Rate Trend:
T-Bill Yield
12.00 10.00 8.00 6.00 4.00 364 Days 2.00 Sep-02 Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10
3 Peer Group Comparison
The peer group comparison is done on 10 listed banks, namely AB Bank Limited, The City Bank Limited, National Bank Limited, Pubali Bank Limited, Uttara Bank Limited, Eastern Bank Limited, Prime Bank Ltd, Dhaka Bank Limited, National Credit And Commerce Bank Limited and Dutch Bangla Bank Ltd. These 10 banks are among the first to be listed in the Dhaka Stock Exchange out of the existing 29 Private Commercial Banks (excluding Islami Banks). These banks together accounted for about 39% of the total assets of all the PCBs (including Islami Banks) in 2007. 3.1 Key Indicators as at 2007 Table **: Key Indicators of 10 Listed Private Commercial Banks in 2007
In BDT Mn
Total Assets Loans & Advances Total Deposits Total Liability Paid Up Capital Equity Capital PAT AB Bank 63,550 40,915 53,375 59,038 743 4,512 1,903 Uttara Bank 52,860 28,477 43,586 50,407 399 2,454 410 Dhaka Bank 57,443 39,972 48,731 54,318 1,547 3,126 704 DBBL 49,371 28,370 42,110 47,037 1,011 2,334 480 Pubali 71,561 50,549 57,997 65,629 2,100 5,932 1,354 National 56,541 36,476 47,961 51,959 1,208 4,568 1,238 NCCBL 32,615 24,678 28,147 30,480 1,202 2,135 479 EBL 40,204 30,962 29,882 36,375 1,035 3,829 559 City 48,755 26,788 40,540 45,881 1,188 2,874 343 Prime 79,588 57,683 70,512 74,315 2,275 5,273 1,399
Source: Banks’ Annual Reports
3.2 Key Indicators as at 2008 Based on the financial performances achieved in 2008, we can see that most of these PCBs enjoy a higher growth in Total Loans and Total Deposits when compared to the total banking industry. Since these banks are all first generation PCBs, their total asset size is reasonably larger than the other PCBs. Thus their above-industry growth rate is reasonable. However these high growths in all the indicators were due to the soaring prices of essentials in 2008. As the inflation figure surges down, along with slowdown in economy, the growth potential for 2009 for all these banks will be severely dampened. Table **: Growth in Key Indicators of 8 Listed Private Commercial Banks in 2008
AB Bank Total Assets Loans & Advances Total Deposits Total Liability Paid Up Capital Equity Capital 32% 39% 28% 31% 200% 49% Uttara Bank 11% 30% 17% 9% 100% 50% Dhaka Bank 24% 24% 17% 24% 25% 28% DBBL 23% 45% 22% 22% 49% 38% Pubali 26% 22% 26% 25% 40% 27% National 28% 36% 25% 27% 55% 34% 23% NCCBL 30% 32% 24% 30% 12% 39% 41% EBL 36% 28% 39% 37% 34% 24% 43% Ind. Growth 26.43% 19.42% -
PAT 21% 178% 19% 71% 12% Source: Banks’ Annual Reports, Financial Sector Review H2 2008, Bangladesh Bank
In this cohort analysis, it could be seen that, all these banks have a similar volume of total asset, loans and deposits in 2007. In terms of growth in 2008, DBBL, AB Bank Ltd and National Bank Ltd have achieved very high growth in Loans and Advances. Currently in 2008, ABBL has the second highest volume of total loans and advances, indicating that the company is doing significantly well in attracting its customers with its loan products. In terms of growth in deposits, ABBL, Pubali Bank and National Bank are at the top 3 among its cohorts. However, Profit after tax figure for ABBL is much higher than any other banks in the PCBs (excluding Islami Banks). In fact, ABBL made the second highest PAT this year, after Islami Bank Bangladesh Ltd (BDT 2,647 mn), among all the PCBs. The illustration below shows the performance of 8 listed banks during 2008. Table **: Key Indicators of 8 Listed Private Commercial Banks in 2008
