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South Indian Bank
Call with the CEO – Key takeaways
Event
We had a quick chat with the CEO Dr. Joseph of South Indian Bank (SIB IN,
Not rated, CMP R25).
Impact
Several qualitative changes done over the past five years, hence
business performance has improved: In the past 5 years, the bank has
fully transitioned to CBS (core banking solution), which was not the case
earlier, re-branded itself and also brought down significantly the average age
of the workforce. 43% of the workforce now is less than 30 years of age and
the average age of workforce now is 39 years. The bank introduced a VRS
(Voluntary Retirement Scheme so that older employees retire) and recruited
new staff at higher salaries. Even the employees now have been given
ESOPs (total ESOPs allotted are 5% of the equity capital), which was not the
case earlier. As a result, overall productivity has improved and business
growth has been strong at 25% CAGR over the past 5 years.
Concentration of gold loans unlikely to be a material risk: Unlike NBFCs,
which charge sizable rates at 20%+ and still double their loan book, the
bank’s yield on gold loans is around 12–13% and it is confident of sustaining
30%+ growth rates here. Secondly, the average LTV is around 70% and there
is unlikely to be a 30% price correction in gold prices within a quarter as the
average duration of these loans are 4 months due to high pre-payments.
Overall, 90% of its loan book is secured.
No issue with respect to brand recognition and business in Northern
areas: Though a large amount of business comes from the South, the bank
has been in a position to achieve good traction even in Northern areas. In
fact, out of the Rs600bn of business it targets this year, nearly 50% is
expected to come from five main cities, which are Mumbai, Delhi, Bangalore,
Calcutta and Hyderabad. Its business from the city of Delhi has gone up from
Rs4bn to Rs55bn within a span of 5–6 years.
Strong liabilities franchise – low cost deposits including NRI deposits is
around 35%: Though CASA has been at 22%, including the NRI deposits
(FCNR, NRE, etc.) the deposit mix is 35% and these NRI deposits have
interest rates less than 4%. Hence it has a good deposit base which keeps
cost of funds low. Also, the issue with small private sector banks in getting
corporate or Govt CASA is that the large PSUs don’t give CASA deposits
unless the net worth of the bank is at least around Rs25bn.
Targeting bringing down cost-income ratio to 45% in the near term: The
bank has maintained cost-income ratio at 47%. However, that is likely to
improve and come down to 45%. It had high employee provisions due to
wage hike arrears and pensions for retired employees, which it had to take in
FY11 and these are unlikely to recur in FY12E.
Outlook
Valuations inexpensive: The stock trades at closer to 1.2x FY13E P/BV for
ROEs around 18%, based on Bloomberg consensus estimates. This doesn’t
incorporate equity dilution, which management is guiding, but assuming 20%
equity dilution, the stock would trade closer to 1.0–1.1x P/BV.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
South Indian Bank
Call with the CEO – Key takeaways
Event
We had a quick chat with the CEO Dr. Joseph of South Indian Bank (SIB IN,
Not rated, CMP R25).
Impact
Several qualitative changes done over the past five years, hence
business performance has improved: In the past 5 years, the bank has
fully transitioned to CBS (core banking solution), which was not the case
earlier, re-branded itself and also brought down significantly the average age
of the workforce. 43% of the workforce now is less than 30 years of age and
the average age of workforce now is 39 years. The bank introduced a VRS
(Voluntary Retirement Scheme so that older employees retire) and recruited
new staff at higher salaries. Even the employees now have been given
ESOPs (total ESOPs allotted are 5% of the equity capital), which was not the
case earlier. As a result, overall productivity has improved and business
growth has been strong at 25% CAGR over the past 5 years.
Concentration of gold loans unlikely to be a material risk: Unlike NBFCs,
which charge sizable rates at 20%+ and still double their loan book, the
bank’s yield on gold loans is around 12–13% and it is confident of sustaining
30%+ growth rates here. Secondly, the average LTV is around 70% and there
is unlikely to be a 30% price correction in gold prices within a quarter as the
average duration of these loans are 4 months due to high pre-payments.
Overall, 90% of its loan book is secured.
No issue with respect to brand recognition and business in Northern
areas: Though a large amount of business comes from the South, the bank
has been in a position to achieve good traction even in Northern areas. In
fact, out of the Rs600bn of business it targets this year, nearly 50% is
expected to come from five main cities, which are Mumbai, Delhi, Bangalore,
Calcutta and Hyderabad. Its business from the city of Delhi has gone up from
Rs4bn to Rs55bn within a span of 5–6 years.
Strong liabilities franchise – low cost deposits including NRI deposits is
around 35%: Though CASA has been at 22%, including the NRI deposits
(FCNR, NRE, etc.) the deposit mix is 35% and these NRI deposits have
interest rates less than 4%. Hence it has a good deposit base which keeps
cost of funds low. Also, the issue with small private sector banks in getting
corporate or Govt CASA is that the large PSUs don’t give CASA deposits
unless the net worth of the bank is at least around Rs25bn.
Targeting bringing down cost-income ratio to 45% in the near term: The
bank has maintained cost-income ratio at 47%. However, that is likely to
improve and come down to 45%. It had high employee provisions due to
wage hike arrears and pensions for retired employees, which it had to take in
FY11 and these are unlikely to recur in FY12E.
Outlook
Valuations inexpensive: The stock trades at closer to 1.2x FY13E P/BV for
ROEs around 18%, based on Bloomberg consensus estimates. This doesn’t
incorporate equity dilution, which management is guiding, but assuming 20%
equity dilution, the stock would trade closer to 1.0–1.1x P/BV.
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