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Steady core operating performance continues
South Indian Bank’s (SIB) core operating performance was strong in Q4FY11.
Net interest income (NII) grew 8% Q-o-Q to INR 2.2 bn (in line with estimates),
led by advances growth of 7% Q-o-Q and less-than-expected contraction (2bps)
in NIMs to 2.84% (since the bank could maintain lending spreads, despite rising
deposit costs). Core fee income, at INR 155 mn (up 20% Y-o-Y, 15% Q-o-Q),
came in line with our estimate. PAT stood at INR 818 mn (up 9% Q-o-Q), ahead
of our estimate, also supported by NPL write-back. Asset quality performance
continues to impress with lower slippages at 0.5% and 9%, and 19% decline in
GNPL and NNPL sequentially.
Above-average business growth
SIB’s business growth continued its strong traction, with advances growth at
~27% Y-o-Y and 7% Q-o-Q, to INR 204.9 bn. Gold loans portfolio has doubled
over the last year and contributes ~14% of the total book. Deposits grew 29%
Y-o-Y and 10% Q-o-Q to INR 297.2 bn. However, SIB’s CASA ratio declined
90bps Q-o-Q, to 21.5%. NRE deposits contributed ~13% to total deposits.
Asset quality performance impressive
Slippage during the quarter came in at INR 218 mn (0.5% annualised), well
below the industry average. During the quarter, the bank witnessed INR 40 mn
write-back of NPL provisions. Gross NPAs declined 9% Q-o-Q to INR 2.3 bn
(1.1%), while net NPAs declined 19% Q-o-Q to INR 600 mn (0.3%). Provision
coverage remained stable at 71%.
Outlook and valuations: Consistent performer; maintain ‘BUY’
The bank reported strong core operating performance in Q4FY11. Business
growth remained healthy and above industry, while margin contraction was
below expectation. Asset quality performance continues to improve. The stock is
currently trading at 1.2x FY12E book, reasonably attractive for a bank delivering
RoE of 18-19%. We maintain ‘BUY’ recommendation on the stock and rate it
‘Sector Performer’ on relative return basis.
Company Description
SIB, a private sector bank, was incorporated at Thrissur in Kerala, south India. The bank
has a pan- India presence with a network of over 550 branches and over 300 ATMs
across 23 states, and 2 Union Territories. ~56% of the branches are in Kerala.
SIB came out with an IPO in 1998, followed it up with a rights issue of 1:3 at a premium
of INR 30 in 2004, and came out with a follow on public issue at INR 66 in 2006. SIB
raised equity capital of INR 3.26bn (20m shares at Rs163/share) through a Qualified
Institutional Placement in September 2007.
The new management’s efforts at improving the bank’s operating performance are
visible with improvement in return on assets (RoA) to 1% in FY09 from 0.1% in FY05.
Over the past four years, the bank has achieved considerable progress in terms of
bringing profitability focus among branches, re-energizing employees, improving asset
quality, and creating greater brand awareness and technology coverage. The employee
compensation has been linked to performance and union clout has diminished. The rebranding
exercise of bank has created greater brand re-call and awareness among
customers. The bank has implemented core banking solution (CBS) platform covering
the entire business. We believe the present management is innovative and dynamic, and
so far superior to other regional banks’ management.
Investment Theme
South Indian Bank is one of the best regional-based private banks in the country. We
like the bank for its strong regional presence, good technology network, and possible
M&A play. SIB generates decent margins on the back of its structurally strong deposit
franchise. Around 30% of its deposits comprise low-cost current account and savings
account (CASA) deposits, and non-residential external (NRE) deposits. Of this, 24% is
CASA deposits and 6% NRE deposits, (where the bank pays lower interest), which
collectively enable the bank to contain its deposit costs. It offers an attractive play on
robust loan growth, improving asset quality, and consolidation in the Indian banking
space.
Key Risks
• System wide economic slowdown will lead to a sharp deterioration in asset quality
and lower than anticipated recoveries.
• Slowdown in business growth is a key systematic risk for the bank as 80% of total
revenues are derived from net interest income. Being a mid-sized bank, it does not
have huge diversification option.
• Disruption by employee union and the management’s inability to sustain pace of
reforms could cause concern.
