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South Indian Bank's reported net profit for 3QFY11 grew ~21% YoY to Rs754m (5% higher than our estimate). However,
adjusting for the proportionate understatement of interest expenses in 3QFY10, net profit was up 62% YoY. Higher than
expected non-interest income and lower employee cost resulted in higher than expected earnings. Key highlights are:
Loan growth remained strong at 29% YoY and 6% QoQ (in line with the industry trend) to Rs192b. Deposits grew
31% YoY and 8% QoQ to Rs270b. CD ratio declined marginally to 71% v/s 72% a quarter ago.
Reported NII grew 19% YoY to Rs2b (in line with our estimate). However, adjusting for the proportionate understatement
of interest expenses last year, NII growth would have been higher at 39% YoY.
For 9MFY11, NIM improved to 3% v/s 2.8% (adjusted) in 9MFY10 and declined marginally by 3bp in 3QFY11
compared to 1HFY11. Our calculations show that NIM for 3QFY11 declined by 8bp as compared with 2QFY11.
In absolute terms, GNPA increased 11% QoQ. In percentage terms, GNPA was up 6bp QoQ to 1.3%. Slippages
during the quarter amounted to Rs485m (one large account of Rs180m slipped during the quarter). With PCR
remaining stable sequentially at ~71%, NNPA ratio remained stable at 0.4%.
Provisions increased to Rs298m v/s Rs68m in 2QFY11 and Rs195m in 3QFY10. Higher provision towards NPA at
Rs193m (on back of higher slippages) and increase in provision towards standard assets at Rs98m were the key
reasons for the rise.
SIB continues to have strong capitalization, with CAR at ~14.9% and tier-I CAR at ~12.3%.
Valuation and view: We expect SIB to report EPS of Rs2.4 and BV of Rs15 in FY11, and EPS of Rs2.9 and BV of
Rs17.2 in FY12. We expect its RoA to sustain at 0.9-1% whereas increased leverage would help drive RoE to ~18% by
FY12. The stock trades at 1.3x FY12E BV. Maintain Buy with a target price of Rs27 (1.6x FY12E BV)
Business growth remains strong
Loans grew 29% YoY and 6% QoQ to Rs192b, while deposits grew 31% YoY and 8%
QoQ to Rs270b. CD ratio declined marginally to 71% v/s 72% a quarter ago. A rising rate
scenario resulted in CASA growth moderating to 21% YoY and flat QoQ. CASA ratio
declined ~150bp QoQ to 22.4%. NRE deposits at the end of 3QFY11 were Rs37b.
9MFY11 margin firm
NII growth on a reported basis was up 19% YoY. However, but for the proportionate
understatement of interest expenses in 3QFY10, NII growth would be higher at 39%
YoY. For 9MFY11, NIM improved to 3% v/s 2.8% (adjusted) in 9MFY10 and declined
marginally by 3bp in 3QFY11 compared to 1HFY11. Our calculations show that NIM for
3QFY11 declined by 8bp as compared with 2QFY11.
Yield on loans improved to 10.7% in 9MFY11 from 10.6% in 1HFY11 (11.4% in 9MFY10;
down 70bp YoY). Yield on investments improved from 6.29% in 1HFY11 to 6.35% in
9MFY11. Cost of deposits increased by 6bp to 6.4% in 9MFY11 from 1HFY11. Higher
cost of deposits was offset by higher yield on assets, leading to stable margin. Management
has guided that margins would be maintained at 2.8-3% in FY11/12.
Fee income growth remains strong; C/I declines
Fee income (ex-forex) was up 25% YoY and ~4% QoQ to Rs352m. Income from forex
was muted both on a QoQ and YoY basis. Treasury gains for the quarter were Rs97m
(muted YoY) as against Rs62m a quarter ago. Opex increased 15% YoY but declined 5%
QoQ, led by ~11% QoQ drop in employee cost.
Management has ascertained liability related towards gratuity and second pension option
to be Rs1.5b at the end of 2QFY11, which it plans to amortize over a period of three years
(subject to regulatory approvals). In 2QFY11, the bank provided for higher pension and
gratuity related liability to cover the under-provisions of earlier quarters, resulting in higher
employee expenses for the quarter. On the back of strong core operating profitability, core
cost to income ratio declined to 45.6% in 3QFY11 v/s 49.7% in 2QFY11 and 47.1% in
3QFY10.
GNPA up 11% QoQ, led by one-off slippages
In absolute terms, GNPA increased 11% sequentially. In percentage terms, GNPA was up
6bp QoQ to 1.3%. Slippages during the quarter amounted to Rs485m (one large account
of Rs180m slipped during the quarter), whereas recoveries and upgradations were at
Rs227m. With PCR remaining stable sequentially at 71%, NNPA remained at 0.4%.
Provisions increased to Rs298m v/s Rs68m in 2QFY11 and Rs195m in 3QFY10. Higher
provisions towards NPA at Rs193 (on back of higher slippages) and increase in provisions
towards standard assets at Rs98m (~Rs60m was towards dual rate housing loans) were
the key reasons for the rise.
