South Indian Bank (SIB)
Buy
Target Price: Rs27
CMP: Rs23
Upside: 20%
A re-rating candidate
South Indian Bank (SIB) has consolidated its position during last few years resulting in impressively consistent return ratios. Inroad into relatively higher business potential locations (outside Kerala) is expected to enhance liability profile and branch productivity. This along with strong asset quality position should drive re-rating of the stock. At current valuation (0.9x FY14E ABV), street is not fully appreciating strong RoE, consistency in return ratios and anticipated improvement in future. We initiate coverage with a Buy.
m Consistent return ratios: SIB has come a long way from its days of high reliance on treasury gains and volatile profitability. Led by its focus on maintaining balance between growth profitability and quality, the bank has achieved significant improvement in core operations which has translated into improvement in return ratios while reducing volatility. RoaA has improved from 0.5% in FY06 to 1.1% in FY2012 while RoaE has expanded from 10% to 20% during the same period. The impressive consistency in return ratios is well brought out by one of the lowest standard deviations in return ratios in the banking industry.
m Return ratios to expand further: With the consolidation phase well behind it, SIB is geared to bridge the gap in return ratios vis-a-vis south based peers. Management’s multi-pronged strategy aided by branch expansion outside Kerala should lead to improvement in liability profile and strengthen fee income flow over medium term. Expansion outside Kerala is key to improving CD ratio, productivity of retail franchisee as well as improving liability profile.
m Robust asset quality: SIB has maintained a robust asset quality matrix driven by 1) long standing relations and regional focus which has enabled deeper understanding of customer profile and 2) strong preference for secured loans with focus on working capital loans. Moreover, ~25% exposure to the gold loan segment also adds to asset quality strength as delinquencies in this segment are negligible. Even during challenging FY12, SIB maintained its edge over south based peers on 1) slippage rate (1% vs 1.2% avg for peers) 2) GNPA (1% vs 1.9% avg for peers 3) NNPA (0.28% vs 0.37% avg for peers).
m Cheap valuation offer attractive entry point:SIB trades at a significant discount to its peers on most valuation parameters: PBV, PE and Market Cap/branch. Clearly, the street is not fully appreciating the strong RoE (~20% currently), consistency in return ratios over last seven years and the anticipated improvement in RoaA over the medium term. We believe that current valuation of 0.9x FY14E BV (near 3 yr average) is unjustified. We value the stock at 1.15x FY14E adjusted BVPS implying a fair value of Rs27 – an upside of ~20% from current level. We initiate coverage with a Buy rating.
m Return ratios to expand further: With the consolidation phase well behind it, SIB is geared to bridge the gap in return ratios vis-a-vis south based peers. Management’s multi-pronged strategy aided by branch expansion outside Kerala should lead to improvement in liability profile and strengthen fee income flow over medium term. Expansion outside Kerala is key to improving CD ratio, productivity of retail franchisee as well as improving liability profile.
m Robust asset quality: SIB has maintained a robust asset quality matrix driven by 1) long standing relations and regional focus which has enabled deeper understanding of customer profile and 2) strong preference for secured loans with focus on working capital loans. Moreover, ~25% exposure to the gold loan segment also adds to asset quality strength as delinquencies in this segment are negligible. Even during challenging FY12, SIB maintained its edge over south based peers on 1) slippage rate (1% vs 1.2% avg for peers) 2) GNPA (1% vs 1.9% avg for peers 3) NNPA (0.28% vs 0.37% avg for peers).
m Cheap valuation offer attractive entry point:SIB trades at a significant discount to its peers on most valuation parameters: PBV, PE and Market Cap/branch. Clearly, the street is not fully appreciating the strong RoE (~20% currently), consistency in return ratios over last seven years and the anticipated improvement in RoaA over the medium term. We believe that current valuation of 0.9x FY14E BV (near 3 yr average) is unjustified. We value the stock at 1.15x FY14E adjusted BVPS implying a fair value of Rs27 – an upside of ~20% from current level. We initiate coverage with a Buy rating.
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