UNION BANK OF COLOMBO PLC - candor-holdings.com · Union Bank of Colombo (“UBC”) was established in 1995 as the 8th indigenous bank in Sri Lanka. Currently UBC holds 1% market

INITIATION REPORT

UNION BANK OF

COLOMBO PLC

OCTOBER 2015

BY CANDOR EQUITIES LTD

Candor Research

Expert Analysis & Insight

Candor Equities Limited Level 8, South Wing Millennium House, 46/58, Nawam Mawatha, Colombo 02, Sri Lanka.

© Candor Equities Limited - Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka

RECOMMENDATION

ONE YEAR TARGET PRICE

CSE CODE

BLOOMBERG CODE

ACCUMULATE

LKR 24.50

UBC

UBC SL Equity Analyst Dushan Virantha [email protected] T: +94 112 359 138

mailto:[email protected]

key statistics

Key data

Price at Evaluation (LKR) 22.20

Market Capitalization (LKR m) 24,010.94

Market Capitalization (USD m) 170.23

Company as a % of Total Market Cap (%) 0.87

52-week High (LKR) 30.30

52-week Low (LKR) 21.00

Average Daily Volume (6 Months) 332,628.90

Number of Shares in Issue (m) 1,091.41

Free Float (%) 7.66

Foreign Holding (%) 80.13

Source: Bloomberg, Candor Research

Return analysis (%)

3M 6M 12M

UBC SL Equity -9.84 -12.70 -7.56

ASPI -1.82 -0.68 -1.29Source: Bloomberg, Candor Research

LKR.Mn 2013 2014 2015E 2016E

Net Interest Income 1286 1971 2967 3398

Net Profit 99 78 196 339

PEX 55.33 421.67 137.69 79.37

PBVX 1.18 1.71 1.48 1.45

Source: Company Data, Candor Research

5,000.00

5,500.00

6,000.00

6,500.00

7,000.00

7,500.00

8,000.00

10.00

12.00

14.00

16.00

18.00

20.00

22.00

24.00

26.00

28.00

30.00

12/10/2012 12/10/2013 12/10/2014 12/10/2015

UBC SL Equity CSEALL Index

UBC & ASPI Price Chart

Sector Classification

CSE Banks Finance & Insurance

GICS Financials

Name of shareholders No. of Voting Shares Stake

Culture Financial Holdings Ltd 763,984,374 70.00%

Vista Knowledge Pte Ltd 64,677,973 5.90%

Associated Electrical Corporation Ltd 29,237,387 2.70%

Mr. A.I. Lovell 22,743,780 2.10%

Mr.C.P.A Wijeyesekera 18,508,468 1.70%


Top 5 Shareholders




PE (x)

PBV (x)

- 22/10/2015

A Prominent Business Turnaround Ahead in Sri Lanka

We initiate coverage on Union Bank of Colombo PLC

with an Accumulate recommendation with one year price

target of LKR 24.50. We are of the view that UBC’s

price will remain sluggish over medium term horizon due

to its thin ROE levels. However, over the long term

horizon we expect the counter will gain noteworthy

investor attraction through the value catalysts illustrated

in our report.

Banking penetration levels still remain low in Sri Lanka

Despite Sri Lanka operating as a bank based economy it

has exhibited low banking penetration (M2/GDP),

limited sophistication in the banking sector (M0/M1) and

low dependency on formal finance (Private sector

credit/GDP) compared to regional counterparts.

Therefore, we are optimistic that the country’s banking

sector is poised for growth in time to come.

Basel 3 Capital and Liquidity reforms ║ UBC resilient

over peers

The Basel committee on banking supervision introduced

the Basel 3 framework with improved measures to

establish a resilient global banking system. Over the long

term horizon, we believe the Sri Lankan Commercial

banks will experience noteworthy pressure on their ROEs

and NIMs due to the improved capital and RWAs under

Basel 3. However, UBC stands well above the regulatory

requirements compared to its peers.

This indicates the bank’s ability to achieve superior ROEs

over long term horizon whilst preserving a strong lending

growth momentum. From the shareholder perspective, UBC

will be an attractive investment as the bank consistently

maintains its capital adequacy levels above the capital

conservation buffers. This confirms the absence of any

restrictions on the bank’s capital redistribution.

TPG’s proven track records ║ Eminent business turnaround

ahead

TPG revamped the Shenzhen Development Bank (SDB) from

a bankrupt creditor to one of China’s most trusted lenders

over a 6 year period. Under TPG’s control, SDB’s net profit

grew at a 5Y CAGR of 72% from RMB 331Mn in 2004 to

RMB 5031Mn in 2009, its NPL ratio improved from 11.40%

to 0.68% (best in China), and its total CAR increased from

2.30% to 8.88%. Following the UBC acquisition, TPG has

restructured the entire management team and Board of

Directors of UBC. The bank is now equipped with proficiency

from TPG and McKinsey & Company, a leading global

consultation firm to mark a legendary business turnaround in

Sri Lanka.

Strong Technological Platform ║ ‘Silverlake’ Core Banking

system

UBC invested heavily on technological innovations including

an advanced core banking system of ‘Silverlake’. ‘Silverlake’

allows a bank to deliver a superior business experience to

its customer across all channels consistently. Operational

excellence is also increased through centralizing of business

processes. The technological improvement places UBC in a

strong position to capitalize on growth opportunities across

its banking mediums including mobile banking, digital

banking etc. Especially considering the long term horizon the

new core banking system will improve the bank’s

operational performance as this is the first time the bank has

unveiled an advanced core banking system.

Valuation

We believe the Sri Lankan banking sector is poised for

growth in time to come and UBC will be able to exploit the

opportunity amidst strong capital buffers & international

proficiency. We have valued UBC using PBV multiple

valuation technique, the primary valuation parameter and

the Residual Income Valuation model, the secondary

valuation parameter. Accordingly, the counter is trading at a

discount to the intrinsic value. However, we are of the view

that UBC’s price will remain sluggish over 1 to 2 year

horizon due to the thin ROE levels. But considering TPG’s

proven track records and expected concerns in terms of

growth in the banking sector peers amidst Basel 3 capital

reforms; we believe the counter would be an attractive stock

over a longer term horizon.

contents Table of

Business Description

06

Industry Overview

08

Investment Overview

10

Investment Risks

15

Valuation

16

Financial Analysis

19

Appendix

22

© 2015 Candor Research

INITIATION REPORT | UNION BANK OF COLOMBO PLC

BUSINESS DESCRIPTION

UBC’s operations

Union Bank of Colombo (“UBC”) was established in 1995 as the 8th indigenous bank

in Sri Lanka. Currently UBC holds 1% market share on lending and deposits within

the Commercial Banking space. In 2014, Texas Pacific Group (TPG), one of the

leading global private equity firms, through its affiliate, Culture Financial Holdings

Ltd., acquired 70% of the equity in UBC. This investment marked as one of the

largest foreign direct investments to Sri Lanka whilst making UBC as the 5th largest

Commercial Bank in Sri Lanka in terms of market capitalization. In addition, UBC’s

growth is further augmented with its subsidiaries including National Asset

Management Limited (51% holding) and UB Finance Company Limited (66%

holding).The bank operates with 63 branches and 83 ATMs while providing a range

of financial solutions under following segments:

Corporate banking- This segment is UBC’s largest market segment, representing 50%

of the total lending book. UBC offers a wide array of corporate financial solutions

from trade finance to working capital management to treasury services covering

multiple business sectors. Going forward with new systems and processes, UBC will

focus on the high yield trade segment (Import & Exports) and working capital

solutions amidst intensive price competition within the corporate segment. In

addition, this will lead to a substantial fee base income as well.

SME banking- UBC was initially positioned as a preferred bank for SME financing

with nearly 70% of the total lending book. Subsequent to TPG’s investment and

business process revamping, the SME segment receded to nearly 40%. Currently, the

bank offers SME financial solutions from project financing to working capital

solutions with free SME advisory service ‘Viyaparika Saviya’. Going forward UBC will

put new processes and expertise to continuously cater the SME segment with a

more balanced approach comparative to other segments.

Retail banking- The customer base within the retail segment grew by 23.4% during

2014 and currently represents nearly 10% of the total lending book. Continuous

branch expansion coupled with new products contributed to the expansion of the

retail banking segment. We expect a similar growth momentum for the sector in the

future as well. UBC currently offers a wide array of lending products, CASA

products, fixed deposit products and Elite Banking services to cater masses as well

as high net worth individuals.

UBC’s business strategies

Improving the low cost franchise: UBC aims to enhance its CASA ratio from 25% to

46% over long term horizon through a continuous branch & offsite ATM expansion

strategy. The integration with LankaPay common ATM switch provides UBC’s

customers greater accessibility to accounts from over 1500 ATMs across Sri Lanka.

These strategies will improve the bank’s visibility and customer accessibility.

Additionally, UBC’s continuous product innovations together with product & branch

revamping and remodeling strategies will further improve the demand for CASA

deposits. As a strategy UBC introduced ‘Salary Power’ and ‘Salary Select’ savings

products. Going forward the bank expects to set different thresholds and value

additions to these two savings products in order to cater to two different segments.

Finally the bank centralized direct sales team apart from branch sales team which

06



will establish relationship with multiple organizations to carter their staff accounts.

Going forward these strategies will complement the expansion of UBC’s retail

banking segment.

Superior assets quality: With the expertise from TPG capital, UBC is able to bring

McKinsey & Company to revamp and reorganize the bank’s entire credit

management system which enables better management of credit risk. McKinsey &

Company is involved in establishing internal risk rating models and in-house training

programs on credit management. Going forward the bank expects to integrate these

processes with the ‘Kalypto’ risk management system to automate the entire credit

risk management process whilst reducing human intervention in the process.

Currently the bank’s credit approval and underwriting processes is conducted via a

centralized team with expertise on credit management. With these initiatives under

new management, the bank was able to enhance its gross NPL ratio from 8.25% to

4.87% during 1H2015.

Improving operating efficiency: UBC expects to improve the cost to income ratio

from 80% to 40% over long term horizon. Currently, the bank’s operating efficiency

remains subdued due to the investment in core banking system (‘Silverlake’) and

ancillary systems (Kalypto risk management system, ALCO system etc.). However,

with these new systems, UBC will be able to centralize its entire back office

functions within 1 year horizon. Hence, going forward the bank will be able to

maintain minimum staff numbers whilst solely focusing on marketing & sales

functions. In addition, the bank expects to streamline the branch & offsite ATMs

expansion strategy in order to optimize visibility and customer satisfaction.

Union Bank’s corporate governance & risk management

UBC has a sound corporate governance structure and is fully compliant with the

CBSL’s regulations. To ensure that UBC meets high levels compliance standards, a

number of committees have been established, including the nomination, audit, risk

management, credit, human resource and remunerations committees. In addition,

the bank has established a comprehensive risk governance and risk management

structure. UBC’s risk management consists of three lines of defense as follows.

1st line defense: the front line staff members fall under this level. They are

considered to be the risk takers as they deal with customer transactions on a day to

day basis. Hence, they have been delegated the adequate level of powers and

responsibilities.

2nd line defense: the Risk Management Department (RMD) of the bank is composed

of this level where it operates as an independent unit. The unit’s functions include to

assess, identify, measure and control risk arising from all business/service units

across the bank.

3rd line defense: internal and external audit functions constitute this line of defense.

Risk governance structure

Board of

Directors

Integrated Risk

Management Committee

(IRMC)

Executive Risk

Management

Committee

(ERMC)

Internal Credit

Committee (ICC)

Assets Liability

Committee

(ALCO)

Operational Risk Management Committee (ERMC)

Source: Company Annual report

(ORMC)

07



COMMERCIAL BANKING INDUSTRY OVERVIEW

AND UBC’S COMPETITIVE POSITIONING

Banking: The dominant sector of the Sri Lankan financial system

The banking sector, comprising of 25 Licensed Commercial Banks (LCBs) including

12 foreign banks, 9 Licensed Specialized Banks (LSBs) and the Central Bank

dominates the Sri Lankan financial system with a 70% share of the total financial

sector assets. The Commercial Banking sector is the prime component of the

Banking sector which accounts for 70% of the total banking sector assets and

registers 48.9% of the total financial sector assets. The sector assets grew at a CAGR

of 17% over the last 5 years to record LKR 8.4Tn in assets. Banking density has also

seen an improvement from 16.8 per 100,000 persons to 17 during 2014.

Banking penetration levels still remain low in Sri Lanka

Even though Sri Lanka is a bank based economy, it exhibits a low banking

penetration compared to regional counter parts. The penetration of the banking

sector which is measured by M2 (broad money) to GDP ratio stands at 42% which is

well below to the regional peers such as Indonesia (71%), Singapore (528%), Thailand

(220%), South Korea (154%). Sri Lanka is also ranked relatively low in the degree of

sophistication in the banking sector which is measured by currency (M0) to narrow

money (M1) ratio in comparison to the regional peers, apart from Indonesia and

Thailand. Higher the ratio, lower the level of sophistication in the country’s financial

system. In addition, Sri Lanka is ranked low for country’s intensity for formal finance,

which is measured through the ratio of private sector credit to GDP. Given the low

financial penetration, limited sophistication in the banking sector and lower

dependency on formal finance, we feel the Sri Lankan banking sector has room to

develop compared to regional peers. This is further exhibited through the low LCB’s

lending to GDP and LCB’s deposits to GDP ratios in Sri Lanka compared to regional

counter parts. Therefore, we are optimistic that the country’s banking sector is

poised for growth in time to come.