AB Bank Total Assets Loans and Advances Total Deposits Total Liability Paid Up Capital Equity Capital PAT 84,054 56,709 68,560 77,331 2,230 6,723 2,301 Uttara Bank 58,444 37,141 50,817 54,755 799 3,689 1,139 Dhaka Bank 71,137 49,698 56,986 67,137 1,934 4,000 839 DBBL 60,682 41,017 51,576 57,461 1,511 3,221 822 Pubali 89,885 61,788 73,017 82,338 2,940 7,547 1,515 National 72,227 49,665 60,188 66,096 1,873 6,131 1,525 NCCBL 42,523 32,688 34,902 39,564 1,352 2,959 677 EBL 54,598 39,662 41,573 49,865 1,387 4,733 798
Source: Banks’ Annual Reports
4
Company Analysis: AB Bank Ltd
4.1
Investment Indicator
Shares in Issue 22,297,854 Operating Income (BDT’mn) 8,593 6,938 6,149 4,656 2,650 1,577 1,460 Net Profit (BDT’mn) 3,149.45 2,447.64 2,300.62 1,903.39 532.18 165.45 90.06 EPS in BDT 141.24 109.77 103.18 85.18 93.08 31.26 18.19 Market Cap BDT 15229.434 mn Book Value Per Share 552.50 411.25 301.486 606.98 451.73 293.76 251.15 ROAE (%) 2.7% 2.6% 3.1% 3.4% 1.3% 0.5% 52-week price range 890.25 ; 593.75
Price (as on May 27, 2009) BDT 685.0
Year 2010 F 2009 F 2008 2007 2006 2005 2004
P/E 16.62 7.97 10.00 30.54 17.61 20.01
P/BV 1.34 2.73 4.21 6.29 1.87 1.45
* Source: Annual Reports, Dhaka Stock Exchange Website
4.2
Share Price Performance:
3,500 3,000
4,500 4,000 3,500
2,500 2,000
3,000 2,500 2,000
1,500 1,000
1,500 1,000 500
500
0
Sep-02
Jan-04
May-05
Oct-06
DGEN
Feb-08
Jul-09
AB BANK LIMITED
4.3 Organizational Profile AB Bank Limited, the first private sector bank under Joint Venture with Dubai Bank Limited, UAE incorporated in Bangladesh on 31st December 1981 and started its operation with effect from April 12, 1982. As of December 31, 2007; the Authorized Capital and the Equity (Paid up Capital and Reserve) of the Bank are BDT 2000 million and BDT 4511.59 million respectively. Authorised Capital of the Bank has been increased to BDT 3000 million in the Extra Ordinary General Meeting held on July 16, 2008. Since beginning, the bank acquired confidence and trust of the public and business houses by rendering high quality services in different areas of banking operations, professional competence and employment of the state of art technology. During the last 27 years, AB Bank Limited has opened 73 Branches in different Business Centers of the country, one foreign Branch in Mumbai, India and also established a wholly owned Subsidiary Finance Company in Hong Kong in the name of AB International Finance Limited. To facilitate cross border trade and payment related services, the Bank has correspondent relationship with over 220 international banks of repute across 58 countries of the World. AB Bank Limited, the premier sector bank of the country is making headway with a mark of sustainable growth. The overall performance indicates mark of improvement with Deposit reaching BDT 53,375.35 million, which is precisely 26.85% higher than the preceding year. On the Advance side, the Bank has been able to achieve 30.76% increase, thereby raising a total portfolio to BDT 40915.35 million, which places the Bank in the top tier of private sector commercial banks of the country. On account of Foreign Trade, the Bank made a significant headway in respect of import, export and inflow of foreign exchange remittances from abroad. AB Bank’s corporate vision and mission are as follows: Vision Statement "To be the trendsetter for innovative banking with excellence & perfection"
Mission Statement "To be the best performing bank in the country"
4.4 Management: The management committee of AB Bank Ltd is led by Mr. Kaiser A. Chowdhury, President and Managing Director of AB Bank Ltd. The bank’s is fundamentally divided into 3 units: Corporate, Credit and Operations. Mr. Niaz Habib, Mr. Faruq M Ahmed and Mr. Shamim Ahmed Chaudhury are acting as Deputy Managing Directors in the respective departments.
