Reinitiating Coverage on South Indian Bank - Cholamandalam Securities

Sturdy business growth

Branch additions, regional advantages augur well for business growth

South Indian Bank (SIB) has pegged a business target of INR 1,250bn by March 2016 (a growth of 25.1% CAGR over FY12-15). Branch expansion (plans to open 50 branches in FY13), regional advantages and a historical growth of 25% CAGR over FY07-12 lend confidence to our loan book growth estimates of 20.1% CAGR over FY12-14.

Bottom-line to be driven by business growth

Net Interest Margins (NIMs) are likely to hover at 3%. Moderation in interest rates, coupled with lower credit offtake is a dampener. Higher cost of funds is likely to compress margins. Net interest income (NII) is expected to register a 25.8% CAGR growth over FY12-14, on the back of a healthy credit growth and flat margins. Other income is expected to be a drag on topline growth (23% CAGR). PAT is expected to grow at 24.1% CAGR.

Capital ratios comfortable

SIB has set a reasonable business target of INR 1,250bn by March 2015 translating into a 25.1% CAGR over FY12-15. The bank is well poised to meet its capital fund requirements as it enjoys a return on equity of ~20%, a high retention ratio of 80%+ and current capital ratios at comfortable levels. Besides, with bulk of its total capital coming from Tier -1 capital the bank is on course to meet its capital adequacy norms in the next couple of years though internal accruals.

Diverse loan book; low exposure to any specific industry

The bank has a relatively diverse loan book exposure on the industry front. As of March 2012, exposure to stressed sectors is relatively lower; electricity and power together constituted ~5% of the loan book while infrastructure (excluding power) constituted ~7%, textiles ~3% and iron and steel ~1%. Gross NPAs and net NPAs are expected to trend higher on the back of a slip in asset quality in stressed sectors that have seen relatively low slippages. The gold loan book (excluding priority ~20% and including priority ~1/4ths of the loan book), provides cushion to downside risks in asset quality.

Valuation

The stock trades at 1.0 X FY14 P/Adj BV and 5.0X P/E FY14. Asset quality concerns in the banking sector have overshadowed earnings growth leading to a correction in valuation multiples. Backed by traction in business growth and steady NIMs, we expect earnings growth to continue. We value the stock at INR 27.3 per share, implying a FY13 P/Adj B of 1.4X and FY14 P/Adj BV of 1.2X. We rate the stock a BUY.

Risks

Further deterioration in the power, infrastructure and textiles sector would hamper asset quality and earnings. With NII contributing to bulk of topline, a dip in margins and / or a slowdown in credit growth would be a negative.

Source : Equity Bulls

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