Below average banking penetration in Sri Lanka

0%

100%

200%

300%

400%

500%

600%

Australia China Indonesia South Korea Singapore Thailand Sri Lanka

M2/GDP


Sri Lanka has a low intensity for formal finance

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Singapore Australia Japan India South Korea Malaysia Thailand Sri Lanka

Private Sector Credit/GDP


Below average banking contribution for GDP

0%

50%

100%

150%

200%

250%

Singapore Australia Japan India South Korea Malaysia Thailand Sri Lanka

LCB Lending/GDP LCB Deposits/GDP


Sri Lanka has a low degree of sophistication in

banking sector

0%

20%

40%

60%

80%

100%

120%

Australia China Indonesia South Korea Singapore Thailand Sri Lanka

Currency/M1


08



UBC’s competitive positioning

UBC caters to the corporate, retail & SME segments whilst providing a range of

financial solutions. Price competition amongst the banking peers has intensified

amidst the recent low interest rate regime. Hence, UBC as an emerging player

follows a product differentiation strategy in order to gain a competitive advantage.

The bank “Viyaparika Saviya’ free advisory service and multiple value additions have

aided to gain a competitive advantage within the SME & retail segments. In addition,

the “Elite banking service” assists to cater to the high net worth individuals.

Furthermore, through National Asset Management Limited (NAMAL), the bank

provides an inclusive financial solution to the masses and high net worth individuals

whilst gaining a noteworthy competitive edge over their peers. UBC’s competitive

advantage lies on TPG’s expertise and management competencies. Therefore, going

forward with prudent cost management structures we expect the bank to

implement a hybrid strategy by incorporating cost leadership and product

differentiation.

Porter’s Generic Strategies

Cost Leadership Differentiation Focus

Siz

e o

f M

ark

et

Larg

e

Commercial Bank of

Ceylon

Bank of Ceylon

People's Bank

Nations Trust Bank

Union Bank of Colombo

Hatton National Bank

Pan Asia Banking Corporation

Seylan Bank

Sampath Bank

NDB Bank

Sm

all

Nations Trust Bank

HSBC

Standard Chartered Bank

Citi Bank

Habib Bank

MCB Bank

Amana Bank

UBC’s lending book grew by 38% during 2Q2015

compared to industry average of 22%

Only 4 commercial banks managed to improve their

market share during 1H2015, & UBC is one of them.

COMB & NTB follow a cost leadership strategy

5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

9.00

COMB AWPR (%) HNB AWPR (%) NDB AWPR (%) NTB AWPR (%)

SAMP AWPR (%) SEYB AWPR (%) UBC AWPR (%) PABC AWPR (%)

Source: CBSL, Candor Research

Source: Candor Research

Industry growth rates & UBC’s market share

2012 2013 20141Q2015 (YoY) 2Q2015 (YoY)

Lending growth (LCB) 22% 9% 12% 19% 22%

UBC's lending growth 17% 23% 13% 17% 38%

Deposits growth (LCB) 20% 16% 12% 11% 13%

UBC's deposits growth 20% 24% 3% 6% 9%

Net profits growth (LCB) 34% -7% 12% 18% 19%

UBC's net profits growth 54% -80% -21% 64% 27%

UBC's Market Share

Lending 0.77% 0.88% 0.89% 0.94% 1.02%

Deposits 0.78% 0.83% 0.76% 0.79% 0.79%

Source: CBSL, UBC, Candor Research

Competitor analysis- market share (lending)

2011 2012 2013 2014 1H2015

BOC 24.80% 25.92% 25.26% 23.21% 23.13%

PB 25.00% 26.17% 25.11% 22.65% 22.59%

COMB 13.99% 13.65% 13.86% 14.92% 14.24%

HNB 11.34% 11.01% 11.77% 11.95% 11.97%

SAMP 7.76% 7.81% 9.02% 9.23% 9.33%

NDB 4.12% 3.98% 4.58% 5.22% 5.00%

SEYB 5.01% 4.70% 4.68% 4.69% 4.54%

NTB 2.73% 2.69% 2.76% 2.92% 2.85%

PABC 1.57% 1.59% 1.53% 1.83% 1.93%

UBC 0.81% 0.77% 0.88% 0.89% 1.02%

Source: Bank’s Annual Reports, Candor Research

09



INVESTMENT OVERVIEW

We initiate coverage of Union Bank of Colombo with an Accumulate

recommendation. Notably, we recommend UBC for investors with a long term

investment horizon. Over medium term, we do not see an impetus for the counter

amidst thin ROE levels. However, over long term horizon we expect the counter will

attract noteworthy investor attraction through following value catalysts.

Basel 3 capital and liquidity reforms ║ UBC resilient over peers

The Basel committee on banking supervision introduced the Basel 3 frame work in

2010 with improved measures to establish a resilient global banking system. Basel 3

comprised with revised capital frame work, which aims at developing a higher

quality and quantity capital base within the banking system. In addition, it aims at

improving the liquidity requirements and risk absorption capabilities of the banking

system as well.

The new capital and liquidity reforms under Basel 3

Higher quantity and quality of capital - Banks are required to hold more

common equity in order to ensure higher quality and quantity of capital as

reflected in Appendix 2.

Regulatory leverage ratio - With effect from 2018, the core capital should

range between 3% to 4% of the total balance sheet assets including on-

balance sheet and off-balance sheet assets. This ratio was introduced to

curtail excessive expansion of a bank’s balance sheet.

Liquidity coverage ratio - banks are required to maintain high quality

unencumbered liquid assets compared to cumulative net cash outflows

for a 30 calendar day time horizon. Basel committee will implement this

ratio on a progressive basis up until 2019.

Net stable funding ratio - this is aimed at coping with possible structural

mismatches in the composition of balance sheet assets and liabilities over

a one year horizon. The ratio compares the total sources of funds with

maturity greater than one year with the portion of stable non maturity

deposits and the less liquid assets. This ratio must at least be 100% and

implement from 2018 onwards.

Capital conservation buffer will be implemented from 2016 onwards

comprising common equity in order to protect the depositors against

shareholders in periods of stress. Basel committee will impose restrictions

on return distribution for banks with less capital conservation buffers.

Countercyclical buffer - Imposed within a range of 0%-2.5% comprising

common equity, when authorities’ judge an excessive credit growth is

existed, resulting in an unacceptable build up of systematic risk.

Regional peers including India, Singapore & Malaysia have already issued directions

for the Basel 3. Hence, we believe the CBSL will issue necessary directions

(directions have already been issued on Liquidity Cover Ratio) over 1 year horizon in

line with international standards. Basel 3 initiatives will undoubtedly impact the

profitability of the Sri Lankan banking system through its range of new and more

strict regulations. The probability of an increased intensity is high as the CBSL has

historically imposed capital buffers above the Basel requirements. Thus in the long

term horizon banks will experience pressures on their ROEs and NIMs due to the

stringent capital and RWAs under Basel 3. Given the more stringent capital

10



requirements, banks with thin capital adequacy levels need to plan on capital

infusion initiatives whilst restructuring their lending & investment strategy.

UBC’s lending growth will flow without any distortion as opposed to its peers

We estimated the capital adequacy levels of key industry peers by assigning

different lending book growth targets. Relative to peers we have assigned higher

risk weighted assets levels on UBC amidst forecasted excessive lending growth.

Even under such circumstances UBC stands well above the regulatory requirement

compared to its peers. This indicates the bank’s ability to achieve superior ROEs over

long term horizon whist preserving strong lending growth momentum. In addition,

we believe the counter will be able to cater different market segments including

high yield segments amidst strong capital buffers. From a shareholder perspective,

UBC will be an attractive investment as the bank always maintains the capital

adequacy levels above the capital conservation buffers. This confirms the absence of

any restrictions on the bank’s capital redistribution over long term horizon.

UBC’s lending strategy – Focusing more on Retail & Corporate with balanced SME

Over the long term horizon we expect the bank to establish a balanced credit

portfolio with a 40% exposure for corporate and 30% each for retail & SME segments

respectively. As such the UBC’s lending growth will primarily be driven through the

retail segment whilst managing the corporate lending segment at a healthy level.

Notably, we expect this will generate a substantial fee base income since the retail

focus lending strategy would increase the bank’s transaction volumes. Presently, the

entire branch network and product portfolio is being revamped since the retail

segment is embedded with high transaction cost and credit risk compared to

corporate and SME segments. Therefore, we presume the bank will cater to

creditworthy retail and corporate clientele despite the strong capital buffers. The

term loans will dominate the credit portfolio by providing multiple lending solutions

to retail and corporate segments. With respect to the corporate segment, over long

term horizon the bank’s strategic focus areas would be tourism and power sectors.

Further, we are of the view that Sri Lanka’s tourism sector has a room to grow

further due to the prevailing weaker accommodation capability in Sri Lanka. Thus,

the industry players will implement strategic investments over long term horizon to

uplift the service offerings and customer satisfaction. Going forward the proposed

lending strategy will intensify the bank’s lending growth and fee base income whilst

minimizing the credit risk.

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC COMB HNB NDB NTB SAMP SEYB UBC

2015E 2016E 2017E 2018E 2019E

Core CAR Tier 2 CAR Core CAR 1 (Basel 3) Total CAR (Basel 3) Total CAR + Capital Conservation Buffer (Basel 3)

UBC resilient over peers in terms of Capital Adequacy

Source: Basel 3 framework, Banks’ Annual Reports & Candor Research

Well balanced portfolio over long term horizon

70%

30% 40%

50%

10%30%

40%

30%

SME Banking Corporate banking Retail banking

Lending Book (before TPG)Current

Lending Book

Lending Book (over next 5Y)

Source: UBC, Candor Research

11



TPG’s proven track records in Asian region banking industry ║ Eminent

business turnaround ahead in Sri Lanka

TPG capital, formerly Texas Pacific Group, is an American based leading global

private equity firm with USD 74.3Bn of capital under management. The firm’s

investments span across a range of industries including financial services, travel &

entertainment, technology, industrials, retail, consumer products, media &

communications, and healthcare. TPG’s investment philosophy ranges from

traditional steady buyouts to turnarounds to strategic partnerships. Currently the

firm has a presence in 10 countries with an extensive track record in management

turnarounds.

A Case Study- Success stories in private equity literature

TPG revamped the Shenzhen Development Bank (SDB) from bankrupt creditor to

china’s one of the trusted lender from 6 year period

Shenzhen Development Bank (SDB) was established in 1987 as a regional state

owned commercial bank. At end of 2002, 72.4% of the SDB’s shares were held by the

public and 27.6% were held by Shenzhen government controlling entities. As a result,

local entities owned most of the SDB’s non tradable shares and they were also the

bank’s own borrowers. This led to biased lending practices while lending to risky

borrowers as well. As a result the NPL ratio surged to 11.6% compared to the

industry average of 7.3%. However, the bank’s extensive national network in China

(225 Branches) attracted the attention of Newbridge capital (A joint venture created

by TPG to invest in emerging markets) despite the depressed assets quality. In 2004,

Newbrigde capital acquired 17.89% of non tradable shares in SDB with an

investment of USD 150Mn. Consequently TPG gained the right to appoint 8 of 15

board members. SDB was bought at roughly 1.6x the book value when it was trading

at 4x in the market mainly due to its poor assets quality coupled with TPG’s proven

track records in Banking Industry.

Newbridge capital appointed

Mr. John Langlois, a Morgan

Stanley executive in China,

and Mr. Jeffrey Williams, the

former CEO of Standard

Chartered Bank in Taiwan as

the new chairman and

president of the SDB. However,

Mr. Frank Newman, a former

US deputy treasury secretary,

became SDB’s chairman and

CEO after Mr. Langlois

resigned a year later.

Newbridge capital was able to

strengthen the SDB’s branch

network, cultivated a strong

credit culture, and improved its

balance sheet with the TPG’s

global expertise and strategic

initiatives from top

management.

