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Syndicate Bank reported NII of INR 11 bn (up 79.3% Y-o-Y, 14.9% Q-o-Q) ahead of
our estimate (INR 9.8 bn), aided by 47bps expansion in NIMs (compensating for flat
loan book). NIMs stood at 3.55%. Other income (ex treasury) grew 17% Q-o-Q and
45% Y-o-Y, led by strong traction in income from forex transactions. PAT came in at
INR 2.37 bn, below our estimate (INR 2.75 bn) because of higher-than-expected
operating expenses and greater retirement benefit provisions (bank made INR 1.8 bn
provisions towards second pension option and gratuity). Slippages during the quarter
stood close to INR 3 bn (against INR 4 bn run-rate over FY10). Headline asset quality
improved with gross NPAs and net NPAs declining Q-o-Q by 1.3% and 7%, to 2.24%
and 0.97%, respectively. Provision coverage (adjusted for write offs) stood at 73%.
CASA ratio for quarter was at 35%.
NIMs improve 47bps sequentially to 3.55%
Led by 31bps expansion in yield on advances, coupled with 13bps decline in cost
of deposits, NIMs expanded 47bps Q-o-Q to 3.55%. Strong improvement in
NIMs helped Syndicate Bank record robust NII of INR 11 bn (up 79.3% Y-o-Y
and 15% Q-o-Q), higher than our estimate (INR 9.8 bn), despite flat loan
book. CD ratio stands high at 82%, as in the interim, management relied on
relatively low-cost borrowing (against retail deposits) to fund loan book. Going
forward, management expects NIMs to decline 10-20bps as the bank
incrementally raises retail deposits, coupled with overall increase in cost of
deposit.
Outlook and valuations: Core performance improves; maintain ‘BUY’
Over the past three quarters: (a) margin expansion has played out well (120bps
improvement to 3.55%), supported by improvement in yield on advances and
declining cost of deposits; (b) core fee income has shown robust growth and
dependence on treasury income has declined; and (c) asset quality has started
showing signs of improvement. We have broadly maintained our numbers for
FY11-12, factoring in lower-than-industry credit growth performance (16% Y-o-
Y), NIMs (cal.) of 2.86% and higher non-loan related provisions. The stock is
currently trading at 1.2x FY12 adjusted book and 5.5x FY12 earnings, delivering
RoEs of ~20%. The risk-reward continues to remain favourable at current
valuations. We maintain ‘BUY’ on the stock and rate it ‘Sector Performer’ on
relative returns.
Asset quality shows signs of improvement
Incremental slippages hovered around INR 3 bn (1.4%) over the past two quarters
(against INR 4 bn run-rate over FY10). Gross NPAs declined 1.3% Q-o-Q, to INR 21.4 bn
(2.24%), as bank wrote off INR 2 bn of stressed assets. Supported by higher
provisioning (credit costs at 104bps during quarter), net NPAs declined 7% Q-o-Q to INR
9.1 bn (0.97%). Provision coverage (without write offs) improved 260bps Q-o-Q to
57.3%. Provision coverage, including write offs, stood at 73%. Restructured assets
declined Q-o-Q by INR 4 bn, to INR 41 bn (4.3% of advances). Slippages in the
restructured book, during the quarter, stood at INR 260 mn (0.6% of restructured book).
Loan book remained flat sequentially
Loan book remained flat Q-o-Q, at INR 946 bn, as management focused on long-term
business and avoided excess infrastructure exposure. Over the next two quarters, the
management is confident of achieving 16-17% growth Y-o-Y. Deposits grew 7% Q-o-Q
to INR 1.2 tn; CASA stood at 35%. CD ratio during quarter declined 5% pt Q-o-Q, to
82%.
Strong fee income growth
Fee income (ex treasury) grew 17% Q-o-Q and 45% Y-o-Y, to INR 2.3 bn, led by strong
growth in income from forex transactions. However, commission, exchange, brokerage
declined 15% Q-o-Q and 4% Y-o-Y; management expects traction in the segment to
track balance sheet growth, picking up in H2FY11. Recoveries remained strong during
the quarter at INR 250 mn. As expected, treasury gains remained low at INR 20 mn.
Other highlights:
• Management provided INR 1.8 bn (captured under other provisions) during the
quarter, to cover liabilities against second pension and gratuity. (Estimated)
outstanding liabilities of the bank towards second pension and gratuity stand close
to INR 9 bn and management intends to meet the gap over next 4-6 quarters.
Currently, the bank holds pension provisions of INR 17 bn (covering ~12,000 staff
members) under the pension plan. Similarly, outstanding gratuity provisions stood
close to INR 7.5 bn and provident fund at INR 10 bn.
• Prudentially written off assets were at ~INR 18 bn.
• Cost-income ratio stood at 42%.
• Tier I was at 8.13%
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