• Redemption in NRE deposit base will lead to rise in cost of funds thereby impacting
margin.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steady core operating performance continues
South Indian Bank’s (SIB) core operating performance was strong in Q4FY11.
Net interest income (NII) grew 8% Q-o-Q to INR 2.2 bn (in line with estimates),
led by advances growth of 7% Q-o-Q and less-than-expected contraction (2bps)
in NIMs to 2.84% (since the bank could maintain lending spreads, despite rising
deposit costs). Core fee income, at INR 155 mn (up 20% Y-o-Y, 15% Q-o-Q),
came in line with our estimate. PAT stood at INR 818 mn (up 9% Q-o-Q), ahead
of our estimate, also supported by NPL write-back. Asset quality performance
continues to impress with lower slippages at 0.5% and 9%, and 19% decline in
GNPL and NNPL sequentially.
Above-average business growth
SIB’s business growth continued its strong traction, with advances growth at
~27% Y-o-Y and 7% Q-o-Q, to INR 204.9 bn. Gold loans portfolio has doubled
over the last year and contributes ~14% of the total book. Deposits grew 29%
Y-o-Y and 10% Q-o-Q to INR 297.2 bn. However, SIB’s CASA ratio declined
90bps Q-o-Q, to 21.5%. NRE deposits contributed ~13% to total deposits.
Asset quality performance impressive
Slippage during the quarter came in at INR 218 mn (0.5% annualised), well
below the industry average. During the quarter, the bank witnessed INR 40 mn
write-back of NPL provisions. Gross NPAs declined 9% Q-o-Q to INR 2.3 bn
(1.1%), while net NPAs declined 19% Q-o-Q to INR 600 mn (0.3%). Provision
coverage remained stable at 71%.
Outlook and valuations: Consistent performer; maintain ‘BUY’
The bank reported strong core operating performance in Q4FY11. Business
growth remained healthy and above industry, while margin contraction was
below expectation. Asset quality performance continues to improve. The stock is
currently trading at 1.2x FY12E book, reasonably attractive for a bank delivering
RoE of 18-19%. We maintain ‘BUY’ recommendation on the stock and rate it
‘Sector Performer’ on relative return basis.
Company Description
SIB, a private sector bank, was incorporated at Thrissur in Kerala, south India. The bank
has a pan- India presence with a network of over 550 branches and over 300 ATMs
across 23 states, and 2 Union Territories. ~56% of the branches are in Kerala.
SIB came out with an IPO in 1998, followed it up with a rights issue of 1:3 at a premium
of INR 30 in 2004, and came out with a follow on public issue at INR 66 in 2006. SIB
raised equity capital of INR 3.26bn (20m shares at Rs163/share) through a Qualified
Institutional Placement in September 2007.
The new management’s efforts at improving the bank’s operating performance are
visible with improvement in return on assets (RoA) to 1% in FY09 from 0.1% in FY05.
Over the past four years, the bank has achieved considerable progress in terms of
bringing profitability focus among branches, re-energizing employees, improving asset
quality, and creating greater brand awareness and technology coverage. The employee
compensation has been linked to performance and union clout has diminished. The rebranding
exercise of bank has created greater brand re-call and awareness among
customers. The bank has implemented core banking solution (CBS) platform covering
the entire business. We believe the present management is innovative and dynamic, and
so far superior to other regional banks’ management.
Investment Theme
South Indian Bank is one of the best regional-based private banks in the country. We
like the bank for its strong regional presence, good technology network, and possible
M&A play. SIB generates decent margins on the back of its structurally strong deposit
franchise. Around 30% of its deposits comprise low-cost current account and savings
account (CASA) deposits, and non-residential external (NRE) deposits. Of this, 24% is
CASA deposits and 6% NRE deposits, (where the bank pays lower interest), which
collectively enable the bank to contain its deposit costs. It offers an attractive play on
robust loan growth, improving asset quality, and consolidation in the Indian banking
space.
Key Risks
• System wide economic slowdown will lead to a sharp deterioration in asset quality
and lower than anticipated recoveries.
• Slowdown in business growth is a key systematic risk for the bank as 80% of total
revenues are derived from net interest income. Being a mid-sized bank, it does not
have huge diversification option.
• Disruption by employee union and the management’s inability to sustain pace of
reforms could cause concern.
• Redemption in NRE deposit base will lead to rise in cost of funds thereby impacting
margin.
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