TPG revamped SDB within a 6 year period


SDB capitalized the Chinese banking space

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2004 2005 2006 2007 2008 2009 2010 2011

SDB TA/ LCB TA

Source: Bloomberg, candor Research

SDB’s share price grew at a 5Y CAGR of 37%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

1/2/2004 1/2/2005 1/2/2006 1/2/2007 1/2/2008 1/2/2009

SDB Share Price (CNY)

Source: Bloomberg, candor Research

RMB. Mn 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net Interest Income 2,428 3,315 3,498 5,342 5,322 7,099 9,807 13,024 13,565 16,058

Net Income 380 387 425 331 286 1,412 2,650 614 5,031 6,247

EPS 0.07 0.07 0.07 0.06 0.05 0.24 0.42 0.09 0.70 0.82

NAV 0.72 0.74 0.75 0.74 0.87 1.13 1.89 2.29 2.86 4.13

Total Loans 70,072 112,613 131,370 126,195 156,103 182,182 221,814 283,741 359,517 407,391

Loan Growth 79.00% 60.71% 16.66% -3.94% 23.70% 16.71% 21.75% 27.92% 26.71% 13.32%

Total Deposits 86,464 113,219 141,157 165,703 200,812 231,140 280,142 359,359 452,866 560,691

Deposits Growth 67.00% 30.94% 24.68% 17.39% 21.19% 15.10% 21.20% 28.28% 26.02% 23.81%

Profitability & Efficiency

ROE 9.43% 9.06% 9.76% 7.57% 6.08% 24.19% 27.04% 4.18% 27.29% 23.28%

ROA 0.41% 0.27% 0.24% 0.17% 0.14% 0.58% 0.86% 0.15% 0.95% 0.95%

NIMs 3.16% 2.69% 2.07% 2.90% 2.80% 3.24% 3.67% 3.66% 2.98% 2.89%

Cost to Income 65.95% 65.44% 61.73% 50.54% 52.27% 48.49% 46.56% 43.93% 49.72% 48.39%

Revenue per Employee 0.84 1.04 1.02 1.35 1.34 1.68 2.26 2.75 2.15 2.35

Liquidity & Credit Quality

Loans to Deposits 81.04% 99.46% 93.07% 76.16% 77.74% 78.82% 79.18% 78.96% 79.39% 72.66%

NPA/ Assets Ratio N/A N/A 5.77% 7.28% 6.55% 5.58% 3.54% 0.41% 0.42% 0.33%

Gross NPL Ratio N/A N/A N/A 11.40% 9.30% 7.98% 5.62% 0.68% 0.68% 0.58%

Capital Adequacy

Core CAR N/A N/A 3.24% 2.32% 3.71% 3.68% 5.77% 5.27% 5.52% 7.10%

Total CAR N/A N/A 6.96% 2.30% 3.70% 3.71% 5.77% 8.58% 8.88% 10.19%

Multiples

PER 61.25 52.45 38.68 38.77 40.93 20.10 30.39 47.30 15.04 8.31

PBV 5.65 4.73 3.77 2.95 2.35 4.27 6.81 1.79 3.70 1.66

No. of Employees 5,089.00 5,834.00 6,471.00 6,999.00 7,142.00 7,737.00 8,573.00 10,381.00 11,308.00 12,203.00

Before TPG’s investment TPG exited

from SDB

12



The bank established strategic partnership with various firms (China National

Foreign Trade Transportation Corporation, China Southern Airlines, Air China, etc) to

penetrate the market whilst promoting cross- selling as well.

Through the collaboration with Bain & Company, a leading management

consultation firm, the bank restructured its business flow in order to further

streamline the processes. In addition, the bank remodeled their branch outlets to

upgrade the customer service. Further, the back office functions including

accounting clearance, retail, treasury and inter-bank business have been integrated

whilst minimizing operational risk. As a result in 2008, the bank has successfully

prevented 11 cases which could have caused a potential loss of RMB 53.51Mn.

The bank has also implemented the ‘Project Excellence’ program in 2008 with a

partnership of McKinsey & Company to restructure the management processes,

credit management and internal controls since the TPG’s prime objective was to

build a resilient credit portfolio. The bank has established rigorous credit rating

systems and early warning systems. In addition, SDB has initiated centralized

independent credit approval centers by streamlining the credit approval process.

The professional NPL collection and disposal team was developed in order to create

a strong credit portfolio. With these prudential initiatives, the bank was able to

successfully endure against the global financial crisis in 2008. The Bank had no

investments related to subprime mortgages or similar assets in overseas financial

institutions. This ensured that SDB was not directly affected by the global crisis in

subprime mortgages or the underperformance of institutions carrying them.

However, SDB had made large special provisions worth of RMB 7.3Bn in 2008

compared to RMB 2.05 in 2007 as per the request made by China’s regulatory

authority amidst global head winds. As a result, the bank’s net profit dipped to RMB

614Mn despite strong core business operation. Due to the strong risk mitigating

initiatives, the bank was awarded as the best risk management bank in China in

2008 at the 2nd annual conference for institutional investors and China times

selection awards.

Over the six years under TPG’s control, SDB’s net profit grew with 5Y CAGR 72%

from RMB 331Mn in 2004 to RMB 5,031Mn in 2009. Its NPL ratio dropped down from

11.40% to 0.68% (best in China), and its total CAR went up from 2.30% to 8.88%.

Furthermore, SDB’s share price grew at a 5Y CAGR of 37% from 2004 to 2009. TPG’s

success in enhancing SDB’s financial performance enabled the firm to exit its

investment with a highly lucrative stake sale. In 2010, TPG was able to sell its entire

stake in SDB to Ping An Insurance Group a leading Chinese Insurer for a total of USD

2.41Bn, which was 16 times its original investment. TPG is one of the few US private

equity firms which recorded such lucrative exits.

TPG revamped the Korea First Bank (KFB) within 6 years period

Adding further to the TPG’s track records, in 1999, Newbridge bought a 51% stake in

Korea First Bank (KFB) for USD 417Mn, becoming the first foreign owner of a South

Korean bank. By redesigning the bank’s branch network, centralizing its credit

approval system, and revamping its operational practices, Newbridge was able to

transform Korea First Bank to a South Korea’s one of the most superior commercial

banks. TPG has managed to reduce the gross NPL ratio from 7.31% to 1.50% while

improving the cost to income ratio from 109% to 67%. Six years later, KFB was sold to

Standard Chartered for USD 3.25Bn, a near seven fold return. These two cases were

recognized as prominent success stories in private equity literature.

Strategic initiatives by TPG in Korea First bank

Centralization of the back office functions

Waiver on all ATM fees for customers to uplift the transactions

New investment products with the strategic alliance with

Templeton Investment Management Company

Initiate a media campaign with a tag line of "Where I am the

First"

Moody's and S&P's upgraded the credit system and bank

lending practice shifted from collateral basis to credit ratings

and future cash flow analysis

Introduction of “SellStation” which combined diverse functions

including platform, lending and teller functions. This aids in

customer-related inquiries, cross-selling and results

management.

Customer relationship management system has introduced in

order to mapping customer needs by establishing a central

data warehouse.

A revamp of the Bank's web site and promote online banking to

improve the customer interaction

Introduction of premier banking unit called “Platinum Banking

Group”

Introduction of Business Continuity Planning (BCP) Disaster

Recovery System, a first in the banking industry for Korea

Introduction of “First BankOn” mobile service. This service uses

a mobile phone with an embedded IC Card to provide speedy,

easy and secure financial transactions anytime and anywhere.

13



Eminent business turnaround ahead in Sri Lanka

In 2014, TPG, through its affiliate, Culture Financial Holdings Ltd., acquired 70%

equity in UBC with a consideration of LKR 15.30 per share. TPG has restructured the

entire management team and board of directors of UBC. TPG appointed Dr. P.J

Nayak, formerly chairman & CEO of Axis Bank Ltd, as a new chairman who

renowned as a visionary banker in India. Currently, 6 board members out of 15 were

appointed from TPG capital. Notably, Mr. Ranvir Dewan, former executive vice

president & CFO of Korea First Bank (KFB) and Mr. Michael J O’Hanlon, formerly

independent director of Shenzhen Development Bank (SDB), also in the UBC’s

Director Board. Further, the entire top management team has been reorganized by

recruiting diverse industry experts from different leading Commercial Banks (NDB,

SEYB, SAMP, HSBC etc). The bank is now equipped with proficiency from TPG and

McKinsey & Company to mark a legendary business turnaround in Sri Lanka. Given

TPG’s above average exit multiples (SDB-16 folds, KFB-7 folds), we believe the UBC

will be a sensible investment for investors with a long term investment horizon.

Strong technological platform ║ ‘Silverlake’ core banking system

UBC has invested heavily on technological innovations including an advanced core

banking system. The ‘Silverlake’ system allows a bank to deliver superior business

experience to its customer across all channels in a consistent manner. In addition, it

facilitates a centralized customer data base allowing customer loyalty programs and

cross-selling. Furthermore, it improves the operational efficiency by centralizing all

the business processes. ‘Silverlake’ will also assist the bank in reducing transaction

costs by providing enterprise level efficiencies. Hence, this places UBC in a stronger

position to capitalize on growth opportunities across its channels including mobile

banking, digital banking etc. Over the long term horizon the new core banking

system will improve the bank’s operational efficiency as this is the first instance

where the bank has unveiled an advanced core banking system. Therefore, going

forward, we believe this may positively impact on UBC’s currently depressed cost to

income ratio.

Prospects on prudential credit risk management ║ McKinsey & Company will

drive the credit culture

UBC’s current assets quality is subdued with a reported Gross NPL ratio of 4.87% and

nearly 48% of the bank’s lending book categorized under a BBB rating. The SME

focused lending strategy would be the main factor for weaker assets quality.

However, with the expertise from McKinsey & Company we expect prudent

initiatives on credit risk management to be put in place over longer term horizon.

Considering the McKinsey & Company’s proven track records in Shenzhen

Development Bank (SDB), we expect a healthy lending book over long term horizon.

Furthermore, the proposed quality retail and corporate focus lending strategy will

aid to achieve a healthy lending book as well. Therefore, we believe this will

positively affect the UBC’s weaker assets quality whilst minimizing the impairment

charges over long term horizon.

Weak credit quality but promising outlook

21%

2%

2%

24%

48%

3%

A

AA

AAA

B

BB

BBB

Others


14



INVESTMENT RISKS

Upside risks

Economic ║ Thriving private sector credit growth (E1)

Credit extended to private sector by Commercial Banks accelerated to 21% (YoY) in July 2015, up

from 1% (YoY) on corresponding period 2014. The CBSL is expected to continue the same

momentum through maintaining all time low level policy rates and healthy excess liquidity levels.

In addition, going forward we expect an expansion in construction and housing sectors with

stable political environment which further accelerate the private sector credit growth. As such, if

these developments persist, our forecast lending growth on UBC can be slightly higher than

expected.

Economic ║ Capital market development (E2)

Capital market development creates a mixed impact on UBC compared to peers due to the bank’s

unit trust operations. Total unit trust investments grew by 109% during 2014. Hence, going

forward this will create an immense opportunity for the bank’s unit trust operations. However, we

do not expect a significant impact on the bank’s deposit growth amidst UBC’s market penetration

strategies coupled with growing national savings. In 2014, national savings to GDP ratio surged

to 27% from 25% in 2013.

Downside risks

Industry ║ Increased ICT banking services (I1)

Sri Lanka’s total internet connection grew by 68% (YoY) during 2014 supported by a sizable 85%

(YoY) growth in mobile connections. This has led to an increasing usage of ICT services such as

E-banking, mobile banking etc. Thus, this creates a greater challenge to the Sri Lankan

commercial banks in terms of customer retention and technological innovations. However, in line

with the industry trend, UBC has introduced internet banking and mobile banking with greater

customer convenience. We therefore do not believe this represents a material risk to the bank.

Economic ║Possible restrictions on vehicle importation (E3)

Sri Lanka recorded a BOP deficit of USD 791.7Mn during 1H2015 compared to a surplus from 2012

to 2014. This is primarily due to the favorable vehicle importation policies through the interim

budget 2015 coupled with subdued export performances. Hence, over the medium term horizon

we expect tightening measures on vehicle imports to provide a cushion for BOP crisis. In addition,

the newly introduced cap on loans & advances for motor vehicles with a maximum LTV ratio of

70% will further discourage the vehicle importation whilst negatively affecting the leasing

segment. Since UBC’s exposure on leasing & hire purchases is at 9%, this possess a sizable risk to

the bank.

Economic ║ Local currency depreciation (E4)

The CBSL has stopped quoting reference on exchange rate and allowed market to determine the

exchange rate from 4th September 2015. However, LKR/USD rate is fairly stable, trading within a

range of LKR 137/- to LKR 141/- from 04/09/2015-16/10/2015 with a standard deviation of 0.44%.

Since Sri Lanka is an import dependent country we believe the CBSL will control any excessive

volatilities and execute necessary interventions. The bank has managed the exchange rate risk

through net open position limits, trading limits, dealer limits etc. Hence, we do not believe this

creates a material risk to the bank amidst the bank’s thin off-shore operations.

E1

Mediu

m

E2 E3

I1

E4

Medium

S

ignific

ance o

f Ris

k

Probability of Risk

Low High

H

igh

L

ow


Risk Matrix

15



VALUATION

No major catalyst over one year horizon

Our one year target price of LKR 24.50 has been derived by using two valuation

measures, the PBV multiple analysis & Residual Income Valuation. The methods

were weighted at 70% and 30% respectively. We have assigned a higher weight on

Price to Book Value considering the industry dynamics. We are of the view that

UBC’s share price will remain sluggish over 1 to 2 year horizon due to thin ROE

levels. However, considering TPG’s proven track records together with expected

muted growth in the banking sector peers amidst Basel 3 capital reforms; we believe

the counter would be an attractive stock over long term horizon. Furthermore, at

current market price of LKR 22.20/- the counter may generate a 10% upside over one

year horizon with a target price of LKR 24.50.