4.5 Key Functional Areas: AB Bank Ltd. conducts business in the following banking arenas: Retail Banking Corporate Banking SME Banking Project Finance Loan Syndication NRB Banking Money Transfer Islami Banking Investment Banking Cards
4.6 The Year 2009 in perspectives: Similar to most of the banks in the industry, the year 2009 appears to be a difficult business year for AB Bank. With global recession surging its way towards the emerging economies, the banking system of Bangladesh is expected to experience decline in net interest margin and contraction of credit and deposits. Recently AB Bank Ltd was brought under the Dow Jones SAFE 100 Index as one of the three banks representing Bangladesh in the prestigious list of South Asian banks. The other banks to be enlisted in the index are: Uttara Bank and Pubali Bank. Earlier in this year, Board of Directors of the Bank in it's 433rd Board Meeting held on January 29, 2009 at 2:30 p.m. resolved to raise the Authorized Capital to Tk. 600,00,00,000/- (Taka six hundred crore) divided into 6,00,00,000 (Six crore) ordinary shares of Tk.100/- each from the existing level of Tk.300,00,00,000/(Taka Three hundred crore). Board also approved necessary amendments to relevant clauses/articles of the Memorandum and Articles of Association of the Bank. AB Bank Ltd also signed an Enterprise Agreement with the world-leading software company, Microsoft. It is the first private bank in the country entering into the Enterprise Agreement with
Microsoft with a commitment of using only genuine Microsoft software and maintaining its leadership position in the industry through effective use of Information technology. In view of the bank administrators, AB Bank Ltd is now focusing on being Bangladesh’s leading bank in terms of customer service. As the Bangladesh government is continuing its effort to reduce banking spreads, it is now very crucial that the banks try to earn more of fee based incomes. The key concerns for the bank in 2009, as mentioned by a top bank official, are to maintain the high growth rate achieved by the bank over the last few years. Also they plan to be more cautious about credit assessment, particularly for the upcoming year. A common projection is that, the amount of non-performing loans is likely to go up in 2009. 4.7 Financial Performance: AB Bank Ltd Table **: Key Financial Ratios for AB Bank Ltd (2004-2008)
2004 Profitability Ratios Return on Average Assets Return on Average Equity Net Interest Income/Operating Income (net of Provision Net Interest Income/Total Operating Income Margins Credits and Deposits Interest Expense to Interest Income Interest Income to Average Interest Earning Assets Interest Expense to Average Interest Bearing Liabilities Net Spread Net Interest Margin Other Investments Investment Income to Average Interest Earning Investments Investment Income to Average Marketable Securities Investment Income to Average Investment Efficiency Cost to Total Operating Income Staff Cost to Total Operating Income Cost to Average Total Assets Liquidity Loans to Interest Earning Asset Gross Loans to Customer Deposits Customer Deposits to Equity (Times) Due From Banks to Due to Banks Credit Quality Loan Provision to Total Operating Income Provisions to Average Loans Classified Loans as % of Total Loans Provisions to Classified Loans Provisions to Unclassified Loans Capital Adequacy 46.4% 35.0% 2005 0.5% 11.7% 84.1% 43.8% 2006 1.3% 25.9% 31.7% 23.2% 2007 3.4% 53.7% 108.1% 30.9% 2008 3.1% 41.0% 109.7% 33.0%
75.1% -
69.4% 11.8% 5.6% 6.1% 3.60%
81.8% 12.8% 8.0% 4.9% 1.52%
72.7% 14.6% 8.0% 6.6% 2.58%
72.4% 15.1% 8.8% 6.3% 2.75%
-
5.4% 8.5% 22.7%
7.6% 78.9% 22.5%
7.8% 71.1% 20.4%
8.4% 43.5% 17.0%
75.3% 28.8% -
52.1% 29.9% 2.5%
73.2% 21.5% 4.8%
28.6% 15.1% 2.4%
30.1% 16.5% 2.5%
52.3% 58.5% 22.76 57.5%
64.7% 74.9% 17.92 20.4%
65.2% 70.1% 16.29 39.9%
64.4% 73.6% 11.83 30.7%
67.5% 79.4% 10.20 37.3%
11.6% 11.7% 8.8% 0.0%
13.4% 1.1% 8.6% 10.4% 0.2%
6.1% 0.7% 4.3% 2.8% 0.5%
7.9% 1.1% 4.5% 13.9% 0.3%
4.6% 0.6% 3.1% 5.4% 0.4%
Equity to Total Assets Equity to Gross Loans Constitution of Total Income Interest Income to Total Operating Income Fee and Commission to Total Operating Income Investment Income to Total Operating Income Other Income to Total Operating Income Operating Performance Change in Interest Income Change in Fee Based Income Change in Investment Income Change in Other Income
3.82% 7.31%
4.62% 7.14%
5.38% 8.25%
7.10% 11.03%
8.00% 11.85%
35.0% 29.9% 28.0% 7.16%
43.8% 30.8% 20.1% 5.21%
23.2% 27.9% 36.8% 12.06%
30.9% 28.0% 37.2% 3.82%
33.0% 28.6% 35.0% 3.36%
-
35.3% 11.5% -22.3% -21.5%
-11.0% 52.3% 207.0% 288.8%
133.8% 76.3% 78.0% -44.4%
41.1% 34.8% 24.1% 16.2%
AB Bank Ltd has made a significant progress on majority of the key financial parameters. During the four year period (2005-08), the bank experienced a CAGR of 27% in total assets, 25% in total deposits and 35% in total loans and advances. Greatly enough, the bank managed to do so by reducing the number of riskier assets. The growth rate of non-performing loans for the bank is declining at a healthy pace. Profitability ratios indicate a 41% return on equity. The Bank’s efficiency ratios are improving significantly which is an indication of it becoming a matured and stable business organisation. In terms of its Asset Structure and Liability Composition, AB Bank finances its asset with only 8% of its equity and its asset are deployed in 67% of Loans and advances.
