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Postby SHARK » Fri Feb 09, 2018 11:22 pm

As far as financial indicators are concerned, Sanasa Development Bank (SDB) highlights its high risk appetite. In banking, a conservative business as depositors’ money is used in the business, a high risk appetite is usually frowned on.

Sanansa is a small, specialised bank. Unlike commercial banks, it cannot offer checking accounts that can provide other deposit and lending products.

Smaller local banks often build a business case by lending to the sub-prime segment: consumers and small businesses. SDB’s strategy has a similar focus. However, the consumer and small business segments have many niches, and SDB’s aggressive growth focuses on niches that other financial institutions aren’t serving, according to stockbrokerage Asia Securities Chairman Dumith Fernando.

“Their penetration into areas where others don’t compete, combined with great shareholders and a strong management team, has positioned the bank well.”

Despite its relatively small size, at a market capitalisation of Rs5.5 billion, SDB is a stock researched by Asia Securities due to its large public holding and strong growth position.

In May 2017, Dutch investment firm FMO and IFC, the private funding arm of the World Bank, invested Rs1.4 billion in Sanasa, a significant development, due to the profile of its new shareholders, raising the bank’s capital closer to a level required by the new minimum capital rules that will be effective soon.

Capitalisation is a challenge for any bank with rapid loan growth. Sanansa, led by lending to small businesses mostly in rural areas, has been growing its loan book by around 20% annually, compared to 15% at large banks. Its net interest margin of 7%, Fernando believes, will decline a notch during the next three years, but even at 6%, it’s double what large banks are able to achieve.

“Its strong small business focus is the principle reason we like the bank. We project loan growth to continue at 20% for three years,” he forecasts.

Around 15% of bank credit is to small businesses, but SMEs contribute around half of GDP and account for over 75% of private ventures in the island.

Of the island’s cooperative societies, SDB is associated with 600 active ones, which introduce new customers and help establish their creditworthiness. Recent technology upgrades have resulted in leaner branches and staff have been re-trained to take up sales roles. However, its cost-to-income ratio, a key measure of productivity, at 70% suggests that the bank has not yet benefited from the new systems or restructuring. Asia Securities forecasts the ratio will decline to 50% in three years, a competitive level for a bank with high net interest margins and focused on small businesses.

High operating and credit costs have impacted the bank’s return on assets, which at 0.8% are below industry levels.

Eighty percent of Sanasa’s branches are outside the Western province, compared to the industry’s only 60% of branches outside the province.

SDB’s high risk appetite may not suit every portfolio. However, Asia Securities forecasts that earnings will grow 50% in the next financial year, by 40% in the year after and around 25% in the third year, raising return on equity to around 15%.
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