PBV multiples

At the current market price of LKR 22.20, the counter is trading at 137.69x earnings

and 1.48x book value on FY2015E. The counter is trading between 0.8x to 1.2x book

value from 1Q2012 to 4Q2013, however subsequently the counter was trading at 1.2x

to 1.8x despite higher earnings multiples. Therefore, given the continued

consolidation of the market share & promising outlook in CASA, Asset Quality, ROE,

Cost to Income, Capital Adequacy etc, it is our view that UBC ought to trade at a

premium to the historical book value multiples; this suggests a one year target price

of LKR 27.00.

Residual Income Valuation

We have utilized the Residual Income Valuation as the secondary valuation method.

The valuation considers a forecast period up to FY2022E. A relatively long explicit

forecast horizon was applied, such that the effects of Basel 3 reforms and positive

outlook on the industry could be adequately imputed in to the model. We have

utilized a cost of equity of 14.0% and terminal growth of 5% in deriving the one year

target price of LKR 18.75. A relatively high terminal growth rate has assigned

considering the long term prospect of the counter.

Interest income assumptions

UBC’s interest income predominately depends on the average lending rates

and UBC’s lending book growth. Through FY2012 to FY2014 the average

lending rates have been ranging from 10.8% to 14%. However, over long term

horizon we expect the CBSL will maintain the low interest rate regime in order

to stem the GDP growth. As such, we expect the average lending rate will drop

to 9.7% by FY2022E. UBC’s lending book growth assumption depends on the

LCB’s lending to GDP ratio and UBC’s market share (Lending). From FY2017E

onwards we expect the country’s GDP will grow at an average rate of 7.10% till

FY2022E. Given the low penetration levels, we expect the LCB’s lending to

GDP ratio will increase to 90% in FY2022E from 49% in FY2015E which is par

with the regional counter parts. Finally, we take a positive view on UBC’s

market share in lending in light of strong capital buffers and the bank’s

Method Value (LKR) Weight

PBV 27.00 70%

Residual Income 18.75 30%

Price 24.53

Valuation Methodology

13.0% 13.5% 14.0% 14.5% 15.0%

3% 20.32 18.66 17.17 15.82 14.60

4% 21.38 19.53 17.88 16.40 15.07

5% 22.70 20.60 18.75 17.11 15.65

6% 24.41 21.96 19.84 17.99 16.35

7% 26.68 23.75 21.24 19.09 17.23

Cost of Equity

Term

inal G

row

th

Sensitivity to TGR & Cost of Equity

Historical PBV Band

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

FQ

1 2

011

FQ

2 2

011

FQ

3 2

011

FQ

4 2

011

FQ

1 2

012

FQ

2 2

012

FQ

3 2

012

FQ

4 2

012

FQ

1 2

013

FQ

2 2

013

FQ

3 2

013

FQ

4 2

013

FQ

1 2

014

FQ

2 2

014

FQ

3 2

014

FQ

4 2

014

FQ

1 2

015

FQ

2 2

015

Share Price 2x 1.8x 1.6x 1.4x 1.2x 1x 0.8x

Source: Bloomberg


16



aggressive market penetration strategies through product revamping, branch

expansions etc. As such, market share expect to increase from 0.89% in FY2014

to 1.61% in FY2022E. Thus, we expect the bank’s interest income will grow at a

7Y CAGR of 21% from FY2015E to FY2022E.

Warrant conversion

For modeling purposes, we expect the TPG will exercise 218.28Mn warrants at

price of LKR 16/- during FY2019E. As a result, the cash infusion will amount to

LKR 3.5Bn. Therefore, in our valuation we have factored the warrant

conversion from FY2019E onwards.

Minimal downside risk over one year horizon, possible entry point at current market

price

Our one year valuation on UBC is derived predominately considering the prospects

of the industry curtsey of a positive outlook on the GDP growth and thin banking

industry penetration levels. In addition, UBC’s continuous consolidation of the

market share amidst strong capital buffers also affects on our valuation. We expect

the CBSL will maintain a low interest rate regime over long term horizon to stem the

GDP growth. Further, the bank’s continuous improvement in the assets quality

through the support of McKinsey & Company will provide a strong buffer against

volatilities in credit quality.

With respect to the UBC’s consolidation of market share, the major concern is with

respect to the subdued operating efficiency since this can negatively impact the

bank’s earnings. However, through the bank’s strategic investments on advanced

systems & processes coupled with the branch cost optimization strategies, we

believe the cost to income ratio will curtail up to 39% from 81% levels over long term

horizon.

To analyze the robustness of our analysis, we performed a series of sensitivity

analyses on cost of equity and terminal growth rate, as well as macroeconomic and

industry factors (Appendix 5). However, as sensitivity analyses are not probability

weighted, we complemented this study with a Monte Carlo simulation for Residual

Income Valuation. In examining changes in average lending & deposits rates,

lending book & deposits growth rates, LCB’s lending to GDP ratio, UBC’s market

share, risk weighted assets and GDP growth assumptions within 10,000 trials, and

the resulting distribution provides a tight price range of LKR 18.31 to LKR 19.18 with

95% probability. This confirms that the major downside risk of the counter over one

year horizon is minimal. Thus, considering the positive long term outlook on the

counter, we believe the current price levels present a possible entry point.

Probability Target Price (LKR)

5% 18.31

15% 18.48

25% 18.57

35% 18.65

45% 18.72

55% 18.79

65% 18.85

75% 18.93

85% 19.02

95% 19.18


Monte Carlo Simulation


--- Value per ordinary share

17



Sturdy Long Term Valuation Fundamentals – Sound

investment for an investor with a long-term

investment horizon

Our long term target price ranges between LKR 41.00 to LKR 45.00 in long term horizon, expecting

the counter to be priced at 11x on forward earnings and 2x on forward book value, backed by strong

fundamentals under conservative assumptions as depicted in table below.

2015E 2016E 2017E 2018E 2019E 2020E 2021E

Multiples

EPS 0.16 0.28 0.50 1.03 1.58 2.64 3.73

NAV 14.99 15.27 15.77 16.59 17.71 19.82 22.81

PER 137.69 79.37 44.46 21.57 14.01 8.41 5.95

PBV 1.48 1.45 1.41 1.34 1.25 1.12 0.97

Forecasted DPS - - - 0.21 0.32 0.53 0.75

Dividend Yeild 0.00% 0.00% 0.00% 0.93% 1.43% 2.38% 3.36%

Underlying Fundementals

ROE 1.08% 1.85% 3.22% 6.36% 10.05% 14.07% 17.50%

CASA Ratio 24.05% 27.16% 29.47% 32.53% 35.67% 38.94% 42.34%

NIMs 4.23% 3.98% 3.95% 3.88% 3.73% 3.76% 3.74%

Lending Book Growth 49.32% 23.43% 22.24% 28.00% 24.15% 26.52% 22.49%

Tier -1 Capital 27.27% 22.71% 20.63% 18.30% 16.91% 16.07% 15.91%

Cost to Income 78.67% 76.69% 72.05% 64.13% 54.68% 46.38% 40.94%

Target Price

PBV Basis

Target Price @ 2x PBV 39.65 45.62

Target Price @ 1.9x PBV 37.67 43.34

Target Price @ 1.8x PBV 35.68 41.06

Target Price

PER Basis

Target Price @ 11x PER 29.05 41.04

Target Price @ 10x PER 26.41 37.31

Target Price @ 9x PER 23.77 33.58 Source: Candor Research

(LKR)

(LKR)

(x)

(x)

(LKR)

18



FINANCIAL ANALYSIS

Bank’s NIMs will remain under pressure

UBC was initially positioned as a preferred bank for SME financing with an exposure

of 70% of the total lending book to SME financing. This has led for a superior NIMs

(2011- 4.56%, 2012-4.31%) from FY2011 to FY2012. In addition, the bank’s substantial

exposure on high yielding pawning segment (2011- 8.40%, 2012- 11.17%) also

contributed for superior NIMs. However, despite the sizeable exposure on high

yielding segments the bank’s NIMs has fallen to 3.51% during FY2013 due to the

accumulation of non-performing loans (Gross NPL- 8.24%). With TPG’s strategic

acquisition the bank’s lending book has been revamped to build a quality lending

book with a 50% exposure to the corporate segment. This has narrowed the bank’s

NIMs to 3.97% in 2Q2015, down from 4.20% in FY2014. In addition, downside re-

pricing of the lending book (90% floating rate lending book) compared to deposits

base (CASA ratio- 24.65%) amidst low interest rate environment further dragged

down the bank’s NIMs. Going forward we expect the bank’s NIMs will remain under

pressure due to the prevailing competition within the corporate segment coupled

with the bank’s sluggish penetration on subprime segment in order to maintain a

quality lending book. However, notably the bank’s net interest income grew at a 3Y

CAGR of 24.4% from FY2011 to FY2014 whilst industry growth was 11%. We expect

the bank’s net interest income to grow at a 7Y CAGR of 20% from FY2015E to

FY2022E amidst the bank’s continues expansion strategies and product innovations.

Further, we expect any short term interest rate hike may positively impact on net

interest income amidst positive re-pricing gaps due to 90% loans are in floating rate

basis.

CASA ratio at moderate levels but outlook promising

The bank’s CASA ratio peaked at 27.06% in FY2011. However the ratio was stagnant

since FY2012 with a CASA ratio to fall at 18.59% during 2Q2014. Lack of product

innovations coupled with SME focused business model dragged down the bank’s

low cost funding ability. However, from 3Q2014 onwards the CASA ratio regained

the growth momentum and currently stands at 24.65%. The bank‘s aggressive focus

on corporate & retail segments together with product innovations (Salary Select,

Salary Power) following the TPG’s acquisition contributed for slightly improved

CASA ratio. Going forward, we expect the CASA ratio will surge to 46% in FY2022E

due to the bank’s continuous branch & offsite ATMs expansion strategy.

Subdued operating efficiency but favorable direction

Currently the bank maintains a subdued operating efficiency with a depressed cost

to income of 81.2% (Industry Average- 52.3%) due to the bank’s investments on core

banking system (‘Silverlake’) and ancillary systems (Kalypto risk management

system, ALCO system etc.). However, with the new systems, UBC will be able to

centralize their entire back office functions over 1 year horizon. Therefore, together

with branch optimization strategies we expect the cost to income ratio to improve

from 79% in FY2015E to 39% in FY2022E. Notably, the branch productivity measured

by revenues per branch improved from LKR 39.5Mn in FY2013 to LKR 44.9Mn in

FY2014.

Bank’s NIMs remained under pressure

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2011 2012 2013 2014 2015E 2016E 2017E

NIMs (Bank)


Promising outlook on CASA

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2012 2013 2014 2015E 2016E 2017E

CASA


Centralization will improve the operating efficiency

62%

64%

66%

68%

70%

72%

74%

76%

78%

80%

2012 2013 2014 2015E 2016E 2017E

Cost to Income


19



Lending growth to accelarate due to strong capital buffers

The bank’s core CAR dropped down to 14.39% in 2Q2014 from 21.32% in FY2011. The

bank’s exposure on risky corporate and SME segments together with contraction in

zero weighted pawning portfolio dragged down the bank’s capital buffers. However,

through the TPG’s capital infusion, the bank’s core CAR surged to 54.24% in 3Q2014

and currently stands at 33.20%. We forecast the bank’s core CAR will dip to 15.88% in

FY2022E due to UBC’s aggressive lending plans. However, the capital buffers will

remain well above the Basel 3 requirements and will provide a substantial

competitive edge for the bank over its peers. Further, the bank’s continuous focus on

quality retail & corporate clientele will also enhance the capital buffers.

Impairment charges to gross loans ratio to improve further

The bank’s total impairment charges to gross loan ratio peaked at 6.32% in FY2013

due to the poor assets quality with a gross NPL ratio of 8.24%. However, under new

management the bank was able to curtail the ratio to 3.31% whilst successfully

improving the gross NPL ratio to 4.87% in 2Q2015. We expect the gross NPL ratio will

dip to 1.27% in FY2022E curtsey of McKinsey & Company and ‘Kalypto’ risk

management system.

ROE to reach at 14% in FY2020E

The bank’s ROE and ROA were depressed over the years amidst lackluster

performance of the bank. Currently, the bank’s ROE and ROA stands at 0.29% and

0.17% amidst LKR 11.4Bn equity infusion from TPG. However, we expect the bank’s

ROE and ROA will surge to 14% and 2% respectively in FY2020E which is relatively

par with the industry average. We believe TPG’s expertise will drive UBC’s bottom

line resulting in a 7Y CARG of 66% from FY2015E to FY2022E.

