Company UpdateBCEL: Profitability o

Company Update
BCEL: Profitability outlook remains challenging - Underperform (16E TP: LAK6,000; US$0.74)

Limited capital remains its key share price overhang
We maintain an Underperform rating for BCEL. Although its cheap valuation should be the main share price support, we still see no near-term price catalysts; meanwhile, earnings risk for the bank still stems mainly from ongoing concerns over its limited capital and the efficiency of its asset quality control. However, the main share price catalyst could come from the success of its capital raising plan, with the timeframe still uncertain.

4Q15 NP improved sharply on provision reversal and bad debt recoveries
BCEL reported a net profit (NP) of LAK93bn in 4Q15. The improving results were due mainly to much higher extra income QoQ as the bank booked a reversal of provision of LAK105bn together with bad debt recoveries of LAK49bn in 4Q15, mainly from the successful resolution of NPLs for some large clients that turned to good loans in 4Q15.

2015 net profit down 6% YoY
BCEL posted a net profit of LAK124bn (-6% YoY) for 2015, ahead of our forecast of LAK39bn, due largely to higher extra income in 4Q15 as mentioned earlier. Meanwhile, post-tax core profit (PPOP) for 2015 still dropped 46% YoY. The sharp drop in PPOP and NP was due mainly to 1) much lower NIM (by 62 bps) on weaker asset quality during the year; and 2) a higher cost-to-income ratio (56.8% to 59.4%) following the bank’s ongoing business expansion plan. Moreover, the bank incurred a loss from currency margin trading of LAK287bn, but the booking of gain of LAK359bn from the sale of lands helped offset the impact. However, solid net fee income growth of 21% and loan growth of 13% could not offset such negatives.

Asset quality for 4Q15 improved QoQ but still needs close monitoring
The bank’s NPLs in 4Q15 declined sharply QoQ to 2.62% of loans from 6.45% in 3Q15, mainly from the successful resolution of NPLs for some large clients that turned to good loans in 4Q15 following the bank’s more proactive efforts in the NPL resolution process. Reserve to NPLs improved to 93% from 67% in 2014. However, we still need to keep a watch on the bank’s consistency with respect to the control of asset quality, which was quite volatile in 2015. Its capital adequacy ratio stood at 5.6%, still below the BOL’s minimum requirement of 8%.

2016 financial targets look challenging in our view
BCEL highlighted the bank’s main financial targets for 2016E, which include 1) growth in both assets and deposits of 6-7%; 2) loan growth of 27.5%; and 3) profit before tax growth of 30.7%. We see some of the bank’s targets as quite challenging, especially the loan growth target given its scarce capital and ongoing asset quality risk.