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Research
South Indian Bank - Prudent business growth and asset quality focus ahead; Buy - Anand Rathi
Posted On : 2013-07-16 19:16:42( TIMEZONE : IST )
Prudent business growth, sturdy NIM and CASA share. South Indian Bank's advances grew 15.7% yoy, slower than deposits at 17.3% yoy, decreasing credit-deposit 99bps yoy to 71.6%. Led by a 52-bp yoy fall in share of CASA to 20.6% and a 48-bp yoy decline in the yield on earning assets, NIM declined 24bps yoy (10bps qoq) to 3%. Yet the average CASA per branch has steadily improved from Rs. 91.5m in Mar'11 to Rs. 115.1m in Mar'13, rising 6.2% yoy. Ahead, we expect the bank's business to register a 23% CAGR over FY13-15, with NIM estimated at 2.9% in FY14 and 3.1% in FY15.
Modest fee income, large Treasury profits, stable productivity. Despite modest fee income (13.3% yoy), non-interest income was led by robust Treasury profits of Rs. 518m (156% yoy, 277% qoq). The bank's core-cost income rose 251bps yoy to 49.2%, with cost-to-assets down 2bps yoy to 1.7%. With no large expansion plans, branches are likely to see better operating leverage. We estimate cost-to-assets at 1.7% over FY14-15.
Provisions for NAFED dents profits, NPA coverage declines. The bank prudently made one-time provisions of Rs. 600m for NAFED. This ate into profit growth. Gross NPAs rose 13.5% qoq, led by fresh slippages of Rs. 2.2bn, of which Rs. 1.75bn was accounted for by four large corporate accounts. Hence, NPA coverage (excl. technical write-offs) fell to 29.3%. In its conference call, management stated that it would sharpen its focus on recoveries of stressed/default accounts, and strive to improve asset quality ahead. The restructured book stood at Rs. 15.4bn (4.9% of loans).
Our take. We retain our Buy rating, as we expect the bank's consistent profitability to be led by steady NIM, low operating expenses and stable credit costs. At our Mar'14 target, the stock would trade at P/BV of 1.3x FY14e and 1.1x FY15e. Our target is based on the two-stage DDM (CoE: 15.6%; beta: 0.8; Rf: 8%). Risk: Sharp increase in loan defaults.