ADR will remain weak but minimal liquidity risk

We expect the bank’s lending book will grow at a 7Y CAGR of 24% from FY2015E to

FY2022E due to the bank’s aggressive market penetration strategies. Furthermore,

we expect the bank’s deposits growth also to stand at a 7Y CAGR of 24% to fund the

forecasted lending growth. Further, we believe the CASA deposits will dominate the

deposits growth over long term horizon amidst the bank’s CASA product innovations

and branch expansion strategies. However, over long term horizon we expect the

prevailing depressed ADR will maintain amidst healthy lending book growth. But we

do not expect this to intensify the bank’s liquidity risk since the UBC is in a position

to raise funds via debentures due to the available capacity in Tier 2 capital.

ROE to grow gradually

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2012 2013 2014 2015E 2016E 2017E

ROE ROA


ADR will remain weak but minimal liquidity risk

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

2012 2013 2014 2015E 2016E 2017E

ADR


COMB HNB SAMP NDB NTB SEYB

ROE (FY2015E) 16.61% 15.67% 16.82% 14.03% 19.03% 13.82%

Industry peer ROEs

McKinsey & Company will pay dividends

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2012 2013 2014 2015E 2016E 2017E

Total impairment to gross loans Bank Gross NPL Bank Net NPL


Strong capital buffer to continue

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2012 2013 2014 2015E 2016E 2017E

Core CAR


Source: Banks, Candor Research

20



LCB’s contribution from fee based income continuously edging up

The contribution from fee & commission income has exhibited a continuous growth

over the last 3 years. The development of multiple payment channels, expansion in

the external sector, improved corporate advisory services and prevailing low interest

rate regime have fostered the fee & commission income growth. In addition, recently

customer convenience emerged as a key differentiator within the Sri Lankan

banking sector. As a result, the banking institutions have introduced new products

including credit cards, debit cards, e-banking, mobile banking etc which bring fee

base income. Nations Trust Bank has achieved the highest fee & commission 3Y

CAGR growth of 18% compared to their peers. The bank’s aggressive penetration of

credit cards & leasing segments aided for the considerable fee & commission income

growth. UBC as an emerging player recently launched a VISA international shopping

debit card in order to accelerate their fee & commission income. Going forward the

bank will focus on the offsite ATMs & credit card strategies to boost the fee based

income.

Contribution from fee based income continuously

rise

12.00%

12.50%

13.00%

13.50%

14.00%

14.50%

15.00%

15.50%

16.00%

16.50%

2011 2012 2013 2014 1Q2015 2Q2015

LCB's Fee income/Total Income

Source: Companies, Candor Research

21

Appendix

UBC

| UNION BANK OF COLOMBO PLC


INITIATION REPORT: APPENDIX

APPENDIX 01 KEY FINANCIAL DATA

Profit & loss (LKR Mn)Year ended December 2012A 2013A 2014A 2015E 2016E 2017ENet interest income 1,410.43 1,285.93 1,970.54 2,966.78 3,397.98 3,981.60 Net Fees & Commission Income 165.11 192.86 263.93 382.70 612.33 979.72 Net Trading Gain/Loss 3.70 120.95 96.05 110.46 132.55 159.07 Other Operating income 339.92 416.48 413.07 433.72 498.78 558.63 Total banking income 1,919.15 2,016.22 2,743.59 3,893.67 4,641.64 5,679.03 Total operating expenses 1,298.61 1,575.68 1,983.93 3,063.11 3,559.73 4,092.01 Provisions 71.93 292.43 526.53 442.62 493.02 535.73 Operating profit 548.61 148.11 233.14 387.94 588.89 1,051.29 Earnings from associates - - - - - - VAT 98.79 42.88 72.61 116.38 117.78 210.26 Tax expense (35.08) 6.16 82.33 76.04 131.91 235.49 NPAT- Recurring 484.89 99.07 78.20 195.52 339.20 605.54 NPAT including non recurring 484.89 99.07 78.20 195.52 339.20 605.54 Net profit attributable to equity holders 430.13 103.93 31.06 175.97 305.28 544.99

Basic EPS -Recurring 1.23 0.30 0.06 0.16 0.28 0.50 Book value per share 14.13 14.09 14.83 14.99 15.27 15.77 DPS 0.50 0.25 - - - -

Balance sheet (LKR Mn)Year ended December 2012A 2013A 2014A 2015E 2016E 2017EASSETSCash and Balances with central banks 2,469.68 2,182.00 2,689.34 3,148.53 1,923.65 1,746.82 Trading capital 433.04 990.66 2,588.62 3,622.41 4,346.15 5,214.70 Loans, advances & leases 20,907.22 25,347.78 29,217.86 44,463.57 54,952.78 67,286.82 Other assets 7,821.89 8,304.30 18,062.55 14,748.83 15,190.03 15,469.15 TOTAL ASSETS 31,631.83 36,824.75 52,558.37 65,983.34 76,412.61 89,717.49 LIABILITIESDeposits 23,725.60 29,462.27 30,323.85 39,356.60 48,091.19 58,227.33 Other liabilities 2,695.93 2,168.76 5,737.49 9,934.19 11,289.67 13,852.86 TOTAL LIABILITIES 26,421.52 31,631.03 36,061.34 49,290.79 59,380.86 72,080.19 EQUITYSHAREHOLDERS' FUNDS 4,936.05 4,920.19 16,184.67 16,360.63 16,665.92 17,210.90 Minorities 274.26 273.53 312.37 331.92 365.84 426.39 TOTAL EQUITY 5,210.31 5,193.72 16,497.03 16,692.55 17,031.75 17,637.30

Source: Company Data, HBSLKey perfomance indicatorsYear ended December 2012A 2013A 2014A 2015E 2016E 2017EEarnings and profitabilityBank Net interest margin (NIM) (%) 4.31 3.51 4.20 4.23 3.98 3.95 Non-interest income margin (%) 1.75 2.13 1.73 1.56 1.75 2.04 Cost to income ratio (%) 67.67 78.15 72.31 78.67 76.69 72.05 Norm'd NPAT growth (%) 53.92 (79.57) (21.07) 150.04 73.49 78.52 Norm'd EPS growth (%) 36.67 (75.61) (80.00) 168.72 73.49 78.52 Operating profit margin (%) 28.59 7.35 8.50 9.96 12.69 18.51 Tax rate (%) (7.80) 5.86 51.29 28.00 28.00 28.00 Total assets yield (%) 2.13 1.29 1.70 1.40 1.52 1.91 ROE (%) 9.09 2.11 0.29 1.08 1.85 3.22 ROA (%) 1.66 0.29 0.17 0.33 0.48 0.73

Capital adequacyTier 1 ratio (%) 17.73 14.15 35.95 27.27 22.71 20.63 Tier 2 ratio (%) 0.23 (0.04) (0.01) (0.01) (0.01) (0.01) Total capital Ratio (%) 17.96 14.11 35.94 27.26 22.70 20.62 Leverage ratio (x) 0.17 0.14 0.36 0.28 0.23 0.21

Asset qualityGross NPL ratio (%) 5.43 8.24 8.25 4.04 3.21 2.67 Net NPL ratio (%) 4.45 7.80 7.44 3.31 2.63 2.19 Individual impairment to gross loans (%) 1.51 3.86 2.49 1.50 1.41 1.30 Collective impairment to gross loans (%) 3.19 2.47 2.18 1.35 1.31 1.25 Total impairment to gross loans (%) 4.70 6.32 4.67 2.84 2.72 2.55 Loan growth (%) 16.73 23.34 13.27 49.32 23.43 22.24

LiquidityDeposit growth (%) 19.55 24.18 2.92 29.79 22.19 21.08 Loans to deposit ratio (%) 88.12 86.03 96.35 112.98 114.27 115.56

Valuation multiplesP/E (x) 11.22 55.33 421.67 137.69 79.37 44.46 P/BV (x) 0.98 1.18 1.71 1.48 1.45 1.41 Mcap/risk weighted assets (x) 0.18 0.19 0.67 0.43 0.35 0.30 Mcap/deposits (x) 0.20 0.20 0.91 0.62 0.50 0.42 Dividend yield (%) 3.62 1.51 - - - -





APPENDIX 02 BASEL 3 CAPITAL AND LIQUIDITY REFORMS

4.0% 4.5% 4.5% 4.5% 4.5% 4.5%

1.5%1.5% 1.5% 1.5% 1.5% 1.5%

2.5% 2.0% 2.0% 2.0% 2.0% 2.0%

0.6% 1.3% 1.9% 2.5%

0-2.5%

2014 2015 2016 2017 2018 2019

Core Tier 1 Capital Non-core Tier 1 Capital Tier 2 Capital Capital Conservation Buffer Countercyclical Buffer

Tier 1 Capital

2015 2016 2017 2018 2019

Liquidity Cover Ratio 60% 70% 80% 90% 100%

Source: Basel 3 framework, Candor Research

Stricter capital definition

Increased quality of Tier 1 capital through improving

the transparency of the capital base

Simplification and reduction of Tier 2 capital

Limits for capital components under Tier 1 capital

Increased RWAs

Higher capital requirements for trading book &

(re)securitizations

Higher capital requirements for counterparty credit

risk exposures arising from derivatives, repos and

securities financing activities

Increased risk weights on exposures to financial

institutions in order to address systemic risk within the

financial sector




UBC has maintained a fairly good concentration risk with HHI index of 0.1690 compared to the industry average of 0.1451.

APPENDIX 03 MINIMAL CONCENTRATION RISK

7%0%

27%

29%

9%

18%

10%

Financial Services

Government

Consumer

Retail & Wholesale

Construction

Manufacturing

Service

Well balanced lending portfolio – Industry wise

Source: UBC Annual Report




Competitive rivalry within industry- Moderate

The Sri Lankan commercial banking industry is highly concentrated with 74% of total assets and 82% of total gross loans captured by the 5

largest commercial banks. Competitive imitation by established rivals is high, which creates a lack of differentiation in products and

services. However, amidst advanced technology and customer empowerment, Sri Lankan commercial banks appear to have reached an

understanding not to compete on price but rather focus on seeking differentiation on other factors such as product features, brand image

and customer service, which are less likely to erode profitability. But, the competitive intensity is strong within retail and corporate lending

segments. This combined with the higher liquidity requirements under Basel 3 and places intense pressure on profitability. In addition, low

switching cost and barriers to exit from the industry creates a rivalry within the industry. Nevertheless, superior market growth rates

amidst thin market penetration levels have tamed the industry competition to an extent. But, going forward the industry players’ growth

momentum is questionable due to the stringent capital requirements under Basel 3. As a result, UBC is in a position to exploit the industry

growth opportunities owing to resilient capital adequacy levels and is able to withstand against the competition from large players.

LCBs- Highly concentrated industry

Threat of new entrants: Low

The commercial banking industry is highly concentrated with the top 5 banks making up more than 70% of the market. These banks

control the distribution channels through extensive national branch networks and the offering of sophisticated internet and mobile

banking tools. These banks benefit from economies of scale, which is why we believe the new entrants do not pose a meaningful threat.

The Sri Lankan commercial banking industry is highly regulated through various regulations including the Banking Act, Monetary Law

Act, Basel Committee directions and Companies Act. These rules and regulations have been imposed on risk management, branch

expansion, shareholding, financial reporting etc. The minimum capital requirement for domestic licensed commercial banks and branches

of foreign banks amounted to LKR 10Bn and LKR 5Bn respectively. The nature of the business and the strong positioning and track record

of the larger Sri Lankan commercial banks provides added benefits to existing players and further deters new entrants, as new entrants

cannot match the level of trust provided by the large commercial banks. The Sri Lankan commercial banks also enjoy strong brand

recognition within the country, which further deters new players from entering the market. Foreign banks can operate in Sri Lanka but

they must be separately incorporated and capitalized. This is an important entry barrier, as new entrants cannot easily get access to

distribution channels through acquisitions. In addition, strict guidelines for anti money laundering and the ‘know your customer’ (KYC)

processes require banks establish sophisticated and expensive transaction monitoring systems. Product differentiation is not a threat to

the industry as the large Sri Lankan commercial banks are multi product, multi service powerhouses, which over the years have pursued

to differentiate its product and service offering from competitors through improved customer service, bundled product offerings and other

differentiating attributes. This leaves only limited room for new entrants to establish a space through product differentiation.

APPENDIX 04 PORTER’S FIVE FORCES ANALYSIS: SRI LANKAN BANKING SECTOR CONTINUES TO REMAIN ATTRACTIVE

23%

19%

14%

10%

5%

3%1%

4%

8%

1%

12%

Bank of Ceylon

Peoples Bank

Commercial Bank


National Development Bank

Nations Trust Bank

Pan Asia Bank

Seylan Bank

Sampath Bank

Union Bank

Others

23%

23%

15%

12%

5%

3%2%

5%

9%1%

2% Bank of Ceylon

Peoples Bank

Commercial Bank


National Development Bank

Nations Trust Bank

Pan Asia Bank

Seylan Bank

Sampath Bank

Union Bank

Others

Assets Distribution Loan Distribution

Source: CBSL, Companies & Candor Research Source: CBSL, Companies & Candor Research




Threat of substitutes: Moderate

Competition from the non-banking financial sector (Finance companies) is increasing rapidly. This sector comprised with 47 finance

companies. The competition from finance companies has intensified amidst improved per capita income and subprime segment. These

companies create an immense competition for commercial banks in market segments such as leasing & hire purchases. In addition, they

have attracted the depositors whilst providing a higher return over commercial banks, but the perceived risk by depositors is high.

