South Indian Bank Ltd - A C Choksi

South Indian Bank Ltd was incorporated on January 25, 1929, and is one of the oldest banks in South India. Bank's Head Office is located at Thrissur, Kerala. It is one of the first private sector banks in Kerala to become a scheduled commercial bank in 1946.

With bank's strong financial performance, expectation of increase in CASA ratio, steady NIM rate, well diversified loan portfolio and improvement in asset quality, we recommendBUYcall on the stockwith a target price of Rs.27.

Investment Rationale:

Strong financial performance & improvement in asset quality

The bank's net profit increased by 37% from Rs.293 cr. in FY11 to Rs.402 cr. in FY12 and operating profit grew by 24% in FY12. Total of deposit and advances grew by 27% in FY12 to Rs.63,782 cr. and the management expects it to grow to Rs.1 Lac cr. in FY14. Total income of the company was Rs. 3,831 cr. in FY12 as compare to Rs. 2,643 cr. in FY11. Return on asset from core income improved to 0.99% as compared to 0.89% in FY11. The bank's asset quality improved, as its Gross NPA decreased by 14 bps to 0.97% for the FY12 from 1.11% in FY 11. Net NPA also declined to 0.28% from 0.29% during the same period.

Strong Business Growth:

Advances of company grew by 33% YoY i.e. from Rs. 20,489 crore to Rs. 27,281 crore. Major increase in advances was due to increase in advances to large scale industries by 41% and NBFC's by 56%. Gold loan accounted 19% of total advances which is highest of total advances. Yield on advances also grew to 12.5%. Deposits of the bank stood at Rs. 36,501 crore as against Rs 29,721 crore in FY 11, shown a growth of 22.81%.

Stable Capital Adequacy ratio:

The CRAR of bank is stable at 14.00% in FY12 as compared to 14.01% in FY11 as per Basel 2, inspite of the macro headwinds which have led to higher provisioning expenses for most of the banks. The Tier I CRAR is 11.54% in FY12 as compared to 11.27% in FY11 and Tier II CRAR has decreased to 2.46% in FY12 from 2.74% in previous fiscal year.

CASA ratio to improve & NIM to be maintained at steady rate

CASA ratio declined for FY12 to 19.67% from FY11 level of 21.55% owing to decline in FCNR deposits. The management expects the ratio to improve to 23% in FY13. NIM of the company increased to 3.10% in FY12 as compared to 3.06% in FY11. Credit deposit ratio of company grew to 74.74% in FY12 from 68.94% in FY 11. Cost of deposit for FY12 stood at 7.94%. The management expects to maintain its NIM at3%forFY13 due to improvement in CASA.

Key concerns:

- As economy is not stable and any changes in norms can decrease NRI's deposits which will reduce overall deposits of bank.

- Bank needs around Rs.1,400 crore to maintain capital adequacy as per Basel III norms in next 4-5 years even after ploughing back its profit, which will be a big challenge for bank. Out of which, bank is planning to raise Rs. 400 crore in current fiscal.

Source : Equity Bulls

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