Valuation and view
SIB has been growing at a healthy rate, with stable operating parameters. With increasing
presence, healthy growth and robust asset quality, we believe the bank is well positioned
to reap the benefits of strong economic growth.
We expect SIB to report EPS of Rs2.4 and BV of Rs15 in FY11, and EPS of Rs2.9 and
BV of Rs17.2 in FY12. We expect its RoA to sustain at 0.9-1% whereas increased leverage
would help drive RoE to ~18% by FY12. The stock trades at 1.3x FY12E BV. Maintain
Buy with a target price of Rs27 (1.6x FY12E BV).
South Indian Bank: an investment profile
Company description
South Indian Bank (SIB) is a private sector bank, with a
strong presence in South India, particularly the state of
Kerala (55% of total branches). It was the first among
private sector banks in Kerala to become a scheduled bank
in 1946 under the RBI Act. In 1964, the bank took over 12
banks, mostly in northern Kerala to increase its presence
in the region. It has a network of 614 branches and 350+
ATMs, and total business of Rs462b.
Key investment arguments
SIB has demonstrated consistent improvement in core
operating performance over the last three years, with
RoA expanding from 0.5% in FY06 to 1% in FY10.
Asset quality has been stable (gross NPA of 1.3% and
net NPA of 0.4%), with lowest restructuring (~2.6%
of the loan book).
High tier-1 ratio of ~12% can effectively be used for
further leverage for dilution-free growth in coming
years.
Key investment risks
High dependence on southern states, particularly Kerala,
increases the geographical risk.
Recent developments
SIB's existing equity shares sub-divided into face value
Re1 each as against Rs10 each.
Mr Amitabha Guha has assumed office as Non-
Executive Part-time Chairman from October 2010.
Valuation and view
We expect SIB to report EPS of Rs2.4 and BV of Rs15
in FY11, and EPS of Rs2.9 and BV of Rs17.2 in FY12.
We expect its RoA to sustain at 0.9-1% whereas
increased leverage would help drive RoE to ~18% by
FY12. The stock trades at 1.3x FY12E BV. Maintain
Buy with a target price of Rs27 (1.6x FY12E BV).
Sector view
Loan growth remains strong. However, rising inflation
and increasing interest rates are the near-term
headwinds for the sector.
Our Economist expects current tightness in liquidity to
start easing in 4QFY11, allaying the pressure of
significant NIM compression.
We believe that margins would start compressing, but
gradually. With strong loan growth and high CD ratio,
there is strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
South Indian Bank's reported net profit for 3QFY11 grew ~21% YoY to Rs754m (5% higher than our estimate). However,
adjusting for the proportionate understatement of interest expenses in 3QFY10, net profit was up 62% YoY. Higher than
expected non-interest income and lower employee cost resulted in higher than expected earnings. Key highlights are:
Loan growth remained strong at 29% YoY and 6% QoQ (in line with the industry trend) to Rs192b. Deposits grew
31% YoY and 8% QoQ to Rs270b. CD ratio declined marginally to 71% v/s 72% a quarter ago.
Reported NII grew 19% YoY to Rs2b (in line with our estimate). However, adjusting for the proportionate understatement
of interest expenses last year, NII growth would have been higher at 39% YoY.
For 9MFY11, NIM improved to 3% v/s 2.8% (adjusted) in 9MFY10 and declined marginally by 3bp in 3QFY11
compared to 1HFY11. Our calculations show that NIM for 3QFY11 declined by 8bp as compared with 2QFY11.
In absolute terms, GNPA increased 11% QoQ. In percentage terms, GNPA was up 6bp QoQ to 1.3%. Slippages
during the quarter amounted to Rs485m (one large account of Rs180m slipped during the quarter). With PCR
remaining stable sequentially at ~71%, NNPA ratio remained stable at 0.4%.
Provisions increased to Rs298m v/s Rs68m in 2QFY11 and Rs195m in 3QFY10. Higher provision towards NPA at
Rs193m (on back of higher slippages) and increase in provision towards standard assets at Rs98m were the key
reasons for the rise.
SIB continues to have strong capitalization, with CAR at ~14.9% and tier-I CAR at ~12.3%.
Valuation and view: We expect SIB to report EPS of Rs2.4 and BV of Rs15 in FY11, and EPS of Rs2.9 and BV of
Rs17.2 in FY12. We expect its RoA to sustain at 0.9-1% whereas increased leverage would help drive RoE to ~18% by
FY12. The stock trades at 1.3x FY12E BV. Maintain Buy with a target price of Rs27 (1.6x FY12E BV)
Business growth remains strong
Loans grew 29% YoY and 6% QoQ to Rs192b, while deposits grew 31% YoY and 8%
QoQ to Rs270b. CD ratio declined marginally to 71% v/s 72% a quarter ago. A rising rate
scenario resulted in CASA growth moderating to 21% YoY and flat QoQ. CASA ratio
declined ~150bp QoQ to 22.4%. NRE deposits at the end of 3QFY11 were Rs37b.
