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Key Facts: Core Business and Current Shareholders
• This is a newly established bank, a regulated entity with a core business which is Islamic Commercial Banking. Established in August 2011 as a Commercial Bank.
• Pioneers of Islamic banking in Sri Lanka. Islamic finance solutions are offered by conventional banks including BOC, Commercial Bank, HNB, MCB etc and NBFI like LOLC, PLC etc. However Amana Bank is the market leader in Islamic Banking by far.
• Current strategic shareholders include Bank Islam Malaysia Berhad (Malaysia), Islamic Development Bank (Saudi Arabia), AB Bank (Bangladesh) etc. Local Shareholders include Akbar Brothers and Expolanka PLC.
• By nature Islamic banking is more resilient to external shock and more stable banking model. This is proved by academics. Islamic banking focuses on asset based financing and shuns the “toxic assets” and excessive speculation (casino banking) that has become the bane of some conventional financial institutions. Islamic banking segment also has shown resilience and is growing at a pace much faster than conventional banking, internationally.
oThis is not a share for you if you intend to exit on the day one of trading. The bank’s MD says that Amana Bank share is not for “punters”. My guess is that Investment horizon should be around two years or more.
oThis is not an IPO for you if you have no expertise in investing in a start up or new company with phenomenal growth potential. You would not know what to monitor!
oThis is not for you if you believe that the CSE could fall another 200/300 points before it improves further.
Valuations
•Early 2013, bank went for a rights issue at LKR7.00 a share and raised LKR 800million from its existing shareholders! Well that is the same price as the IPO and more than half of the amount of the IPO size (LKR 1.5 billion).
• Last time a commercial bank of similar size came to the market was Union Bank(UNIO.CM) in March 2011. The issue was valued at 2 times price per book value (PBV) at LKR 25. PBV of Amana Bank at IPO price of LKR 7 is also 2 times. So that is your first valuation guide! It is in line with the market. Union Banks issue was oversubscribed by 350 times raising a staggering RS. 131 billion.
o Critics may point out the fact that UNIO, although it traded above Rs. 37 during the initial days of trading (i.e. much above the Offer Price), it came below the Rs. 25 by July. But once could easily refute this by looking at the ASI which lost (over 700 points?) during this period. Then again if you believe that market will go down another 700 points you shouldn’t buy this share!
o The bulls may also point out to you that unlike Union Bank, Amana’s business is based on retail as well as corporate banking. That will make a large change in its growth trajectory.
o I also note that some of the banks property on the Galle Road Colombo 3 is value at cost when the market value may be much more!
• I am less worried about banks losses given the nature of business. They need to have the infrastructure ready for take off and have spent on recruiting people, for licence etc. I am told that any bank may take 3 years to break even. (Though in 2012 ABL made profits due to good income from treasury or trading securities).
• Bank also says that is investing in increasing branch network and IT infrastructure (both new and existing to create more convenience. This will definitely bring in more income and free cash flows. I also understand that bank despite its high growth rate, does not offer some standard products currently. With the launch of these products post IPO, income flows could improve substantially.
• Growth of both Advances and Deposits seems to be far above industry average, and in line with experience of Islamic banking sector throughout the world. This is especially for those who say that the valuation looks above industry average (Though this is not right as per Union Bank’s case). If you say that the potential market size of Islamic banks is roughly 10%-15% of the commercial banks assets, it leaves a substantial room for ABL to grow from its current 100,000 customers. Anybody who does the cash flow valuation should check this out.
• Middle eastern fund managers “who are famous for buying and holding” given the paucity of Sharia compliant banking stocks may be very much interested. I hear some possibility of Middle Eastern money is coming. Long term there may be potential for trading blocks.
• Islamic banks elsewhere in the world also have similar valuations; For instance Ajman Bank of UAE has a PE of 103 times and PBV of 2.22 times.
The risks
• Of course the price could come down on the first day of trading if more people who subscribed to it have very short term horizons. “Weak hands” of the shareholder doesn’t seem to interest Amana Bank. They are talking of “shareowners”! If your investment horizon is long, nothing much to worry about.
• Some of the existing shareholders may want to sell at IPO. Although there are restrictions in terms of “lock out period” this could happen eventually.
• Bank should move into Breakeven by end next year (2014). It is important to monitor this.
• As an investor, I would also look for dividend may be a couple of years down the line. We need to monitor this as well.
• May not give you your quota of shares in the event of oversubscription. This was the same issue with Union Bank too.
