Management Interaction Takeaways
South Indian Bank
We have interacted with the management of South Indian Bank and following are the key takeaways from the same:-
m Asset quality stable: After the double whammy (NAFED & branch fraud) in Q2FY13 earnings, Q3FY13 has been a quieter quarter on asset quality front according to the management implying less likelihood of major deviations in terms of slippages or restructuring. The management expects to report improvement in GNPA on a sequential basis (%GNPA had risen to 1.74% in Q2FY13 and 68% QoQ). The management expects the Q3FY13 GNPA to come down to 1.5-1.6% led by one account (exposure of Rs 500mn) which was recognized as NPA previously but has been restructured subsequently. On the restructuring front, the bank has already restructured the entire lending to Rajasthan and UPSEB and there has been regular interest servicing till date. The TNSEB exposure continues to remain a standard asset.
m Update on NAFED: The management shared that there was no significant progress in terms of recovery in the case of NAFED exposure and the branch fraud case. On NAFED exposure (originally at Rs1500mn), the management is pursuing one-time settlement of the exposure and given that the entity is government owned, final settlement could take some time due to mandatory approvals from various ministries. The eventual compromise on the exposure could be in 30-40% range, requiring additional provisioning on the exposure (15% provisioning done already). The bank has already recognized Rs. 400mn during the last quarter and the balance if any (likely to be small) would be recognized in future.
m Update on branch fraud case: On the exposure in branch fraud (~Rs320mn), the bank has safeguarded itself by 1) creating security of Rs120mn on certain assets 2) Rs100mn insurance and 3) 100% provisioning in Q2FY13 itself. The exposure is sufficiently provided for and hence there will be only reversal of provisions as the recovery process progresses. As this is a criminal case, the management is not clear on the possible timeline of the recovery but could materialize over next 2-3 quarters. Following the incident, the management has tightened branch processes and increased scrutiny and monitoring of securities/collaterals besides increasing staff strength in the surveillance division.
m NIM likely to expand sequentially: The management expects to improve NIMs on a sequential basis, which is in line with our expectations given that Q2FY13 NIM was adversely impacted by the reversal of interest income (Rs220mn) on NAFED exposure. Moreover, the benefit of easing in wholesale deposit costs too should support sequential improvement in NIM. From a medium term perspective, the bank is confident of maintaining the NIM at ~3%.
m Loan growth to remain stable: The advances book grew by 23% YoY in Q2FY13, a clear moderation from 30%+ growth in FY2012. The management expects to maintain a similar level of credit growth in Q3FY13 as well given that they have not witnessed significant improvement in 1) pace of disbursement requests from past sanctions, 2) bankable credit proposals and 3) lackluster demand from the agriculture segment due to interest subvention for PSBs. However, in the light of reforms vigor shown by the government, there is gradual improvement in business sentiments which could lead to a pick up in credit offtake down the line. Following the recent amendment in priority sector lending norms by RBI, SIB is focusing on loan to housing finance companies for achieving its priority sector targets.
m Macro commentary: While sentiments in capital markets have been uplifted by reforms (FDI in retail, banking amendments etc), ground realities are lagging. However, the management is optimistic that business sentiments are gradually on the mend and can improve further if the reforms momentum continues. This, along with streamlining of project approvals and passage of Land acquisition bill etc, should pave the way for improved credit offtake. On the banking amendments bill, the management shared that most amendments were aimed at paving a lucrative yet controlled way for new banking players. The benefit of hike in voting rights cap to 26% is likely to be limited given that FII ownership in the stock (47% currently) is spread among multiple investors.
m Maintain Buy: The stock has rallied in recent months and reached our fair value of Rs27/share as street has begun to fully appreciate the strong RoE (~20% currently) and consistency in return ratios over the past seven years. Following the interaction with the management, we have revisited our numbers leading to upward revision in our fair value estimate to Rs30. We maintain our Buy recommendation on the stock.
Thanks & Regards,
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