Company Analysis: Agricultural Development Bank Ltd.
Thu, Oct 15, 2015 11:35 AM on Latest, Exclusive, Featured, Company Analysis, Stock Market,
Agricultural Development Bank was established in 1968 under the ADBN Act 1967. The main objective of the bank is to provide institutional credit for enhancing the production and productivity of the agricultural sector in the country. The bank primarily focuses on extending credit in rural areas.
The bank has been involved in commercial banking operations since 1984. Agricultural Development Bank Ltd. (ADBL) was incorporated as a public limited company on July 14, 2005. It currently operates as an A category financial institution under the Bank and Financial Institution Ordinance and the Company Act, 2063.
With 224 branches, ADBL has one of the largest network of branches among all commercial banks in Nepal.
51% of the company’s stocks are held by promoters (Government of Nepal) and 49% is held by the general public. Additionally, the company has also issued Rs.6.44 billion worth of Non-cumulative Irredeemable Preference Shares which is owned completely by the Government of Nepal. The company pays 6% interest to the preference shareholders.
According to the bank’s Q4 report, ADBL has the highest interest income and net interest income among all the commercial banks in Nepal.
Capital structure
Mr. Lila Prakash Sitaula was appointed as the CEO of the Bank on December 14, 2014. He replaced Mr. Tej Bahadur Budhathoki as the CEO.
Mr. Sitaula has worked as an Executive Director at Nepal Rastra Bank (NRB). He was a director at ADBL before he was appointed as the CEO.
The bank’s deposit collection has been increasing throughout our review period. It has more than doubled in just the past 6 years and reached Rs.76.92 arba. The deposit collection of the bank increased by 20.96% in FY 2070/71 and by 16.73% in FY 71/72.
The bank’s mobilization of its funds has also been increasing throughout our review period. The bank’s investments in the past 6 years have grown by almost 3 folds from Rs.4.54 billion in FY 2066/67 to Rs.13.52 billion in FY 2071/72. The bank’s loans and advances have also doubled during the same period. Loans and Advances grew from Rs.33.88 billion in FY 2066/67 to Rs.66.60 billion in FY 2071/72.
Interest income which is the bank’s primary income has increased quite rapidly from FY 2066/67 to FY 2070/71. It increased from Rs.5.28 billion in FY 2066/67 to Rs.8.46 billion in FY 2070/71 which is an overall increase of about 60%.
However, the bank only managed to increase its interest income by 0.14% in FY 2071/72 which might be a cause for concern. During the same period the interest expenses decreased by 15.2% which caused the net interest income to increase by 12.88%.
The bank’s net interest income has been increasing since FY 2066/67 and only decreased once in FY 2070/71 by 2.05%. The net interest income of the bank in Q4 2072 is 5.21 billion.
The bank’s operating profit which was negative by Rs.1.22 billion in FY 2066/67 has now become positive by Rs.1.71 billion. The bank’s operating profit becoming positive is extremely good news for the bank and its investors. This means the bank has finally become profitable in its core business. The bank’s operating profit increased by more than 200% in FY 2071/72.
The bank comes 3rd among all the commercial banks traded in Nepse in terms of net profit. The bank earned a net profit of Rs.1.88 billion in FY 2071/72. This is an increase in profit of more than 23% which can be considered very good.
The bank also has the highest staff expenses among all the commercial banks. It spent Rs.2.96 billion in FY 2071/72 on staff expenses. Although the figure might seem huge, this is a decrease of 10.84% compared to last year. The bank has recognized its staff expenses issue and is taking major steps to reduce this cost. 304 employees retired from the bank last fiscal year and approximately 300 more are expected to retire this fiscal year. This should go a long way in reducing the company’s staff expenses.
The bank managed to write back Rs.602 million and still has Rs.903 million in loan loss provisions. If the bank manages to write back more of its provisions, the bank’s net profit will increase even further.