• This is a newly established bank, a regulated entity with a core business which is Islamic Commercial Banking. Established in August 2011 as a Commercial Bank.
• Pioneers of Islamic banking in Sri Lanka. Islamic finance solutions are offered by conventional banks including BOC, Commercial Bank, HNB, MCB etc and NBFI like LOLC, PLC etc. However Amana Bank is the market leader in Islamic Banking by far.
• Current strategic shareholders include Bank Islam Malaysia Berhad (Malaysia), Islamic Development Bank (Saudi Arabia), AB Bank (Bangladesh) etc. Local Shareholders include Akbar Brothers and Expolanka PLC.
• By nature Islamic banking is more resilient to external shock and more stable banking model. This is proved by academics. Islamic banking focuses on asset based financing and shuns the “toxic assets” and excessive speculation (casino banking) that has become the bane of some conventional financial institutions. Islamic banking segment also has shown resilience and is growing at a pace much faster than conventional banking, internationally.
oThis is not a share for you if you intend to exit on the day one of trading. The bank’s MD says that Amana Bank share is not for “punters”. My guess is that Investment horizon should be around two years or more.
oThis is not an IPO for you if you have no expertise in investing in a start up or new company with phenomenal growth potential. You would not know what to monitor!
oThis is not for you if you believe that the CSE could fall another 200/300 points before it improves further.
Valuations
•Early 2013, bank went for a rights issue at LKR7.00 a share and raised LKR 800million from its existing shareholders! Well that is the same price as the IPO and more than half of the amount of the IPO size (LKR 1.5 billion).
• Last time a commercial bank of similar size came to the market was Union Bank(UNIO.CM) in March 2011. The issue was valued at 2 times price per book value (PBV) at LKR 25. PBV of Amana Bank at IPO price of LKR 7 is also 2 times. So that is your first valuation guide! It is in line with the market. Union Banks issue was oversubscribed by 350 times raising a staggering RS. 131 billion.
o Critics may point out the fact that UNIO, although it traded above Rs. 37 during the initial days of trading (i.e. much above the Offer Price), it came below the Rs. 25 by July. But once could easily refute this by looking at the ASI which lost (over 700 points?) during this period. Then again if you believe that market will go down another 700 points you shouldn’t buy this share!
o The bulls may also point out to you that unlike Union Bank, Amana’s business is based on retail as well as corporate banking. That will make a large change in its growth trajectory.
o I also note that some of the banks property on the Galle Road Colombo 3 is value at cost when the market value may be much more!
• I am less worried about banks losses given the nature of business. They need to have the infrastructure ready for take off and have spent on recruiting people, for licence etc. I am told that any bank may take 3 years to break even. (Though in 2012 ABL made profits due to good income from treasury or trading securities).
• Bank also says that is investing in increasing branch network and IT infrastructure (both new and existing to create more convenience. This will definitely bring in more income and free cash flows. I also understand that bank despite its high growth rate, does not offer some standard products currently. With the launch of these products post IPO, income flows could improve substantially.
• Growth of both Advances and Deposits seems to be far above industry average, and in line with experience of Islamic banking sector throughout the world. This is especially for those who say that the valuation looks above industry average (Though this is not right as per Union Bank’s case). If you say that the potential market size of Islamic banks is roughly 10%-15% of the commercial banks assets, it leaves a substantial room for ABL to grow from its current 100,000 customers. Anybody who does the cash flow valuation should check this out.
• Middle eastern fund managers “who are famous for buying and holding” given the paucity of Sharia compliant banking stocks may be very much interested. I hear some possibility of Middle Eastern money is coming. Long term there may be potential for trading blocks.
• Islamic banks elsewhere in the world also have similar valuations; For instance Ajman Bank of UAE has a PE of 103 times and PBV of 2.22 times.
The risks
• Of course the price could come down on the first day of trading if more people who subscribed to it have very short term horizons. “Weak hands” of the shareholder doesn’t seem to interest Amana Bank. They are talking of “shareowners”! If your investment horizon is long, nothing much to worry about.
• Some of the existing shareholders may want to sell at IPO. Although there are restrictions in terms of “lock out period” this could happen eventually.
• Bank should move into Breakeven by end next year (2014). It is important to monitor this.
• As an investor, I would also look for dividend may be a couple of years down the line. We need to monitor this as well.
• May not give you your quota of shares in the event of oversubscription. This was the same issue with Union Bank too.