However, the commercial banks have outperformed in corporate lending segment and high end retail segment by providing a low interest

rate and multiple value additions. Adding further, key products including credit cards, mobile banking & e-banking coupled with extended

branch network have provided a superior competitive advantage for commercial banks over finance companies. In addition, the recently

introduced cap on loans & advances for motor vehicles has exploded the prime differentiation factor for finance companies within the

leasing segment. Hence, we believe the threat of substitutes is relatively moderate.

Bargaining power of suppliers: Low

Key supplier segment for banks are its depositors. These are individuals who have excess money and prefer regular income and safety. In

the banking industry suppliers have low bargaining power. Following are the reasons for low bargaining power of suppliers:

Nature of suppliers: Suppliers of banks are generally those people who prefer low risk and those who need regular income and

safety as well. Banks are best place for such individuals to deposit their surplus money. They believe that banks are safer than

other investment alternatives and high risk finance companies. Therefore, they do not consider alternatives, which lower their

bargaining power.

Limited alternatives: Suppliers are risk averse and want regular income. Hence, they have few alternatives available for them to

invest such as treasury bills, government bonds etc. Therefore, few alternatives lower their bargaining power.

CBSL’s rules and regulations: Banks are subject to CBSL’s rules and regulations. Thus, CBSL takes all decisions relating to

interest rates. This reduces suppliers bargaining power.

Suppliers are not concentrated: the banking industry’s suppliers are not concentrated. There are numerous suppliers with

negligible portion to offer. Hence, this reduces their bargaining power.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2013Dec 2014Mar 2014Jun 2014Sep 2014Dec 2015Mar

NBFI's NIM (%) LCB's NIM (%)

400bps

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2013Dec 2014Mar 2014Jun 2014Sep 2014Dec 2015Mar

Total Assets (LKR.Mn) Gross Loans (LKR.Mn)

Assets +21% (YoY)

Source: CBSL, Candor Research Source: CBSL, Candor Research

NBFIs maintained high NIMs NBFIs assets grew by 21% (YoY)




Bargaining power of customers- Moderate

Customers of the banks are those who take loans, advances and use other services of banks. Following are the reasons for relatively

strong bargaining power of customers:

Large number of players: Customers have very large number of alternatives. There are number of players, which compete for the

same share. There are many non-financial institutions which have also into this business. There are foreign banks and cooperative

banks together with specialized financial companies that provide finance to customers.

Undifferentiated service: Banks provide similar services. There is not much difference in service offering by different banks.

Hence, bargaining power of customer’s increases. Banks cannot be charged for differentiation.

Full information about the market: Customers have full information about the market. The Internet has increased customer’s

access to information. As a result, banks have to be more competitive and customer friendly to serve them.

However, retail customers do face some switching costs, mostly involving moving fees and other costs associated with changing over to

another bank. Corporate customers are similar as their lending relationship with a bank may be bundled with other products and services,

which makes price comparisons difficult and limits the flexibility to move the business to a competitor. In addition, reduced customer

concentration minimizes the customer’s bargaining power. UBC has attempted to increase customer switching cost by implementing

augmented services like “Elite Banking centers’. Hence, we believe the customer bargaining power is relatively moderate.

0: No threat | 1: Insignificant Threat | 2: A Low Threat Level

3: Moderate Threat Level | 4: Material Threat | 5: Substantial Threat

0

1

2

3

4

5Competition in the industry

Bargaining power of suppliers

Threat of new entrantsThreat of substitutes

Bargaining power of customers





No major down side risk persist from current market price for UBC

The sensitivity analysis focused on key inputs affecting the intrinsic value of UBC. Simulations determining how these inputs independently

affect the intrinsic value are shown below.

9.0% LKR 15.02

9.1% LKR 15.55

9.2% LKR 16.08

9.3% LKR 16.62

9.4% LKR 17.15

9.5% LKR 17.68

9.6% LKR 18.22

9.7% LKR 18.75

9.8% LKR 19.29

9.9% LKR 19.82

Average Lending Rate

5.5% LKR 20.01

5.6% LKR 19.59

5.7% LKR 19.17

5.8% LKR 18.75

5.9% LKR 18.33

6.0% LKR 17.91

6.1% LKR 17.49

6.2% LKR 17.07

6.3% LKR 16.65

6.4% LKR 16.23

Average Deposits Rate

6.3% LKR 18.57

6.4% LKR 18.59

6.5% LKR 18.62

6.6% LKR 18.64

6.7% LKR 18.66

6.8% LKR 18.68

6.9% LKR 18.71

7.0% LKR 18.73

7.1% LKR 18.75

7.2% LKR 18.77

7.3% LKR 18.80

7.4% LKR 18.82

7.5% LKR 18.84

7.6% LKR 18.86

7.7% LKR 18.89

7.8% LKR 18.91

7.9% LKR 18.93

8.0% LKR 18.95

GDP Growth

70.0% LKR 13.41

73.0% LKR 14.21

76.0% LKR 15.01

79.0% LKR 15.81

82.0% LKR 16.61

85.0% LKR 17.42

88.0% LKR 18.22

91.0% LKR 19.02

94.0% LKR 19.82

97.0% LKR 20.62

100.0% LKR 21.42

LCB's Lending/ GDP

1.0% LKR 9.64

1.1% LKR 11.13

1.2% LKR 12.63

1.3% LKR 14.12

1.4% LKR 15.62

1.5% LKR 17.11

1.6% LKR 18.60

1.7% LKR 20.10

1.8% LKR 21.59

1.9% LKR 23.08

2.0% LKR 24.58

2.1% LKR 26.07

UBC's Market Share-Lending

25.5% LKR 19.69

26.0% LKR 19.50

26.5% LKR 19.31

27.0% LKR 19.13

27.5% LKR 18.94

28.0% LKR 18.75

28.5% LKR 18.56

29.0% LKR 18.38

29.5% LKR 18.19

30.0% LKR 18.00

Tax Rate

Impact: HIGH Impact: HIGH

Impact: MEDIUM Impact: HIGH

Impact: MEDIUM

Impact: HIGH

Source: Candor Research Source: Candor Research





APPENDIX 05 RESIDUAL INCOME VALUATION: SENSITIVITY ANALYSIS




Strengths

UBC is the 5th largest Commercial Bank in Sri Lanka in terms of market capitalization with a strong proficiency from TPG Capital

and McKinsey & Company

UBC currently operates with related diversification strategies with both UB finance & NAMAL, which provides a strong competitive

advantage over peers

UBC resilient over Basel 3 capital and liquidity reforms with a industry best total CAR of 32.59%

Strong penetration on SME segment. In 2014, UBC awarded as the best SME bank in Sri Lanka by capital finance international and

UBC is the principal sponsor of the ‘2015 Industrial Excellence Awards’.

The bank’s current off-site ATM expansion strategy will improve the bank visibility and accessibility across the country.

Technological superiority: First bank to launch Microsoft cloud technology

Weaknesses

High cost of funding with a subdued CASA ratio of 25% compared to industry average of 42%

Poor operating efficiency with a cost to income ratio of 81% compared to industry average of 52%

Moderate diversification of product portfolio compared to peers

UBC has less number of branches and ATM network compared to other major players

Opportunities

Amidst low banking penetration levels, the Sri Lankan banking sector has a room to grow further

With a positive outlook on Sri Lankan construction and housing sector, there is a room for noteworthy private sector credit growth

With the bank resilient capital adequacy levels, the bank is in a position to support growing SME and subprime segments

The prevailing low interest rate and low inflationary environment

Threats

Increasing competition within the corporate lending segment will pressure the bank’s NIMs

Growing concerns on ICT banking services will create a substantial treat to the bank in terms of customer retention and product

innovations

Enormous competition from non-banking financial services

Exchange rate environment volatilities will negatively affect on the bank’s treasury functions

Competition from other leading banks.

APPENDIX 06 SWOT ANALYSIS

| UNION BANK OF COLOMBO PLC INITIATION REPORT: APPENDIX


APPENDIX 07 CORRELATION ANALYSIS- DOMESTIC KEY ECONOMIC INDICATORS VS UBC SHARE PRICE

UBC SHARE PRICE SLFR TRADE BALANCE SDFR INFLATION GDP GROWTH FOREIGN RESERVES EXCHAGE RATE AWPR AWLR AWFDR AWDR 1Y TB RATE 10Y T-BD RATE

UBC SHARE PRICE 1.00

SLFR -0.83 1.00

TRADE BALANCE 0.00 -0.28 1.00

UNEMPLOYMENT RATE 0.62 -0.50 0.06

SDFR -0.73 0.96 -0.43 1.00

INFLATION -0.89 0.94 -0.26 0.87 1.00

GDP GROWTH 0.09 -0.53 0.31 -0.55 -0.42 1.00

FOREIGN RESERVES 0.68 -0.70 0.19 -0.69 -0.56 0.13 1.00

EXCHAGE RATE 0.21 -0.30 0.25 -0.34 -0.34 0.11 0.06 1.00

AWPR -0.92 0.96 -0.18 0.89 0.94 -0.36 -0.73 -0.41 1.00

AWLR -0.87 0.74 0.00 0.60 0.84 -0.11 -0.47 -0.45 0.87 1.00

AWFDR -0.83 0.74 -0.03 0.58 0.81 -0.18 -0.51 -0.46 0.86 0.98 1.00

AWDR -0.81 0.70 0.00 0.53 0.78 -0.13 -0.48 -0.46 0.83 0.98 1.00 1.00

1Y T-BILL RATE -0.85 0.98 -0.26 0.95 0.91 -0.46 -0.76 -0.28 0.97 0.75 0.73 0.70 1.00

10Y T-BOND RATE -0.87 0.94 -0.20 0.91 0.88 -0.45 -0.71 -0.30 0.95 0.76 0.75 0.71 0.95 1.00

Source: Eviews statistical package, Candor Research



APPENDIX 08 CORRELATION ANALYSIS- COMMERCIAL BANKING SECTOR INDICATORS VS UBC SHARE PRICE

UBC SHARE PRICE SLAR (DBU) TOTAL ASSETS GROWTH TOTAL CAR ROE ROA PROVISION COVER NIM LENDING GROWTH GROSS NPL DEPOSITS GROWTH COST TO INCOME CORE CAR CASA ADR


SLAR (DBU) 0.73 1.00

TOTAL ASSETS GROWTH -0.48 -0.86 1.00

TOTAL CAR 0.47 0.81 -0.91 1.00

ROE -0.63 -0.86 0.72 -0.69 1.00

ROA -0.60 -0.85 0.72 -0.68 1.00 1.00

PROVISION COVER 0.02 -0.55 0.76 -0.66 0.44 0.46 1.00

NIM -0.67 -0.97 0.85 -0.81 0.82 0.82 0.64 1.00

LENDING GROWTH -0.41 -0.85 0.98 -0.88 0.72 0.72 0.74 0.82 1.00

GROSS NPL 0.13 0.69 -0.79 0.69 -0.64 -0.66 -0.95 -0.78 -0.78 1.00

DEPOSITS GROWTH -0.83 -0.86 0.81 -0.78 0.77 0.75 0.32 0.76 0.78 -0.40 1.00

COST TO INCOME 0.50 0.84 -0.73 0.72 -0.97 -0.97 -0.57 -0.84 -0.73 0.75 -0.67 1.00

CORE CAR 0.24 0.55 -0.72 0.91 -0.44 -0.44 -0.55 -0.57 -0.69 0.52 -0.55 0.51 1.00

CASA 0.54 -0.02 0.45 -0.34 -0.05 -0.02 0.71 0.06 0.50 -0.54 -0.06 -0.07 -0.38 1.00

ADR -0.55 -0.96 0.88 -0.82 0.83 0.83 0.71 0.97 0.87 -0.85 0.72 -0.87 -0.60 0.20 1.00




APPENDIX 09 CORRELATION ANALYSIS- GLOBAL KEY ECONOMIC INDICATORS VS UBC SHARE PRICE

UBC SHARE PRICE INDIA 1Y TB CHINA INFLATION CHINA GDP BRENT OIL US 10Y BOND YIELD US FED RATE US INFLATION US UNEMPLOYMENT


