Financial Times

A tale of two banks
Commercial Bank was trading at Rs 160 per share as at Wednesday while an HNB share was trading at Rs 70. This write-up is based on the Financial Statements for the year ended December 31, 2003 as well as first Quarter Financial Statements for the quarter ended March 31, 2004.

Strategy
HNB has been striving to consolidate its operations and to increase its business in Sri Lanka while Commercial Bank wants to have a visible presence in the region by the year 2010 to reduce the risks of operating in one market only. Commercial has invested in Bangladesh by acquiring Credit Agricole Indosuez and also by inviting IFC to become a 15 percent shareholder in the bank.

Net Income
The income of these banks comprises of interest income, foreign exchange income, fees and commission income and other items. For the year ended December 31, 2003 HNB group earned a net income of Rs 15.15 billion, which was a 26 percent increase from the previous years income of Rs 12.03 billion. For the first quarter for 2004 HNB posted earnings of Rs 3.51 billion with a dip of seven percent when compared to the previous year's first quarter.

Commercial Bank group posted an income of Rs 9.75 billion for the year ended December 31, 2003, which was a 9.5 percent increase from the previous year. In the case of the first quarter of 2004 Commercial's income was Rs 2.5 billion, which was an increase of 11.73 percent when compared to the previous years first quarter.

This means HNB has experienced a dip in its income in the first quarter whereas Commercial has achieved a growth.

Earnings Per Share
HNB earned Rs 21.9 per share for its ordinary shareholders for the year ended December 31, 2003. This was a 222.76 percent increase from that of the previous year. The annualised EPS for the first quarter of 2004 was Rs 10.30 and this was 43 percent below that of the previous year.

Commercial's EPS for 2003 was Rs 23.17 which was a 12.86 percent increase from the previous year. Commercial's annualised EPS for the first quarter was Rs 18.40, which was 7.72 percent less than that of the previous years.

HNB's Group earnings had dropped in the first quarter due to the dip in income, increase in overhead expenses by 57 percent and higher tax provision despite of lower earnings. In the case of Commercial there was a dip in earnings in the first quarter of 2004 due to personnel and overhead costs increasing by more than 50 percent and a higher tax provision which has been explained by the bank as due to higher rates of taxes for profits from the Off Shore Banking Unit.

Advances and Deposits
This can also be a useful measure of a bank's performance. HNB group loans and advances at the end of December 31, 2003 were Rs 68.7 billion, which was a 16.9 percent increase from that of the previous year. For the same period Commercial experienced a 28.03 percent growth in the loans and advances portfolio which was Rs 60.48 billion at the year-end.

Deposits that the public were holding with HNB had grown by 14.92 percent to Rs 100.94 billion during the year ended March 31, 2003 whereas during the first quarter of 2004 there was further growth of one percent and deposits were at Rs 102 billion. In 2003 Commercial Group achieved a growth of 37.84 percent where the deposits were at Rs 75.09 billion. During the first quarter of 2004 the growth in deposits was 5.46 percent with the final deposit portfolio being Rs 79.19 billion.

Capital Adequacy
This is a target set as a measure of prudence by the Central Bank to limit the ability of the banks to expand their business. There are two tiers with regard to capital adequacy and targets are set for both. The 2003 target for Tier 1 was five percent whereas for Tier 1 and 2 it was 10 percent.

HNB achieved 8.06 percent for Tier 1 and 11.47 percent for Tier 1 and 2 whereas Commercial achieved 13.43 percent for Tier 1 and 14.83 percent for Tier 1 and 2. Even though both banks comply with the capital adequacy requirements it can be seen that Commercial has achieved a higher standard when compared to HNB

Return and Investor Confidence
For the year ended December 31, 2003 HNB generated a return on average shareholders funds of 15.24 percent when compared to the previous year's 9.82 percent. Commercial on the other hand generated 15.82 percent when compared to the previous year's 18.48 percent. A measure of shareholder confidence the PE (Price-Earnings) multiple was seven for HNB based on today's share price and first quarter earnings.

Commercial's PE stood at 8.6. This measure indicates that the market has more confidence in the growth prospects of Commercial when compared to HNB.

Message to the small investor
I feel both these stocks are attractive. Commercial in particular is an excellent stock, which may pick to a higher level with success of their new strategies and the revival of the Sri Lankan economy.

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