South Indian Bank - Asset quality surprises negatively - Centrum

Weakness in SIB's core earnings performance continued in Q1FY14 with sequential NIM contraction of 20bps. Asset quality challenges accentuated further with 1) slippages inching higher to 2.75% 2) GNPA going up 14% QoQ despite aggressive write-offs (NAFED exposure) and 3) material erosion in PCR. The only saving grace was stable restructured assets (5% of loans). Chunky slippages on a relatively small balance sheet should keep credit costs higher and thus keep return ratios under pressure. We lower our estimate downwards, after revising loan growth and NIM assumptions, leading to a revised price target of Rs27 (1.1x Sep'14 estimates) from Rs31 earlier. Maintain Buy on cheap valuations.

- NIM contracts by ~20bps QoQ: NII came in lower than expected at Rs3.3bn led by 20bps sequential NIM contraction to 2.7%, even as advance growth remained healthy at 15.7% YoY. The NIM contraction can be traced to lower lending yields (down 13 bps QoQ) led by reversal of interest income on slippages. Given the inability to reduce term deposit rates and the impact of slippages, we have factored in a 20bps contraction in NIM for FY2014.

- Asset quality surprises negatively: Slippages for the quarter were higher at Rs2.2bn, which includes four chunky accounts (2 steel rolling mills, 1 paper company and 1 rail infra exposure). Consequently, despite significant write offs (Rs1.5bn of NAFED exposure on prudential basis) GNPA increased by 14% sequentially to Rs4.9bn. On the flip side, the significant write-offs led to erosion in PCR to 29% despite higher provisions. SIB has provided fully towards NAFED account in Q1FY14 (despite dispensation from RBI) though expects ~60% recovery over FY2014 based on the settlement offered. The management expects healthy recoveries during FY14 from the slippages in the last two quarters though incremental slippages could offset such gains.

- Loan growth moderates further: SIB's Q1FY14 advances grew by 15.7% YoY, though lower than 16.6% in Q4FY13, it is above industry average. For FY14, the bank is targeting 20% loan growth (vs 25% guided earlier) with clear focus on retail products. Pricing of auto loan has been realigned with a view to deepen existing relations. Gold loan portfolio continues to behave well with current LTV at ~83% with no material slippages so far.

- Treasury boost, lower opex QoQ: SIB registered a strong performance on the non-interest income front, with a growth of 57% YoY to Rs1.2bn, which was aided by sharp jump in treasury income. Treasury income for the bank came in higher at Rs518mn as against Rs202mn in Q1FY13. Opex was lower QoQ as Q4FY13 was impacted by the change in actuarial assumptions.

- Maintain Buy on valuations: At the current market price of Rs23, the stock trades at 5.2x FY2015E EPS and 0.9x FY2015E ABVPS. We see normalisation of credit costs containing improvement in return ratios during FY2014. We have lowered our loan growth assumption and NIM assumption leading to downward revision in earnings estimates (11% lower for FY14E and 15% for FY15E). Based on our revised estimates and a fair value multiple of 1.1x, we lower our target price to Rs27 (Rs31 earlier) but maintain Buy given 17% upside.

Source : Equity Bulls

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