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Syndicate Bank reported NII of INR 11.5 bn (up 60.2% Y-o-Y, 3.8% Q-o-Q) in
Q3FY11, ahead of our estimate (INR 11.17 bn), aided by stable margins (to 3.58%)
and strong loan book growth (6% Q-o-Q). On account of weak traction in exchange
income (down 26% Q-o-Q), core fee income declined 9% sequentially. Slippages
came in a tad higher at INR 4.0 bn (1.7%) against INR 3.15 bn run rate during the
previous two quarters. Provision coverage improved sequentially by 1 percentage
point to 74%. Bucking the industry trend, deposit growth (7% Q-o-Q) came in
higher than advances growth; hence, the bank’s CD ratio declined sequentially by 2
percentage points to 80%. CASA ratio remained stable at 34%. On account of lower–
than-expected fee income and higher loan loss provisioning, PAT came in at INR 2.56
bn (up 8% Q-o-Q, 25% Y-o-Y), below our estimate (INR 2.8 bn).
Stable margins
During the quarter, drawing upon asset/liability re-pricing benefit, the bank’s
NIMs expanded sequentially by 3bps (to 3.58%) despite sequential decline in CD
ratio (down 200bps to 80%) and (1% pt) decline in CASA ratio (to 34%). Going
forward, management expects to maintain NIMs at 3.4% plus level.
Slippages disappoint; provisioning improves
Syndicate Bank’s incremental slippages in Q3FY11 came in a tad higher at
INR 4.0 bn (1.7%) against INR 3.15 bn run rate during the previous two
quarters. A few large accounts contributed INR 1.5 bn to slippages, which
management expects to upgrade/recover before end of the current financial
year. Gross NPA increased sequentially by 9% to INR 23.4 bn (2.32%) while net
NPAs jumped 4% to INR 9.4 bn (0.85%). On account of higher provisioning
(credit cost at 174bps), provision coverage (adjusted for write offs) improved
sequentially by 1 percentage point to 74%. Restructured assets stood at
INR 40.3 bn (4.04%). During the quarter, INR 200 mn of restructured book
slipped, taking total slippages to INR 5 bn (12% of restructured book).
Outlook and valuations: Core performance improves; maintain ‘BUY’
Over the past three quarters, margin expansion has played out well (up 123bps
to 3.58%). After a weak loan book growth over H1 (3.5% YTD), the momentum
picked up during Q3FY11. The stock is currently trading at 0.9x FY12E adjusted
book and 4.5x FY12E earnings, delivering RoEs of ~20%. The risk-reward
continues to remain favourable at current valuations. We maintain ‘BUY/Sector
Performer’.
Business momentum picked up
After recording a weak loan book growth during H1FY11 (3.5% YTD), Syndicate Bank
recorded 6% Q-o-Q growth during Q3FY11 (15% Y-o-Y). Bucking the industry trend,
deposit growth (7% Q-o-Q) came in higher than advances growth; hence, CD ratio
declined sequentially by 2 percentage points to 80%. CASA deposits failed to keep pace
with strong growth in overall deposits. So CASA ratio declined sequentially by 1
percentage point to 34%. Management has guided for 20% Y-o-Y advances growth and
18% Y-o-Y deposits growth during FY11.
Other income declines sequentially
Other income (ex-treasury) contracted 9% sequentially on account of weak tractions in
exchange income (down 26% Q-o-Q). Income from commission, exchange and
brokerage remained strong (up 14% Q-o-Q). Treasury profits came in at INR 90 mn.
Other highlights:
• Second pension estimate for the bank stands at INR 12 bn. During the quarter the
bank provided INR 1.3 bn towards second pension option.
• Liability towards gratuity stood at INR 3.5 bn; during Q3FY11 management provided
INR 400 mn (INR 1.5 bn YTD).
• Cost-income ratio stood at 48%, higher than 42% in Q2FY11, as the provisions for
staff expenses during Q2FY11 were captured in other provisions, against staff
expenses during the current quarter.
• Tier I was at 7.84%.
Company Description
Syndicate Bank is a mid-sized PSU bank, with the eight-largest branch network and
tenth-largest asset book among Indian banks. The bank has evolved from being a strong
regional player to a formidable national player with improving fundamentals. The bank
has a balance sheet size of more than INR 1.4 tn and a deposit base of INR 1.2 tn. It has
2,182 branches across India and 96% of its business is covered under CBS. The
government holding in the bank is 66.5% and FIIs own 4.8% as of December 2010.
Investment Theme
We expect Syndicate Bank to generate ~18% average RoE, supported by strong asset
growth and low operating expense. Syndicate Bank is a well-managed bank with a strong
regional presence. Considering the expected growth in EPS as well as the bank’s high
RoE over FY11-12E, we believe the stock is attractively priced at 0.9x FY12 adjusted
book.
Key Risks
Continued aggressive growth at the cost of margins could hamper our estimates.
