South Indian Bank Q3FY11- Strong results; upgrade to BUY; Target: Rs 30: Emkay

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South Indian Bank

Strong results; upgrade to BUY

BUY

CMP: Rs 22                                       Target Price: Rs 30

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n     SIB’s Q3FY11 net profit at Rs753mn was better than consensus estimates (in line with ours) driven by strong 38.3%yoy growth in NII

n     The NII growth was led by a strong 6.4%qoq growth in advances and stable NIMs. Some part of the growth was back ended during the quarter

n     The asset quality remained stable with GNPA at 1.3% and NNPA at 0.4%. Provision cover stood strong at 71%.

n     We remain extremely positive with strong RoEs + robust Tier I + clean asset quality. Recent correction provides good entry point. Upgrade to BUY. High gold loan portfolio a key risk

NII growth inline with expectation

SIB’s NII for the quarter has grown by 38.3% yoy driven by 32.3% yoy (6.4% qoq)

growth in advances, even as the NIMs remained stable at 3%. Despite strong growth in

deposits, the cost of funds has gone up by just 6bps qoq.

Some back ended growth pushes up deposit/advances growth

SIB has grown its deposits by aggressive 7% qoq to take advantage of some lending

opportunities which arose at the back end of the quarter. And hence, the growth in term

deposits was high at 12.1% qoq. As a result the CASA proportion has also declined by

147bps to 22.4%. The advances also grew by strong 6.4% qoq to Rs189bn

Fee income growth strong

The fee income (including forex and others) has shown a strong growth of 18.2% yoy and

3.6% qoq. We believe that for SIB the CEB portion is likely to grow at slower pace due to

lower income from products like TT/DD etc.

Strong growth in core operating profit

The core operating profit has grown by strong 70.6% yoy driven by strong operating

revenues. During the quarter, SIB has also provided Rs123mn for pension provisions of the

total required provisions of Rs1.5bn.

Higher tax rate in Q3FY10 helps further

While SIB’s operating performance was strong, it was further aided by higher effective tax

rate in Q3FY10. Compared to 48.3% effective tax rate in Q3FY10, the tax rate in Q3FY11

was at 33.3% resulting in sharp swing in the profit after tax. As a result, though the profit

before tax grew by 50.4% yoy, the profit after tax grew by 94.0% yoy.

Asset quality remains stable; slippages controlled

The asset quality remains stable during the quarter with GNPA and NNPA remaining flat at

1.3% and 0.4%.

CAR remains extremely comfortable

The tier I CAR for the quarter was extremely strong at 12.3%. We believe that SIB would

not need any funds for growth for at least next two years. SIB has benefited from the

composition of loan book in favour of loans against gold, small savings and deposits

resulting in lower RWAs.

Valuations and view

High RoEs (20% over FY11-12E), high tier I CAR (12.3%) along with low NPAs, ,makes SIB

one of the best bets amongst the old private sector banks. We find the valuations at 1.5x

FY11E ABV and 1.2x FY12 ABV, extremely attractive and recent correction in the stock

provides good entry point. Upgrade to BUY with price target of Rs30. Higher concentration

of gold loans (20%) in loan portfolio is key risk to the bank.