Visit http://indiaer.blogspot.com/ for complete details South Indian Bank (SIB) reported net profit of `77cr for 2QFY2011, which
exceeded our estimate of `63cr on the back of strong balance sheet growth led
by sustained increase in loans against gold and SME lending. However, on the
valuation front, we believe that the stock is expensive relative to its peers as well
as its own historical range. Hence, we remain Neutral on the stock.
Business growth above industry with stable asset quality and profitability: The
bank’s business growth continued to show strong traction, with advances growing
35.7% yoy and deposits 27.3% yoy. CASA deposits stood at `5,979cr (up 2.2%
qoq) and constituted 23.9% (down by ~122bp qoq) of total deposits. NRE
deposits constituted 15.5% of total deposits. Reported NIMs improved by 17bp
sequentially to 3.0% from 2.83% in 1QFY2011 on the back of decrease in cost of
deposits on a sequential basis by 9bp to 6.34% and increase in yield on
investments by ~24bp. With the improvement in NIMs, net interest income (NII)
rose by a healthy 19.4% yoy and 17.9% qoq to `197cr. Asset quality remained
stable with the gross and net NPA ratio at 1.3% and 0.4% respectively, and a
provision coverage ratio of 70.5% excluding write-offs.
Outlook and Valuation
We expect the bank to deliver profitable growth above the average growth rate of
its peer group and sustain normalised RoE at 16-18% levels. However, at the
CMP, the stock is trading at fair valuations of 9.6x FY2012E EPS of `2.9 and 1.7x
FY2012E ABV of `16.5, which we believe is expensive relative to peers and its
own historical range. Hence, we maintain our Neutral rating on the stock.
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