South Indian Bank - Too dependent on stable asset quality - Prabhudas Lilladher

(PT of Rs25/share, ~5% upside)

- Best-in-class asset quality drives return ratios: Highest share of secured loans, high proportion of gold loans and conservative underwriting has led to best in class asset quality. Conservative corporate underwriting and low risk Infra exposure will keep asset quality under check.

- Gold loans - Large book - Risks Limited: Proportion of gold loans is highest for SIB and our feedback suggest that RBI is relatively comfortable with gold lending by banks limiting regulatory risks. Risk weight calculation for gold loans could be increased but impact will be low for SIB, given high Tier-1.

- All other metrics deteriorating; risks to profitability remain: The good story ends with asset quality with (1) one of the lowest fee/assets and (2) lowest CASA ratio which is also steadily coming off, making ROA delivery always contingent on low credit costs. Large miss on PSL lending in FY12 exposes another structural negative which could impact profitability.

- Initiate with an 'ACCUMULATE' with a PT of Rs25/share: SIB enjoys one of the best asset quality franchise. However, with deterioration in all other metrics and increasing risk from higher RIDF call, we rate SIB an 'Accumulate', with Sep-13 PT of Rs25/share implying 1x FY14 book.

Source : Equity Bulls

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