South Indian Bank - 2QFY2013 Result Update - Angel Broking

For 2QFY2013, South Indian Bank (SIB) reported a muted net profit growth of 2.3% yoy (down 21.0% qoq) to Rs.97cr, which is lower than our as well as the street's estimates. This is on account of higher provisioning expenses due to a large government account (NAFED, Rs.150cr) slipping during the quarter and due to employee related fraud worth Rs.32cr. Adjusting for interest reversal on NAFED (Rs.20cr) and interest on income tax refund (Rs.15cr), the pre-provisioning profit was however, in line with our estimates. We maintain our Accumulate rating on the stock.

Asset quality deteriorates qoq: Slippages mostly one-offs: For 2QFY2013, the bank's business growth remained healthy, with advances growing by 20.6% yoy and deposits growing by 16.5% yoy. The reported NIM as of 1HFY2013 stood at 3.1%, lower than 3.2% reported for 1QFY2013. The fee income of the bank reported a strong growth of 69.8% yoy during 2QFY2013, primarily driven by a 39.1% yoy growth in commission, exchange and brokerage (CEB) income and due to interest on income tax refund of Rs.15cr (classified as non-interest income). The asset quality of the bank surprised negatively in 2QFY2013, with slippages increasing to Rs.235cr (annualised slippage ratio of 3.5%) compared to Rs.91cr in 1QFY2013. The rise in slippages during 2QFY2013 can be primarily attributed to a major government account (NAFED, exposure of Rs.150cr) slipping during the quarter. Also, there was an employee related fraud worth Rs.34cr (Rs.2cr recovered) during the quarter which added on the NPA levels.

Outlook and valuation: The bank's asset quality which had held up pretty well till now in spite of the macro headwinds (which have led to higher provisioning expenses for most banks) has started to witness signs of pressure. Although, the high slippages in 2QFY2013 were mostly one-off in nature and most of the amount is expected to be recovered entirely before FY2013 end, aggressive yields (~12.8%) on non-gold loan portfolio however could lead to stress on the balance sheet and provide downside risk to the bank's RoA. Having said that, the stock has been an underperformer compared to peers since the start of FY2013 and at FY2014E P/ABV of 1.0x and expected FY2014 RoA of 1.0%, we believe there is some room for upside in the stock. Hence we recommend an Accumulate rating on the stock.

Source : Equity Bulls

Keywords