SOUTH INDIAN BANK: Met management; Business growth remains strong; Target of 25% CAGR till FY13; Buy
We met the management of South Indian Bank (SIB IN, Mkt Cap US$660m, CMP Rs27, Buy) to get an update about business growth, margins and asset quality. Key takeaways:
- Management remains confident of achieving loans CAGR of 25%+ and deposits CAGR of 23%+ over FY10-13. Margins are expected to be at 2.8% with an upward bias.
- It is targeting to increase the share of corporate fee income and third party distribution income.
- The bank expects to increase its branch network by ~10% every year and is targeting to reach to 750 branches by FY13 (from 580 as of 1QFY11).
- Asset quality is a non-issue; the management remains confident of maintaining GNPA ratio at ~1.3% and NNPA at ~0.4% with PCR of ~70%.
- Overall, on track to achieve RoA of ~1% and RoE of ~18%. Maintain Buy.
Business growth to remain strong
- Management expects to achieve business growth of 25-28% YoY to Rs480-500b in FY11. Loans are expected to grow 25%+ YoY to Rs200b and deposits 23%+ YoY to Rs280b. We expect loans to grow 25% YoY and deposit to grow 24% YoY in FY11.
- FY13 business target of Rs750b, 750 branches and ATM and 7,500 employees remains intact. The management remains confident of achieving its targets ahead of schedule.
- As of 1QFY11, loans grew 5% QoQ and 34% YoY to Rs169b while deposits grew 1% QoQ and 25% YoY to Rs233b.
- Gold loans, SME and Corporate loans will remain key drivers of loan growth going forward.
- Management expects to maintain CASA growth in line with overall deposits growth and CASA ratio is expected to remain stable at ~25%. However, in 1QFY11, CASA growth of 28% YoY outpaced overall deposits growth. CASA ratio had improved to 25.1% vs 23.3% for FY10 and 24.5% for 1QFY10.
Loan growth remains in excess of 30% over last 3 quarters Deposits growth remains in excess of 25%
Margin guidance of 2.8% with an upward bias
- NIMs for 1QFY11 were 2.83% compared to 2.76% (adjusted) for 1QFY10 and 2.77% for FY10.
- Management expects to maintain margins at 2.8%+. Increase in cost of deposits is likely to be compensated by increasing share of gold loans and SME loans which are high yielding.
- Improving share of CASA deposits and higher proportion of NRE deposit (~14% of deposits) coupled with improvement in CD ratio (72% as of 1QFY11) will help the bank maintain margins.
6bp increase in NIM in 1QFY11 (%)
Fee income to accelerate; branch expansion to limit C/I ratio improvement
- Fee income growth remained muted for SIB over last few quarters, however, mgmt expects it to improve with increased focus on corporate fees and third party distribution
- Branch expansion picked up during 2QFY11. Management expects to reach 625+ branches by December 2010 (vs 580 branches as on 1QFY11).
- On back of higher branch expansion C/I ratio to remain at ~50%. However, improving branch and employee productivity coupled with incremental branches coming up in semi urban and rural areas, C/I ratio can provide positive surprise.
Fee income growth remains volatile
Trades at P/BV of 1.6x FY12E; RoA of ~1% and RoE of ~18%; Buy
- While our business growth figures are in line with management’s internal targets, PAT growth of 12% YoY is lower than management guidance of ~20% YoY.
- SIB has shown consistent improvement in its operating performance. We expect its ROAs to sustain at ~1% whereas increase in leverage would help drive ROEs to ~18% by FY12E.
- SIB is planning to add 60 new branches to its existing network of 580 branches. Of this, roughly 30 would be in southern India (without RBI license requirement) which would further strengthen its presence in that region.
- Stock trades at FY12 P/BV of 1.6x and PE of 9.4x. Maintain Buy.
No comments:
Post a Comment