Impact on NDB following exit from insurance entity

Following the sale of stake in Aviva NDB Insurance, profit forecast for NDB in financial year 12 has been revised upwards whilst one broker has lowered outlook for FY13.

Softlogic Stockbrokers

Softlogic Stockbrokers said Upon the disposal of its holding in both Aviva NDB Insurance (CTCE : Rs. 415.5) and Aviva NDB Wealth Management,  NDB Group has received a total of US$ 59 million from AIA.

The cost of NDB’s investment in both the entities accumulate to around Rs. 762.4 million, estimating a capital gain of nearly Rs. 6.88 billion for NDB.

However Softlogic said following the disposal of CTCE, NDB group’s profitability would be negatively affected with the decline in profits from associate companies (CTCE contributed Rs. 430.7 million to NDB’s Associate Company profits during 2011). “We have accordingly adjusted the impact on forecast earnings excluding the contribution from CTCE to NDB’s associate company profits. Also, an increase in the Net Asset value of the Bank is evident with the disposal,” the broking firm added.

CT Smith Stockbrokers

CT Smith Stockbrokers said with NDB receiving an estimated 43% premium over what Aviva received per CTCE share, it expect NDB to remain well capitalised (with both Tier 1 and Tier 1+2 ratios expected to be above 10%) in the near term.

“However we expect the NDB group to utilise its CTCE sales proceeds to fund its near term inorganic growth plans as we do not expect the bank to deploy new funds to its organic growth,” CT Smith said.

The broking firm also revised up its NDB profit forecast by 3% to Rs. 3.81 billion for FY2013 (up 24% YoY), on conservative assumption (sales proceeds are expected to provide a ROI of only 11% during 2013E). “However we maintain our recurring profit forecast for 2012E at Rs. 3.06 billion (up 13% YoY) as we expect the aforementioned transaction to be finalised by mid 4Q2012.” CT Smith said.

On revised earnings, it said NDB trades at a discount to the market and sector on PE multiples of 8.0x 2012E (PBV - 1.3x) and 6.4x 2013E (PBV - 0.9x). The Bank provides ROEs of 16.7% and 16.0% for 2012E and 2013E respectively.

CT Smith also said that NDB share appreciated 25% and 11% during the past month and in 2012YTD outperforming the market’s 17% MoM rise and -2% 2012YTD decline respectively.

“We expect the NDB share to provide sustainable moderate gains in the medium term as we expect interest rates and broader macroeconomic variables to stabilise in the near term,” CT Smith Stockbrokers added in an update on NDB.  Pursuant to Aviva Asia Holdings Ltd. of Singapore notifying NDB (fifth largest listed licensed commercial bank) and NDB Capital Holdings (in which NDB holds 99.6%), of its intention to sell the entirety of Aviva’s 58.4% stake (which gives 51% control of CTCE) in Aviva NDB Holdings Ltd., (ANHL) to American International Assurance Company Ltd of Hong Kong (AIA - the fifth largest insurance company in the world by market capitalisation), NDB and CDIC entered into a Share Sale and Purchase Agreement (SPA) on 27 September 2012 with AIA whereby CDIC agreed to sell its ANHL shares to AIA.

According to the SPA, CDIC has also agreed to divest its direct 5% stake in CTCE to AIA resulting in a further transfer of 41.3% control of CTCE to AIA. In addition, NDB is expected enter into an exclusive 20 year bancassurance agreement with CTCE and also purchase 83.9% of the shares of NDB Aviva Wealth Management Ltd., from 83.9% of shares of NDB Aviva Wealth Management Ltd., from AIA (subject to regulatory approval).

Consequently AIA will hold 100% of the capital of ANHL and 92.3% of the capital of CTCE (direct 5% and indirect 87.3%). The remaining 7.7% of CTCE represents shares publicly held and traded on the CSE and no offer will be made for the remaining shares.