Buy South Indian Bank 3QFY11 – Healthy business growth, stable NIM; Anand rathi

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South Indian Bank
3QFY11 – Healthy business growth, stable NIM; Buy
South Indian Bank’s 3QFY11 net profit growth was led by
healthy net interest income growth (19.2% yoy) and better
productivity. We maintain Buy on the stock as the bank’s
prudent loan growth, strong deposit franchise and healthy asset
quality make it an attractive pick among small-cap banks.

 Healthy business growth, improving margin. Advances and
deposits grew 27.4% yoy and 30.8% yoy respectively. NIM
marginally improved 3bps qoq to 3.03%. However, share of
CASA slightly declined yoy, from 24.2% to 22.4%. Low-cost
(current and savings accounts) and non-residential external (NRE)
deposits constitute 36.1% of the Bank’s deposits base, enabling it
to keep deposit costs low, thereby protecting margin.
 Modest fees, flat treasury gains. Healthy business growth led to
a modest 15.3% yoy growth in fees. Treasury gains were flat yoy
and comprised 19.5% of non-interest income. Productivity
improved, with core cost-income rising 153bps yoy to 45.6%.
 Asset quality slips, adequately capitalized. Gross NPAs rose
11.4% qoq, but a sharp rise in NPA provisions saw NPA coverage
maintained at 71%. Net NPAs are only 0.39% of loans, one of the
best among peers. Capital adequacy stands at 14.9% (tier-I capital:
12.3%), sufficient to support the bank’s business growth targets.
 Valuation and risks. At our price target, the stock would trade at
PABV of 1.7x FY12e and 1.4x FY13e. Risks: Slow economic
growth leading to credit growth being lower than estimated and
higher NPAs.