Asset Composition Cash Balance with other banks and FIs Money at call and on short notice Loans and advances Investments Fixed assets including premises, furniture and fixtures Other assets 5% 3% 1% 67% 14% 3% 7% Liability Composition Borrowings from other banks, FIs & agents Deposits and other accounts Other liabilities Total Shareholders' Equity Contingent liabilities 4% 82% 7% 8% 45%
4.8
SWOT Analysis
Strengths • The Bank has been rated by CRAB Single A Two (A2) in terms of long term lending. The banks asset portfolio consists of above 60% in long term lending. • The Bank’s Loan disbursement rate is growing largely, suggesting its high growth in lending to deposit ration (currently 79.4%). • The bank’s returns on assets and equity are also consistently rising. Its return on average assets registered significant growth of 3.4% in 2007 and 3.1% in 2008, while its return on average equity also grew to 41% in 2008. • Its Efficiency ratios are improving, with lower cost per unit operating income.
Weaknesses • Net Interest Margin on the decline. • Dilution in EPS in a recent 200%B share issue in 2007. • No cash dividend for shareholders in five years.
Opportunities • The bank should focus on expanding its loan syndication and project financing business bigger projects. • Improving capital market conditions and developing equity culture should help the bank to improve its fee based revenue by further developing its existing investment management and advisory business.
Threats • There is intense competition in the local market, not only from the local banks but also from the foreign banks. • The high growth period for PCBs is sure to decline in the near future, so the bank should be aware of it.
5 Valuation
AB Bank Ltd has been a consistent performer for the last couple of years increasing its net profits and return on shareholders equity year-on-year. Interestingly its share price has plummeted quite a few times in the recent years. And now it is back to the range of below the BDT 1,000 mark. For arriving at the fair value of AB Bank we have used the following methods: (a) Free Cash Flow to Equity Method (b) The Relative Valuation Method
5.1 Free Cash Flow to Equity Method: In this method, the individual items in the balance sheet and income statement were carefully projected, keeping in mind of the macro-economic and industry specific variables that affect them respectively. A detail note on the assumptions made is attached in the appendix. Some key assumption for the discounting are: • Risk free rate: For risk free rate, we have taken the yield on the Bangladeshi Government 1 Year T-bill rate. The rate is 6.25% as of Apr 2009. • The market return is assumed to be of 23% based on monthly return calculation for (20032008. • A beta of 1.31 is taken for AB Bank. It has been calculated based on its stock performance, as well as other banks performance. • Based on the above assumptions and CAPM model, the cost of equity for AB Bank works out to 28.37%. • We have further assumed a terminal growth rate of 10%, conservatively assuming below the nominal growth rate of the economy.
2009 Expected Free Cash Flow NPV of FCF NPV of Terminal CF Estimated Fair Value of Equity No. of Shares Outstanding Current Share Price (BDT) DDM value of AB Bank per share (BDT)
(345,435,776) 3,952,047,960
2008
82,504,922
2011
833,471,971
2012
2,037,666,464
2013
3,860,343,014
Terminal
6,514,975,172
10,176,770,086
14,128,818,046
22,297,854
822
634
Recommendation = Sell
5.2
Relative Valuation:
The peer group comparison uses Balance sheet and P&L multiples of some Bangladeshi Banks which reflect the profitability and growth potential of a stock. For peer group comparison, we have used the valuation of four listed banks, as these banks have already declared their results for the year 2008 and the latest results would more appropriately reflect the right valuations of peer group banks. For our P/BV multiple valuation method we used, the information of four banks: • Dhaka Bank • Pubali Bank • National Bank • Pubali Bank In relative asset size, these banks are similar to AB Bank Ltd. Also their equity betas are similar to that of AB Bank Ltd. In our Price/BV valuation we get the following result. We took the average P/BV multiple of these four banks, which came down to be 1.34. According to that calculation the fair value of AB Banks share price is BDT 549.6 (recommendation: Sell). P/E multiple method was also applied to value the fair price of AB Banks share. We took the forecasted P/E ratio of the listed banks of SAFE 100 Index, i.e. 8.82. Based on this method we calculated the share price value as BDT 959.65 (recommendation: Buy).