Aggressive loan growth can lead to higher (than system) NPL accretion, in case of an
economic slow-down.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Syndicate Bank reported NII of INR 11.5 bn (up 60.2% Y-o-Y, 3.8% Q-o-Q) in
Q3FY11, ahead of our estimate (INR 11.17 bn), aided by stable margins (to 3.58%)
and strong loan book growth (6% Q-o-Q). On account of weak traction in exchange
income (down 26% Q-o-Q), core fee income declined 9% sequentially. Slippages
came in a tad higher at INR 4.0 bn (1.7%) against INR 3.15 bn run rate during the
previous two quarters. Provision coverage improved sequentially by 1 percentage
point to 74%. Bucking the industry trend, deposit growth (7% Q-o-Q) came in
higher than advances growth; hence, the bank’s CD ratio declined sequentially by 2
percentage points to 80%. CASA ratio remained stable at 34%. On account of lower–
than-expected fee income and higher loan loss provisioning, PAT came in at INR 2.56
bn (up 8% Q-o-Q, 25% Y-o-Y), below our estimate (INR 2.8 bn).
Stable margins
During the quarter, drawing upon asset/liability re-pricing benefit, the bank’s
NIMs expanded sequentially by 3bps (to 3.58%) despite sequential decline in CD
ratio (down 200bps to 80%) and (1% pt) decline in CASA ratio (to 34%). Going
forward, management expects to maintain NIMs at 3.4% plus level.
Slippages disappoint; provisioning improves
Syndicate Bank’s incremental slippages in Q3FY11 came in a tad higher at
INR 4.0 bn (1.7%) against INR 3.15 bn run rate during the previous two
quarters. A few large accounts contributed INR 1.5 bn to slippages, which
management expects to upgrade/recover before end of the current financial
year. Gross NPA increased sequentially by 9% to INR 23.4 bn (2.32%) while net
NPAs jumped 4% to INR 9.4 bn (0.85%). On account of higher provisioning
(credit cost at 174bps), provision coverage (adjusted for write offs) improved
sequentially by 1 percentage point to 74%. Restructured assets stood at
INR 40.3 bn (4.04%). During the quarter, INR 200 mn of restructured book
slipped, taking total slippages to INR 5 bn (12% of restructured book).
Outlook and valuations: Core performance improves; maintain ‘BUY’
Over the past three quarters, margin expansion has played out well (up 123bps
to 3.58%). After a weak loan book growth over H1 (3.5% YTD), the momentum
picked up during Q3FY11. The stock is currently trading at 0.9x FY12E adjusted
book and 4.5x FY12E earnings, delivering RoEs of ~20%. The risk-reward
continues to remain favourable at current valuations. We maintain ‘BUY/Sector
Performer’.
Business momentum picked up
After recording a weak loan book growth during H1FY11 (3.5% YTD), Syndicate Bank
recorded 6% Q-o-Q growth during Q3FY11 (15% Y-o-Y). Bucking the industry trend,
deposit growth (7% Q-o-Q) came in higher than advances growth; hence, CD ratio
declined sequentially by 2 percentage points to 80%. CASA deposits failed to keep pace
with strong growth in overall deposits. So CASA ratio declined sequentially by 1
percentage point to 34%. Management has guided for 20% Y-o-Y advances growth and
18% Y-o-Y deposits growth during FY11.
Other income declines sequentially
Other income (ex-treasury) contracted 9% sequentially on account of weak tractions in
exchange income (down 26% Q-o-Q). Income from commission, exchange and
brokerage remained strong (up 14% Q-o-Q). Treasury profits came in at INR 90 mn.
Other highlights:
• Second pension estimate for the bank stands at INR 12 bn. During the quarter the
bank provided INR 1.3 bn towards second pension option.
• Liability towards gratuity stood at INR 3.5 bn; during Q3FY11 management provided
INR 400 mn (INR 1.5 bn YTD).
• Cost-income ratio stood at 48%, higher than 42% in Q2FY11, as the provisions for
staff expenses during Q2FY11 were captured in other provisions, against staff
expenses during the current quarter.
• Tier I was at 7.84%.
Company Description
Syndicate Bank is a mid-sized PSU bank, with the eight-largest branch network and
tenth-largest asset book among Indian banks. The bank has evolved from being a strong
regional player to a formidable national player with improving fundamentals. The bank
has a balance sheet size of more than INR 1.4 tn and a deposit base of INR 1.2 tn. It has
2,182 branches across India and 96% of its business is covered under CBS. The
government holding in the bank is 66.5% and FIIs own 4.8% as of December 2010.
Investment Theme
We expect Syndicate Bank to generate ~18% average RoE, supported by strong asset
growth and low operating expense. Syndicate Bank is a well-managed bank with a strong
regional presence. Considering the expected growth in EPS as well as the bank’s high
RoE over FY11-12E, we believe the stock is attractively priced at 0.9x FY12 adjusted
book.
Key Risks
Continued aggressive growth at the cost of margins could hamper our estimates.
Aggressive loan growth can lead to higher (than system) NPL accretion, in case of an
economic slow-down.
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