9MFY11 margin firm
NII growth on a reported basis was up 19% YoY. However, but for the proportionate
understatement of interest expenses in 3QFY10, NII growth would be higher at 39%
YoY. For 9MFY11, NIM improved to 3% v/s 2.8% (adjusted) in 9MFY10 and declined
marginally by 3bp in 3QFY11 compared to 1HFY11. Our calculations show that NIM for
3QFY11 declined by 8bp as compared with 2QFY11.
Yield on loans improved to 10.7% in 9MFY11 from 10.6% in 1HFY11 (11.4% in 9MFY10;
down 70bp YoY). Yield on investments improved from 6.29% in 1HFY11 to 6.35% in
9MFY11. Cost of deposits increased by 6bp to 6.4% in 9MFY11 from 1HFY11. Higher
cost of deposits was offset by higher yield on assets, leading to stable margin. Management
has guided that margins would be maintained at 2.8-3% in FY11/12.
Fee income growth remains strong; C/I declines
Fee income (ex-forex) was up 25% YoY and ~4% QoQ to Rs352m. Income from forex
was muted both on a QoQ and YoY basis. Treasury gains for the quarter were Rs97m
(muted YoY) as against Rs62m a quarter ago. Opex increased 15% YoY but declined 5%
QoQ, led by ~11% QoQ drop in employee cost.
Management has ascertained liability related towards gratuity and second pension option
to be Rs1.5b at the end of 2QFY11, which it plans to amortize over a period of three years
(subject to regulatory approvals). In 2QFY11, the bank provided for higher pension and
gratuity related liability to cover the under-provisions of earlier quarters, resulting in higher
employee expenses for the quarter. On the back of strong core operating profitability, core
cost to income ratio declined to 45.6% in 3QFY11 v/s 49.7% in 2QFY11 and 47.1% in
3QFY10.
GNPA up 11% QoQ, led by one-off slippages
In absolute terms, GNPA increased 11% sequentially. In percentage terms, GNPA was up
6bp QoQ to 1.3%. Slippages during the quarter amounted to Rs485m (one large account
of Rs180m slipped during the quarter), whereas recoveries and upgradations were at
Rs227m. With PCR remaining stable sequentially at 71%, NNPA remained at 0.4%.
Provisions increased to Rs298m v/s Rs68m in 2QFY11 and Rs195m in 3QFY10. Higher
provisions towards NPA at Rs193 (on back of higher slippages) and increase in provisions
towards standard assets at Rs98m (~Rs60m was towards dual rate housing loans) were
the key reasons for the rise.
Valuation and view
SIB has been growing at a healthy rate, with stable operating parameters. With increasing
presence, healthy growth and robust asset quality, we believe the bank is well positioned
to reap the benefits of strong economic growth.
We expect SIB to report EPS of Rs2.4 and BV of Rs15 in FY11, and EPS of Rs2.9 and
BV of Rs17.2 in FY12. We expect its RoA to sustain at 0.9-1% whereas increased leverage
would help drive RoE to ~18% by FY12. The stock trades at 1.3x FY12E BV. Maintain
Buy with a target price of Rs27 (1.6x FY12E BV).
South Indian Bank: an investment profile
Company description
South Indian Bank (SIB) is a private sector bank, with a
strong presence in South India, particularly the state of
Kerala (55% of total branches). It was the first among
private sector banks in Kerala to become a scheduled bank
in 1946 under the RBI Act. In 1964, the bank took over 12
banks, mostly in northern Kerala to increase its presence
in the region. It has a network of 614 branches and 350+
ATMs, and total business of Rs462b.
Key investment arguments
SIB has demonstrated consistent improvement in core
operating performance over the last three years, with
RoA expanding from 0.5% in FY06 to 1% in FY10.
Asset quality has been stable (gross NPA of 1.3% and
net NPA of 0.4%), with lowest restructuring (~2.6%
of the loan book).
High tier-1 ratio of ~12% can effectively be used for
further leverage for dilution-free growth in coming
years.
Key investment risks
High dependence on southern states, particularly Kerala,
increases the geographical risk.
Recent developments
SIB's existing equity shares sub-divided into face value
Re1 each as against Rs10 each.
Mr Amitabha Guha has assumed office as Non-
Executive Part-time Chairman from October 2010.
Valuation and view
We expect SIB to report EPS of Rs2.4 and BV of Rs15
in FY11, and EPS of Rs2.9 and BV of Rs17.2 in FY12.
We expect its RoA to sustain at 0.9-1% whereas
increased leverage would help drive RoE to ~18% by
FY12. The stock trades at 1.3x FY12E BV. Maintain
Buy with a target price of Rs27 (1.6x FY12E BV).
Sector view
Loan growth remains strong. However, rising inflation
and increasing interest rates are the near-term
headwinds for the sector.
Our Economist expects current tightness in liquidity to
start easing in 4QFY11, allaying the pressure of
significant NIM compression.
We believe that margins would start compressing, but
gradually. With strong loan growth and high CD ratio,
there is strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
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