The bank’s earning per share which had remained above Rs.60 from FY 2066/67 to FY 2069/70 fell to Rs.47.53 and Rs.43.52 in FY 2070/71 and FY 2071/72 respectively. This might seem alarming but this actually more healthy. The current EPS represents the earnings from the bank’s core business instead of earnings from the sale of assets. The EPS is sustainable and will only grow in the future if the bank manages to perform well.
The bank’s CD ratio currently stands at 76.70% and its Capital Adequacy Ratio is at a comfortable 12.55%. The bank’s liquidity ratio stands at 28.92%.
The bank’s Non-Performing Loan to Total Loan decreased by more than 17.03% from 5.46% in FY 2070/71 to 4.53% FY 2071/72. Although this is a good improvement it is still dangerously high. The bank’s networth per share in FY 2070/71 stands at Rs.471.13.
The bank also has the option to call a rights issue and merge and acquire other smaller institutions. But considering that the bank has large investments by the Government of Nepal it might be hesitant to invest more in the bank which means that a rights call may not be very likely. Merger and acquisitions are also less likely due the same reason.
The bank and the NRB are most likely to reach an agreement whereby the current preference shares of the bank can be included in the capital plan thereby removing the need for the bank to raise more capital.
Income Statement
Key Ratios
Board of Directors
The bank has 9 members in its BOD of which 4 represent the Government of Nepal and 4 represent public shareholders. The board is chaired by Mr. Pramod Kumar Karki.
CEO’s Profile
Mr. Lila Prakash Sitaula
Mr. Lila Prakash Sitaula was appointed as the CEO of the Bank on December 14, 2014. He replaced Mr. Tej Bahadur Budhathoki as the CEO.
Mr. Sitaula has worked as an Executive Director at Nepal Rastra Bank (NRB). He was a director at ADBL before he was appointed as the CEO.
Analysis
Agriculture Development Bank has a core capital of Rs.9.86 arba. This includes Rs.3.42 arba Common Stock and Rs.6.44 arba Preference Shares. According to the Q4 2072 report the bank has the third highest reserves among all the commercial banks. The bank’s reserves stands at 4.97 billion which is more than it’s paid up capital by Rs.1.55 arba.
The bank’s deposit collection has been increasing throughout our review period. It has more than doubled in just the past 6 years and reached Rs.76.92 arba. The deposit collection of the bank increased by 20.96% in FY 2070/71 and by 16.73% in FY 71/72.
The bank’s mobilization of its funds has also been increasing throughout our review period. The bank’s investments in the past 6 years have grown by almost 3 folds from Rs.4.54 billion in FY 2066/67 to Rs.13.52 billion in FY 2071/72. The bank’s loans and advances have also doubled during the same period. Loans and Advances grew from Rs.33.88 billion in FY 2066/67 to Rs.66.60 billion in FY 2071/72.
Interest income which is the bank’s primary income has increased quite rapidly from FY 2066/67 to FY 2070/71. It increased from Rs.5.28 billion in FY 2066/67 to Rs.8.46 billion in FY 2070/71 which is an overall increase of about 60%.
However, the bank only managed to increase its interest income by 0.14% in FY 2071/72 which might be a cause for concern. During the same period the interest expenses decreased by 15.2% which caused the net interest income to increase by 12.88%.
The bank’s net interest income has been increasing since FY 2066/67 and only decreased once in FY 2070/71 by 2.05%. The net interest income of the bank in Q4 2072 is 5.21 billion.
The bank’s operating profit which was negative by Rs.1.22 billion in FY 2066/67 has now become positive by Rs.1.71 billion. The bank’s operating profit becoming positive is extremely good news for the bank and its investors. This means the bank has finally become profitable in its core business. The bank’s operating profit increased by more than 200% in FY 2071/72.
The bank comes 3rd among all the commercial banks traded in Nepse in terms of net profit. The bank earned a net profit of Rs.1.88 billion in FY 2071/72. This is an increase in profit of more than 23% which can be considered very good.
