Banking

The Company

Established in 1969 Commercial Bank of Sri Lanka is the largest private sector commercial bank in the country, and the only Sri Lankan banking sector counter represented in the MSCI Frontier Market Index. With a total asset base of approximately LKR816bn ($5.9bn), it has the largest market share in the private commercial banking sector of both loans (14%) and deposits (13.5%) as of June 2015. The bank has healthy mix of retail and corporate clientele, and places a special focus on small and medium-sized enterprises (SMEs). With a network of over 261 branches, wider product offerings and aggressive marketing, Commercial bank has improved its deposit base, with a current and savings account ratio (CASA) of 49% at its highest point, yielding lower-cost funds and improved profitability.

Commercial bank has always been at the head of the industry, recording loan growth of 21% in 2014, to LKR498bn ($3.6bn), compared to industry private sector loan growth of 7.5% in the same year. The bank maintained stable deposit growth of 17.33%, to LKR529bn ($3.8bn). The bank recorded a 2004-14 loan growth CAGR of 13.25%, going far beyond the rest of the sector.

Commercial bank’s presence in Bangladesh has given greater advantage to its overall operations by providing greater geographical risk management aspects to the bank by having 8% of loans in Bangladesh and contributing 14% of earnings to the bottom line. Currently, the bank has expanded its overseas operations in Myanmar and the Maldives, where banking is heavily under penetrated.

Over the past ten years Commercial Bank has posted sound profits, registering a CAGR of 12.36% from 2004-14. The bank’s financial position has continued to strengthen in all aspects. For example, the non-performing loan (NPL) ratio declined to 3.47% in 2014 from 3.88% in 2013. Furthermore, the bank has been able to maintain sound capital adequacy ratios of 12.70% for tier-1 capital and 15.45% for tier-2, which are well above the regulatory requirement of 5% and 10%, respectively.

Development Strategy

Commercial Bank’s longer-term strategy rests on three fundamental pillars: strengthening the existing customer base, improving cost efficiency, and seeking new opportunities to expand and diversify the business to improve value for shareholders. Hence, the bank has always been able to take a very conservative approach to maximising earnings, while managing substantial loan growth by maintaining a quality loan book. In the essence of diversification, the bank has initiated its entrance into the investment banking sector and is actively seeking opportunities in listed equities and debts.

Commercial Bank’s leadership in the local private banking sector is mainly owed to its trustworthiness and stable culture. The bank is expected to maintain this culture going forward, with its widely spread branch network. In terms of the lending business the bank has started its initiatives to improve SME lending at a rapid rate.

Forecast

In line with its current momentum, we expect Commercial Bank to achieve a 28% growth in earnings by the end of 2015, coupled with robust loan growth emerging from SME and consumption-related borrowing, and a higher consumption CASA ratio, margin expansion, maintained lower cost-to-income ratio and growth stemming from Bangladesh operations. Commercial bank’s presence in Bangladesh and Myanmar offers greater opportunities to diversify the geographical risk of the bank, while its regional presence provides more exposure to high-growth economies in South Asia. Commercial Bank is willing to maintain its 50% dividend payout policy in order to attract and retain investors by providing a maximum return.