Bartleet Mallory Stockbrokers Research issued a research paper on Commercial Bank PLC’s forcast profits for the 2008 financial year after the Supreme Court suspended oil hedging contracts the bank had entered into with the Ceylon Petroleum Corporation. The full text of the research paper follows.

On 28 November 2008, the Supreme Court issued an Interim Order suspending the payment by Ceylon Petroleum Corporation (CPC) under CPC’s oil hedging contracts.

Commercial Bank has an outstanding "WIT Crude Oil Hedging Contract with CPC" due to expire on 30 June 2009.

Commercial Bank has a continuing liability under its back-to-back hedge contract with its international counterparty. If the suspension of payments under this hedging contract continues, the bank’s liability under the contract to make payments to back-to-back market risk counterparty would total USD 8.93 million (Rs.982 million at today’s exchange rate of Rs.110) if the price of WIT Crude Oil remains at the current price of USD 48 per barrel throughout the remaining period of this contract.

Commercial bank has obtained all required legal documentation to support this contract.

Impact on Commercial Bank’s Forecast Profits for FY08

BMS Research has forecasted Commercial Bank (COMB) to notch a bottom line of Rs.4.12Bn for the FY08. With the Supreme Court issuing an Interim Order suspending the payment by CPC, COMB’s liability stands at Rs.982 million.

However after deducting for VAT and Corporate Taxes the liability would approximately be around Rs.540 million.

Hence if the entire amount is to be made as a provision in FY08 income statement then BMS Research would trim the forecasted profit of Rs.4.12Bn in its recent Research Report to Rs.3.58Bn. Based on the new forecasted profit of Rs.3.58 billion, Earnings Per Share (EPS) stands at Rs.14.37 reflecting a PE multiple of 5.2 times for voting and 3.9 times for non voting compared to the sector PE of 4.1 times.