The bank also has the highest staff expenses among all the commercial banks. It spent Rs.2.96 billion in FY 2071/72 on staff expenses. Although the figure might seem huge, this is a decrease of 10.84% compared to last year. The bank has recognized its staff expenses issue and is taking major steps to reduce this cost. 304 employees retired from the bank last fiscal year and approximately 300 more are expected to retire this fiscal year. This should go a long way in reducing the company’s staff expenses.
The bank managed to write back Rs.602 million and still has Rs.903 million in loan loss provisions. If the bank manages to write back more of its provisions, the bank’s net profit will increase even further.
The bank’s earning per share which had remained above Rs.60 from FY 2066/67 to FY 2069/70 fell to Rs.47.53 and Rs.43.52 in FY 2070/71 and FY 2071/72 respectively. This might seem alarming but this actually more healthy. The current EPS represents the earnings from the bank’s core business instead of earnings from the sale of assets. The EPS is sustainable and will only grow in the future if the bank manages to perform well.
The bank’s CD ratio currently stands at 76.70% and its Capital Adequacy Ratio is at a comfortable 12.55%. The bank’s liquidity ratio stands at 28.92%.
The bank’s Non-Performing Loan to Total Loan decreased by more than 17.03% from 5.46% in FY 2070/71 to 4.53% FY 2071/72. Although this is a good improvement it is still dangerously high. The bank’s networth per share in FY 2070/71 stands at Rs.471.13.
For investors
ADBL with a total share capital of Rs.9.86 arba has already shown that it can manage a large amount of capital. The bank has infrastructure already in place to mobilize large funds which means the bank has advantage over other banks which have to set up new infrastructure to be able to mobilize the funds they will have once their capital reaches Rs.8 billion. As of Q4 2072, the bank has an EPS of Rs.43.52. With a closing price of Rs.494, the PE ratio turns out to be just 11.35. The bank would be considered undervalued even in normal circumstances but given the current level of the market and the average PE ratio of the banking industry (which is 28.54), the bank is highly undervalued. The bank distributed 31.58% cash dividend in FY 2069/70 and 7% bonus and 8.79% cash in FY 2070/71. The dividend for this year depends on the bank’s capital plan. Regardless, the bank’s dividends are sure to be more than what it distributed the previous year.Capital Plan
The bank had planned to include its non-cumulative irredeemable preference shares in its capital plan. The bank has preference shares of Rs.6.44 billion and common stocks of Rs.3.42 billion. This would mean that it didn’t need to raise its capital to reach the Rs.8 billion target set by NRB. However, a recent circular issued by the NRB that instructs banks to not include preference shares in their capital plan means the bank has to find some other way of increasing it’s paid up capital to Rs.8 billion. As of now the bank is short Rs.4.58 billion which the bank can raise just by issuing bonus shares. The bank’s reserves and earnings are high enough to raise its capital to Rs.8 billion just by issuing bonus shares.
The bank also has the option to call a rights issue and merge and acquire other smaller institutions. But considering that the bank has large investments by the Government of Nepal it might be hesitant to invest more in the bank which means that a rights call may not be very likely. Merger and acquisitions are also less likely due the same reason.
The bank and the NRB are most likely to reach an agreement whereby the current preference shares of the bank can be included in the capital plan thereby removing the need for the bank to raise more capital.
Prospects and Challenges
The bank has extremely high potential to become one of the most profitable institutions in Nepal. The reach granted to the bank due to its large number of branches is unparalleled. The bank’s branches are also geographically diverse and cover all the regions of Nepal. One of the major challenges facing the company is the high number of employees it has. The bank has one of the largest number of employees among all the banks in Nepal. This has resulted in the bank having to spend a very high amount in its employees. Another problem the company has is the employee unions which have made it very difficult to run the organization efficiently.Financial Highlight
Balance Sheet
Income Statement
Key Ratios