INDIA 1Y TB 0.03 1.00

CHINA INFLATION -0.61 0.29 1.00

CHINA GDP -0.76 0.21 0.80 1.00

BRENT OIL -0.71 0.30 0.73 0.74 1.00

US 10Y BOND YIELD 0.19 0.67 0.30 -0.01 0.17 1.00

US FED RATE NA NA NA NA NA NA NA

US INFLATION -0.43 0.26 0.61 0.70 0.74 -0.05 NA 1.00

US UNEMPLOYMENT 0.21 0.51 0.10 0.13 0.14 0.43 NA 0.31 1.00




APPENDIX 10 CORRELATION ANALYSIS- GLOBAL KEY INDICES VS UBC SHARE PRICE

UBC SHARE PRICE S&P 500 INDEX NIKKEI MSCI INDEX HANG SENG INDEX FTSE 100 DOW JONES DAX INDEX


S&P 500 INDEX 0.86 1.00

NIKKEI 0.78 0.95 1.00

MSCI INDEX 0.79 0.98 0.94 1.00

HANG SENG INDEX 0.64 0.82 0.85 0.83 1.00

FTSE 100 0.66 0.91 0.93 0.96 0.84 1.00

DOW JONES 0.85 1.00 0.97 0.98 0.81 0.93 1.00

DAX INDEX 0.78 0.94 0.95 0.93 0.89 0.89 0.93 1.00




APPENDIX 11 UBC’S KEY INDICATORS

Deposits grew at a 3Y CAGR of 15%

2.00%

7.00%

12.00%

17.00%

22.00%

27.00%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2012 2013 2014 1Q2015 2Q2015

Depsoits (LKR.Mn) Deposits growth


Promising outlook on CASA

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2011 2012 2013 2014 1Q2015 2Q2015

CASA ratio


Pawing exposure continuously declining

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2011 2012 2013 2014 1Q2015 2Q2015

Pawning exposure


Bank’s NIMs remained under pressure

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

0.00

500.00

1000.00

1500.00

2000.00

2500.00

2011 2012 2013 2014

Net interets income (LKR.Mn) Bank NIMs


L&A grew at a 3Y CAGR of 18%

2.00%

7.00%

12.00%

17.00%

22.00%

27.00%

32.00%

37.00%

42.00%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2011 2012 2013 2014 1Q2015 2Q2015

Gross loans & advances (LKR.Mn) Gross L&A growth


Relatively weak ADR amidst strong lending growth

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

2011 2012 2013 2014 1Q2015 2Q2015

ADR




UBC to absorb the commercial banking space

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

2011 2012 2013 2014 1Q2015 2Q2015

UBC total assets % LCB's total assets


Lending book segregation

20%

18%

1%1%46%

9%

4%1%

Overdrafts

Trade finance

Pawning

Staff loans

Term loans

Lease and Hire PurchaseFactoring

Debentures

Trust certificates

Others


Deposits segregation

8%

17%

68%

7%Demand deposits

Savings deposits

Fixed deposits

Other deposits -(Certificate of Deposits)


McKinsey & Company’s expertise will drive the

credit culture

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2011 2012 2013 2014 1Q2015 2Q2015

Gross NPL Net NPL


Continuous expansion in distribution network

0

10

20

30

40

50

60

70

80

90

2012 2013 2014 1H2015

No of Branches No of ATMs


Centralization will improve the operating

efficiency

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

2011 2012 2013 2014 1Q2015 2Q2015

Cost to Income


Segmental analysis

20% 11%

-33%

24%

-26%

4%

139%

62%

-100%

-50%

0%

50%

100%

150%

200%

1H2014 1H2015

Corporate Treasury SME Other Group Companies




APPENDIX 12 LCB’S INDUSTRY INDICATORS

L & A grew at a 4Y CAGR of 18%

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2010 2011 2012 2013 2014 1Q20152Q2015

Loans & Advances (LKR.Mn)


Deposits grew at a 4Y CAGR of 17%

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2010 2011 2012 2013 2014 1Q2015 2Q2015

Deposits (LKR.Mn)


Industry CASA to stand at average 40%

0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 2014 1Q2015 2Q2015

CASA ratio


Industry profitability remained moderate

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2010 2011 2012 2013 2014 1Q2015 2Q2015

ROA NIM ROE


Efficiency remained moderate

46.00%

47.00%

48.00%

49.00%

50.00%

51.00%

52.00%

53.00%

54.00%

55.00%

2010 2011 2012 2013 2014 1Q2015 2Q2015

Cost to income


Healthy assets quality levels

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2010 2011 2012 2013 2014 1Q2015 2Q2015

Gross NPL Net NPL




Resilient liquidity buffers

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2010 2011 2012 2013 2014 1Q2015 2Q2015

Liquid Assets Ratio Credit to Deposit Ratio


Continuous expansion in the industry

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010 2011 2012 2013 2014

LCB's Total assets to GDP


Strong capital buffers

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

2010 2011 2012 2013 2014 1Q2015 2Q2015

Core CAR Total CAR


Improved low cost funding in 2014

61% 55%

27% 32%

8% 10%

3% 3%

0%

20%

40%

60%

80%

100%

120%

2013 2014

Time Deposits Savings Deposits Demand Deposits Other Deposits


Expansion in the industry segment credits

12% 11%

36% 41%

25%26%

27% 22%

0%

20%

40%

60%

80%

100%

120%

2013 2014

Agriculture and Fishing Industry Services Personal Loans and Advances


Low interest rate regime

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

SLFR (%) SDFR (%) AWLR (%) AWPR (%) AWDR (%) AWFDR (%)




APPENDIX 13 SUBSIDIARIES

Union Bank of Colombo PLC

National Asset Management Limited (NAMAL) is the

pioneer Unit Trust management company in Sri Lanka

established in 1991 with over 20 years of

experience and a successful track record of investing

in Sri Lankan equity and fixed income markets.

NAMAL launched the first Unit Trust to be licensed in

Sri Lanka - National Equity Fund and the first listed

Unit Trust -NAMAL Acuity Value Fund.

In 2014 the fund was ranked No. 3 of the 65 unit

trust in the industry with returns of 42.4%. The fund

was also ranked No 2 in the balanced category with

returns of 33.4%.

NAMAL built on the impressive growth in assets

under management (AUM) in 2013 with an increase

of 15% from LKR 13.1 Bn to LKR 14.9 Bn in FY14.

UB Finance (UBF) was formed by Union Bank of

Colombo PLC and its international strategic

investment partner, ShoreCap II Ltd and has become

the latest entrant to the world of finance in Sri Lanka.

UBF currently offers its customers an enhanced range

of products & services including investment solutions

such as fixed deposits and savings; financial solutions

in the form of leasing, hire purchase and mortgage

loans as well as working capital solutions through

factoring.

In 2014, the Management also completely re-

engineered the Company's business operations

including documentation, procedures, processes and

systems. The Company is now geared to offer its

customers a superior level of service due to the

overall efficiency and effectiveness of operations.

Going forward the Board’s decision to move into the

SME sector continued to gather momentum as the

Company increased its presence across the Country

in new geographies.

National Asset Management Limited UB Finance

51% Holding 66.17% Holding



APPENDIX 14 REGIONAL COMPARISON

ROE ROA NIM NPL ratio Total CAR

China 17.59% 1.23% 2.70% 1.25% 13.18%

Korea 4.05% 0.31% 1.79% 1.53% N/A

Indonesia N/A 2.80% 4.23% 2.16% 19.38%

Philippines 10.96% 1.28% 2.99% 1.87% 19.01%

India 13.84% 1.03% 2.79% N/A N/A

Singapore 12.40% 1.00% 1.70% N/A 16.00%

Key Banking indicators of regional countries


LKR/ Asia (Developed)

Ticker Name Country Mkt Cap (LKR) NIM (%) CIR (%) NPL ratio (%) ROE (%) ROA (%) Total Assets (LKR.Bn) Total Loans (LKR.Bn) Customer Deposits (LKR.Bn) CASA ratio (%) ADR (%) Tier 1 Capital (%)

2388 HK Equity BOC HONG KONG HOLDINGS LTD Hong Kong 4,528,269.75 1.68 47.64 0.30 14.60 1.16 40,845.01 18,687.75 27,814.30 53.32 64.79 12.35 8304 JP Equity AOZORA BANK LTD Japan 604,773.84 1.18 42.76 N/A 11.30 0.90 5,310.61 3,001.46 3,421.07 N/A N/A N/AUOB SP Equity UNITED OVERSEAS BANK LTD Singapore 2,999,266.76 1.86 46.29 1.18 11.65 1.06 30,775.27 20,088.98 23,967.49 41.56 83.80 14.00 1111 HK Equity CHONG HING BANK LTD Hong Kong 207,905.89 1.70 43.57 0.04 10.95 1.12 1,998.03 1,075.31 1,617.73 46.15 N/A 8.65 DBS SP Equity DBS GROUP HOLDINGS LTD Singapore 4,197,288.54 1.76 45.54 0.87 11.23 0.99 43,695.69 28,159.63 30,361.99 56.95 86.90 13.44 2892 TT Equity FIRST FINANCIAL HOLDING CO Taiwan 747,434.90 1.30 52.66 0.20 9.34 0.59 10,330.26 6,263.90 7,923.11 78.49 83.03 N/A23 HK Equity BANK OF EAST ASIA Hong Kong 1,260,776.46 1.84 52.78 0.54 8.65 0.79 14,076.60 8,605.92 10,314.20 28.37 74.80 13.20 2356 HK Equity DAH SING BANKING GROUP LTD Hong Kong 374,298.01 1.82 46.67 0.33 11.12 1.21 3,257.42 1,985.88 2,572.79 34.94 70.80 11.70 440 HK Equity DAH SING FINANCIAL HOLDINGS Hong Kong 262,646.49 1.98 57.53 0.33 9.32 0.89 3,542.69 1,985.88 2,550.40 34.75 N/A 11.70 ANZ AU Equity AUST AND NZ BANKING GROUP Australia 7,774,007.04 2.87 46.32 0.51 15.08 0.93 87,261.43 56,783.39 55,079.42 42.52 N/A 8.70

LKR/ Asia (Emerging)

Ticker Name Country Mkt Cap (LKR) NIM (%) CIR (%) NPL ratio (%) ROE (%) ROA (%) Total Assets (LKR.Bn) Total Loans (LKR.Bn) Customer Deposits (LKR.Bn) CASA ratio (%) ADR (%) Tier 1 Capital (%)

600000 CH Equity SHANGHAI PUDONG DEVEL BANK-A China 6,158,405.95 3.71 28.44 1.06 20.36 1.13 99,323.72 46,912.49 64,483.01 N/A 74.33 8.16 YES IN Equity YES BANK LTD India 651,791.21 3.13 45.80 0.41 21.27 1.63 2,909.94 1,618.93 1,832.10 24.15 N/A N/A600015 CH Equity HUAXIA BANK CO LTD-A China 2,388,062.84 3.21 44.02 1.09 18.34 1.01 41,363.46 21,812.20 28,420.18 N/A 70.65 8.71 DBNK IN Equity DENA BANK India 47,111.19 2.11 63.83 5.49 3.64 0.21 2,776.94 1,709.44 2,245.32 30.58 N/A N/ACRPBK IN Equity CORPORATION BANK India 80,261.74 1.94 47.55 4.85 5.55 0.26 4,830.97 3,135.01 3,770.28 22.28 N/A N/A601009 CH Equity BANK OF NANJING CO LTD -A China 1,079,300.66 4.39 32.42 0.94 17.25 1.01 15,777.52 4,402.28 10,275.03 N/A 3.06 9.41 UNTDB IN Equity UNITED BANK OF INDIA India 39,813.89 N/A 41.65 9.47 N/A N/A 2,590.63 1,388.23 2,284.05 42.06 N/A N/A002142 CH Equity BANK OF NINGBO CO LTD -A China 982,640.76 3.29 35.67 0.89 18.13 1.03 14,181.24 4,998.47 7,727.64 N/A 64.12 9.12 VJYBK IN Equity VIJAYA BANK India 63,225.96 N/A 62.99 2.81 N/A N/A 3,048.88 1,859.72 2,699.16 20.37 N/A N/ABOI IN Equity BANK OF INDIA India 192,892.02 2.05 55.31 5.81 6.36 0.33 13,364.93 8,170.13 10,098.34 25.07 N/A 7.59

Key indicators of regional banks


INITIATION REPORT: APPENDIX | UNION BANK OF COLOMBO PLC


Indrajit Wickramasinghe- Director/Chief Executive Officer

Appointed on the 15th of November 2014

25 years of Management experience

Prior to his appointment at UBC he served as the Chief Operating Officer of NDB Bank where he was responsible for

all business areas

Hiranthi de Silva- Vice President Wholesale Banking

Appointed in February 2015.

Over 27 years of Banking experience extensively covering the branch banking network. Extensive experience in

credit which included more than 10 years experience in Corporate Banking.

Prior to her appointment was associated with Sampath Bank PLC, and served as Deputy General Manager Corporate

Credit.

Malinda Samaratunga- Chief Financial Officer

Appointed in March 2011.

Over 18 years of experience in Banking and Finance

Prior to this appointment Assistant General Manager – Finance & Treasury of Commercial Leasing and Finance PLC

Ravi Divulwewa- Vice President Credit

Appointed in 2010.

Overall 35 years of Banking experience.

