South Indian Bank – 3QFY2011 Result Update - Angel Broking

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South Indian Bank – 3QFY2011 Result Update

Angel Broking maintains a Neutral view on South Indian Bank

South Indian Bank (SIB) reported net profit of `75cr for 3QFY2011, which was in

line with our estimates of ~`76cr. Key highlights of the results were strong

balance sheet growth and deterioration in asset quality. We remain Neutral on

the stock.

Business growth above industry, concerns on asset quality persist: The bank’s

business growth continued to register strong traction, with advances growth at

32.3% yoy (8.3% qoq) and deposits growth at 30.74% yoy (7.7% qoq). The bank’s

CASA deposits stood at `6,045cr (up by 1.1% qoq) and constituted 22.4% (down

from 23.86% in 2QFY2011) of total deposits. NRE deposits fell 4.7% sequentially

to `3,701cr. The annualised slippage ratio increased to 1.2%, up from 0.7% in

2QFY2011. The Gross NPAs increased by `22.1cr (83% qoq) to `48.6cr, largely

due to default by a domestic retail chain (~`18cr), leading to a spurt in

provisioning expenses. However, management expects this account to be

recovered in less than a month and attributes it to be a one-off case. The bank

was able to maintain stable Gross and Net NPA ratios of 1.33% (1.27% in

2QFY2011) and 0.39% (0.38% in 2QFY2011) respectively, aided by strong

balance sheet growth and higher provisioning expenses. The provision coverage

ratio, excluding technical write-offs, stood at 70.7% (70.5% in 2QFY2011).

Outlook and Valuation: Post the recent correction, the stock is trading at 1.3x

FY2012E ABV. We believe that the stock is trading expensive relative to its peers

as well as its own historical range. Hence, we remain Neutral on the stock.

Strong business growth continues

The bank’s business growth continued to register strong traction, with advances

growth at 32.3% yoy (8.3% qoq) and deposits growth at 30.74% yoy (7.7% qoq).

The bank’s CASA deposits stood at `6,045cr (up by 1.1% qoq) and constituted

22.4% (down from 23.9% in 2QFY2011) of total deposits. NRE deposits fell 4.7%

sequentially to `3,701cr, out of which low-cost NRE deposits stood at ~`1,500cr,

at 5.6% of the total deposits.

Major contributors to the growth in advances were the gold loans (up 14% qoq

and comprising 20% of overall advances) and agriculture (up 9% qoq and

comprising 17% of overall advances), while loans to medium and large corporates

and loans via LCs, bills receivable and packing credit comprised 15% each of the

overall advances.

Incremental CD ratio of the bank stood at 76.3%, up from 48.1% in 2QFY2011,

indicating a considerable increase in credit off-take this quarter compared to the

previous quarter. On account of relatively slower growth in CASA deposits (1.1%

qoq) as compared to deposit growth (7.7% qoq), CASA ratio fell to 22.4% from

23.9% in 2QFY2011. Reported NIM remained flattish at ~3% sequentially. NII

increased by a healthy 19.2% yoy and 3.8% qoq to `205cr. Going forward, we

believe margins could come under pressure considering the low CASA ratio, which

is one of the lowest in the industry, in a rising interest rate regime.

Going forward, management aims to increase the NRE deposits by undertaking

various initiatives such as tie-up with foreign banks and providing real-time

remittance services.

The bank added four branches during the quarter taking the total to 614

branches. The bank aims to open 26 branches mostly outside Kerala over the next

couple of months and take its total business to ~`48,000cr by the end of next

quarter (`46,176cr as of 3QFY2011)

Asset quality under pressure

The annualised slippage ratio increased to 1.2%, up from 0.7% in Q2FY11. The

Gross NPA increased by `22.1cr (83% qoq) to `48.6cr, largely due to default by a

domestic retail chain (~`18cr), leading to a spurt in provisioning expenses.

However, management expects this account to be recovered in less than a month

and attributes it to be a one-off case. Provision for NPAs stood at `18.9cr, up from

`1.4cr in 2QFY2011, while provision for investments stood at `3.3cr.

Gross NPAs increased by 11.4% sequentially to `254cr, while Net NPAs stood at

`74cr compared to `67cr in 2QFY2011. The bank was able to maintain stable

Gross and Net NPA ratios of 1.33% (1.27% in 2QFY2011) and 0.39% (0.38% in

2QFY2011) respectively, aided by a strong balance sheet growth and higher

provisioning expenses. The provision coverage ratio excluding technical write-offs

stood at 70.7% (70.5% in 2QFY2011).

Non-interest income above expectations

Other income excluding treasury grew by 19.8% yoy to `40cr, in line with our

estimates, while total other income grew by 15.3% yoy to `50cr on account of

higher-than-estimated treasury gains. The treasury gains grew by 56.5%

sequentially to `10cr, up from `6cr in 2QFY2011. Fee income increased by 8.0%

yoy (4.6% sequentially) to `14cr. With the interest rates having an upward bias, we

expect lower treasury gains in the future.

Operating expenses under control

The operating costs increased by 15.4% yoy, but reduced 4.9% sequentially to

`112cr. Other operating expenses increased by 21.1% yoy and 6.4% sequentially

to `43cr. Staff expenses declined by 10.7% sequentially to `69cr (`77cr in

2QFY2011). Consequently, the cost-to-income ratio improved to 43.9% from

48.5% in 2QFY2011. The bank has existing pension liabilities of ~`122cr, of

which ~`12cr was provided in this quarter

Investment Arguments

Strong business growth but higher slippages

The annualised slippage rate increased to 1.2% up by ~55bp from 0.7% in

2QFY2011. Although according to management this is a one-off case, we believe

that continuous accelerated business growth over the last year could exert pressure

on the asset quality in the coming quarters. Also, we expect the bank’s growth rate

to slow down hereon, as the rising interest rate environment is not favourable for

banks with low CASA franchise.

Low CASA ratio

The bank’s deposit franchise includes a niche NRI customer base that contributes a

meaningful 13.7% of total deposits (15.5% in 2QFY2011), out of which low-cost

NRE deposits stand at `1,500cr (5.5% of the total deposits). If the low-cost NRE

deposits are taken into account along with CASA deposits, it still ends up at 27.9%

of total deposits which is relatively lower than the industry average. Hence, going

forward, we expect the cost of funds to increase faster due to the bank’s low CASA

deposit ratio and expect calculated NIMs to trend down to a more sustainable

2.6% in FY2012E from 2.8% in FY2011E

Outlook and Valuation

Post the recent correction, the stock is trading at 1.3x FY2012E ABV. We believe

that the stock is trading expensive relative to its peers as well as its own historical

range. Hence, we remain Neutral on the stock.