South Indian Bank - Asset quality one-offs mar bottom-line - Centrum

SIB's earnings performance disappointed on two counts 1) NIM was impacted negatively by reversal of interest income from a PSU (Rs1500mn exposure) and 2) an exceptional provision for credit fraud by an employee. Meanwhile, restructured assets increased to 4.6%. While incremental restructuring and slippages are likely to remain high for a few quarters, current valuations and our assumptions adequately factor in the concerns. We maintain Buy rating and price target of Rs27 (1.2x FY14E ABVPS).

- Loan yield contracts by ~30bps QoQ, Loan growth at ~22.3%: NII grew by 15% YoY led by a healthy credit growth (22.3% YoY) while reported NIM contracted by ~5bps sequentially. Loan yields dropped sharply by 30bps QoQ due to interest income reversal of Rs200mn on NAFED exposure, which was partly offset by ~30bps improvement in cost of funds. Given the easing in liquidity situation as well as reduction in term deposit rates, the pressure on cost of funds will ease gradually.

- Asset quality takes a knock: Asset quality performance disappointed as 1) GNPA spiked by 68% YOY to 1.74% 2) restructured loans increased to 4.6% of loans and 3) provisioning coverage dipped to 51% from 68% in the previous quarter. Slippages saw a quantum jump led by 1) big ticket government sponsored account (NAFED: Rs1.5bn exposure) 2) fraud committed by a branch manager in granting credit. The management expressed confidence in reporting higher recoveries in Q3FY13 as it expects to resolve a couple of chunky accounts.

- Loan growth moderates, despite capital infusion: The advances book grew by 23% YoY, a clear moderation from 30%+ growth in FY12 and 23.5% growth rate in Q1FY13. The moderation in loan growth, despite recent capital infusion stems from 1) management's cautious stance on asset quality and 2) increased competition from PSBs in the agriculture loan segment which has hampered demand for gold loans (agri related). For FY2013, management guided for 25% loan book growth.

- Capital position strengthened: During the quarter, SIB raised Rs4.4bn through a QIP, resulting in a dilution of 18% with tier-1 capital coming to 12.3% from 10.9% in Q1FY13. The overall capital adequacy ratio improved to a comfortable 14.43%.

- Maintain Buy: At the current market price of Rs22, the stock trades at 4.2x FY2014E EPS and 0.9x FY2014E ABVPS. We have tightened out asset quality assumptions further to factor in potential chunky slippages over the next few quarters. However, we believe that current valuation of 0.9x FY14E BV (near 3 yr average) is not fully appreciative of the strong RoE (~20% currently) and consistency in return ratios over the past seven years. We maintain our Buy rating and target price on the stock.

Source : Equity Bulls

Keywords