Prior to his appointment was the DGM of credit at Seylan Bank PLC

Rajeev Munasinghe- Vice President Information Technology Appointed in July 2008.

Over 17 years of sector experience.

Prior to his appointment was the AGM-IT for LB Finance.

Ravi Jayasekera- Vice President Human Resources Appointed in November 2014

Over 20 years of experience in the banking industry

Prior to his appointment he was the Head of HR HSBC Mauritius

S.Sri Ganendran- Vice President Operations

Appointed in December 2014

Over 17 years of experience

Prior to his appointment was an AVP (Branch Banking) at NDB. Prior to this he was also Program Head, Business

Integration & Process Reengineering and Head of Operational Excellence –Lending at SCB, UAE.

Chaya Jayawardena- Vice President Retail Banking

Appointed February 2015

Over 21 years of experience in the banking industry

Prior to her appointment she was the GM of SME Banking and Consumer Banking Market sales (TRY) & Distribution

for Standard Charted Bank

APPENDIX 15 KEY MANAGEMENT (EXTRACTED FROM COMPANY’S INVESTOR PRESENTATION)



APPENDIX 16 PRODUCT PORTFOLIO

Personal/ Retail Corporate sector SME sector

Savings accounts Trade Finance Project Financing

· Regular Savings Working Capital Finance Leasing

· Ultra Saver Leasing Factoring

· Salary Power Long term finance Working Capital Solutions

· Salary Select Foreign Exchange Services Trade finance

· Kid's Saver/ Piyawara Treasury Services Bancassurance

· Ruweththi- Ladies Savings account

Current accounts

· Regular Current Accounts

· Easy Plus

Fixed deposits

· Regular fixed deposits

· Super 7 fixed deposits

· 55plus- fixed deposits

· 3 Month Fixed Deposit With Interest Upfront

Overdraft

· Dynamic overdraft facility

Loans

· Loans for executive & professionals

· Educational loan scheme

· Personnel loans

· Homes loans

· Pawning-“Ranone”

· Union Bank leasing

E-banking products

· Internet banking

· Tele Banking

· Cirrus enables ATM cards

· TV banking

Remittances

· Union Bank Remit To Sri Lanka

· Western union

Visa Travel Card

Safety Deposits Lockers

Elite Circle (Elite Banking Services)




APPENDIX 17 TOP 20 SHAREHOLDER LIST

Name of shareholders No. of Voting Shares Stake

Culture Financial Holdings Ltd 763,984,374 70.00%

Vista Knowledge Pte Ltd 64,677,973 5.90%

Associated Electrical Corporation Ltd 29,237,387 2.70%

Mr. A.I. Lovell 22,743,780 2.10%

Mr.C.P.A Wijeyesekera 18,508,468 1.70%

Mr.D.A.J Warunakulasuriya 14,842,730 1.40%

EXSAB International Holding Co. for Trading Development 8,902,139 0.80%

Ashyaki Holdings (Pvt) Ltd. 7,792,506 0.70%

Rosewood (Pvt) Ltd - Account No. 1 7,700,698 0.70%

Mr. M.D. Samarawickrama 7,660,582 0.70%

Mr. S.P. Khattar 7,343,365 0.70%

Asian Alliance Insurance PLC - A/C 02 (Life Fund) 6,067,256 0.60%

Commercial Agencies (Ceylon) Ltd. 4,050,833 0.40%

Ajita De Zoysa & Company Limited. 4,050,832 0.40%

Standard Chartered Bank Singapore S/A HL Bank Singapore Branch 2,875,149 0.30%

Dr. T. Senthilverl 2,694,709 0.20%

Anverally and Sons (Pvt) Ltd A/C No 01 2,432,600 0.20%

Rubber Investment Trust Limited A/C No 01 2,078,975 0.20%

Ceylon Biscuits Limited 2,000,000 0.20%

The Ceylon Chamber of Commerce Account No 02 1,948,500 0.20%


80.13%

19.87%

Foreign SH Local SH

Source: CSE, Candor Research



APPENDIX 18 PEER COMPARISON

COMB.N HNB.N SAMP.N NDB.N NTB.N SEYB.N PABC.N UBC.N

Current price 158.00 215.00 256.00 220.00 95.40 101.00 28.00 22.20

2014 13.14 7.96 7.54 9.94 8.80 10.31 18.37 421.67

2015E 11.09 7.72 7.27 8.95 7.83 9.61 11.20 137.69

2014 2.08 1.16 1.15 1.48 1.61 1.29 1.61 1.71

2015E 1.75 1.14 1.17 1.21 1.41 1.28 1.51 1.48

Bank Net interest margin 3.70% 4.16% 3.80% 2.74% 5.69% 4.59% 4.49% 3.97%

Net interest income growth ( Y-o-Y) 6.61% 17.49% 16.72% -10.53% 7.99% 7.21% 78.00% 42.59%

Deposit growth (Y-o-Y) 16.71% 15.15% 13.46% 21.90% 15.02% 10.24% 22.74% 8.86%

Deposit growth (4Y CAGR) 19.48% 16.15% 22.60% 26.39% 23.12% 14.05% 31.85% 15.18%

CASA ratio 49.05% 43.53% 49.77% 23.05% 31.62% 38.25% 28.38% 24.65%

Lending book growth (Y-o-Y) 16.80% 22.72% 29.14% 18.17% 23.26% 20.60% 35.29% 37.83%

Lending book growth (4Y CAGR) 24.97% 21.01% 26.34% 27.82% 30.09% 13.84% 31.78% 17.71%

Pawning Exposure 0.38% 4.10% 5.11% 0.14% 0.67% 5.19% 1.78% 1.29%

Bank Gross NPL ratio 3.15% 3.24% 1.71% 2.64% 4.02% 6.53% 5.90% 4.87%

Provision cover (2014) 46.34% N/A N/A N/A N/A 47.00% N/A N/A

Cost to income ratio 40.84% 52.49% 52.33% 57.40% 51.46% 51.98% 52.29% 81.17%

Capital adequacy ratios

Tier 1 12.67% 10.88% 8.47% 12.73% 13.05% 13.33% 7.03% 33.20%

Total capital (Tier 1+Tier 2) 15.50% 13.38% 12.72% 17.43% 16.34% 14.02% 11.49% 32.59%

Bank Liquidity assets ratio (DBU) 27.75% 25.61% 20.89% 24.33% 24.58% 27.91% 23.39% 26.97%

ROE (2015E) 16.61% 15.67% 16.82% 14.03% 19.03% 13.82% 14.23% 1.08%

ROA (2015E) 1.52% 1.81% 1.32% 1.54% 1.75% 1.44% 0.87% 0.33%

Dividend pay out ratio (2015E) 45.00% 34.00% 30.00% 30.00% 15.00% 22.00% 0.00% 0.00%

Dividend Yeild (2015E) 3.21% 3.26% 3.31% 2.58% 1.36% 1.70% 0.00% 0.00%

Risk ratings AA AA- A+ AA- A A- BBB BB+

No of Employees (2014) 4852 4451 4000 1744 2,562 2947 1302 924

No of Branches (2014) 257 249 220 83 89 157 78 61

No of ATMs (2014) 625 450 326 83 124 177 76 62

Revenue per employee (2014) (LKR. Mn) 8.07 8.39 6.04 7.43 4.74 5.53 3.09 2.97

Revenue per branch (2014) (LKR. Mn) 152.38 149.91 109.74 156.22 136.32 103.86 51.63 44.98

Source: Company, Candor Research

* Based on 3Y CAGR

PER

(x)

PBV

(x)

*

*

All the above figures are based on 2Q2015 unless otherwise stated



ADR- Advance to deposits ratio BOC- Bank of Ceylon BOP- Balance of payment CAGR- Compound Annual Growth Rate CAR- Capital adequacy ratio CASA- Current accounts and savings accounts CBSL- Central Bank of Sri Lanka COMB- Commercial Bank of Ceylon PLC CSE- Colombo Stock Exchange GICS- Global Industry Classification Standard HHI- Herfindahl-Hirschman index HNB- Hatton National Bank PLC KFB- Korea First Bank LTV- Loan to value M0- Currency M1- Narrow money supply M2- Broad money supply NAMAL- National Asset Management Limited NDB- National Development Bank PLC NIM- Net interest margin NPL- Non performing loans NTB- Nations Trust Bank PLC PABC- Pan Asia Banking Corporation PLC PB- People’s Bank ROA- Return on assets ROE- Return on equity RWA- Risk weighted assets SAMP- Sampath Bank PLC SDB - Shenzhen Development Bank SEYB- Seylan Bank PLC

APPENDIX 19 GLOSSARY



Current Rating

Recommendation Accumulate Rating 6

Historical Rating

Candor Rating System

Recommendation Total Return* Rating

* Total Return includes both capital gain and dividends.

Remarks

Expects the s tock to appreciate/depreciate within the given

return range over the next 12 Months .

Expects the s tock to fa l l by more than 11% over the next 12

months

Stock i s not within regular research coverage

2

1

Sell

Not Rated

> +5%

.-5% to +5%

< -11%

-

Hold

Reduce

Trading Buy

Candor Stock Rating Methodelogy

.+6% to +14% Expects the s tock to appreciate within the given return range

over the next 12 Months .

.-6% to -10%

8

7

6

5

4

3

> +20%

.+15% to +19%

Expects the s tock to fa l l by within the given return range over

the next 12 Months .

Description

Expects the s tock to exceed 5% or more over the next 3 months ,

however the rating does not cons ider any outlook beyond 3

months .

Expects the s tock to appreciate 20% or more over the next 12

Months .

Expects the s tock to appreciate within the given return range

over the next 12 Months .

Strong Buy

Buy

Accumulate

20

21

22

23

24

25

26

27

28

29

30

Oct

-14

No

v-1

4

No

v-1

4

De

c-1

4

De

c-1

4

De

c-1

4

Jan

-15

Jan

-15

Feb

-15

Feb

-15

Mar

-15

Mar

-15

Ap

r-1

5

Ap

r-1

5

May

-15

May

-15

Jun

-15

Jun

-15

Jun

-15

Jul-

15

Jul-

15

Au

g-1

5

Au

g-1

5

Sep

-15

Sep

-15

Oct

-15

Last Price

Target Price

12345678

Oct

-14

No

v-1

4

No

v-1

4

Dec

-14

Dec

-14

Dec

-14

Jan

-15

Jan

-15

Feb

-15

Feb

-15

Mar

-15

Mar

-15

Ap

r-1

5

Ap

r-1

5

Ma

y-1

5

Ma

y-1

5

Jun-

15

Jun-

15

Jun-

15

Jul-

15

Jul-

15

Au

g-1

5

Au

g-1

5

Sep

-15

Sep

-15

Oct

-15

Rating

Our recommendations take into consideration diverse qualitative and quantitaive factors in addition to our ratings crieteria. Further to the fundamental factors we also take into consideration Technical & Sentimental drivers.

Contact Us

Disclaimer

The report has been prepared by Candor Equities limited (CEL). The information and opinions contained herein are based upon information obtained from sources

believed to be reliable and made in good faith. Such information has not been independently verified and no guarantee, representation or warranty, express or

implied is made as to their accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for

information purposes only, and the description of any company or their securities mentioned herein is not intended to be complete and this document is not, and

should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.

Sales

Mohammed Riyas Director Sales +94 11 2359102 /+94 777325270 [email protected]

Chaminda Mahanama Assistant Vice President – Equities +94 11 2359113 /+94 777556582 [email protected]

Auburn Senn Assistant Vice President - Equities +94 11 2359117 /+94 71 4943304 [email protected]

Buddhike Payoe Senior Manager- Equities + 94 11 2359116 /+94 71 2737956 [email protected]

Damayanthi Madawalage Assistant Manager – Equities +94 11 2359114 /+94 777781001 [email protected]

Dilanjan Perera Assistant Manager – Equities +94 11 2359108 /+94 772544444 [email protected]

Bishen Mendez Senior Investment Advisor +94 11 2359121 /+94 779368660 [email protected] Vishvajith Nayakarathne Investment Advisor +94 11 2359112 /+94 772331355 [email protected]

Swanthri Ekanayake Executive - Business Development +94 11 2359122 /+94 770071304 [email protected]

International Desk

Indula Wickramasinghe Executive- Business Development +94 11 2359115 /+94 771503808 [email protected]

Research

Pasindu Perera Head of Research +94 112359137 / +94712452413 [email protected]

Usama Jiffry Assistant Manager –Research +94 112359135 /+94 777245605 [email protected]

Shadhir Jannath Assistant Manager – Technical Analysis +94 112359162 / +94777073411 [email protected]

Ranuka De Silva Assistant Manager – Research +94 112359134 / +94777726852 [email protected]

Dushan Virantha Research Analyst +94 112359138 /+94 776449410 [email protected]














Documents

UNION BANK OF COLOMBO PLC - candor-holdings.com · Union Bank of Colombo (“UBC”) was established in 1995 as the 8th indigenous bank in Sri Lanka. Currently UBC holds 1% market