Q3FY13 Result Update
South Indian Bank
Buy
Target Price: Rs31
CMP: Rs28
Upside: 10%
Well rounded performance
SIB’s earnings performance for Q3FY13 was well rounded with PPP surprising positively though bottomline was in line. Absence of interest reversal and benefit of capital raising led to NIM expansion. Asset quality improved as 1) slippage rate came off to 0.75% 2) %GNPA improved by 10bps and 3) restructured assets were largely stable at 4.6% of loans. We maintain Buy rating and tweak our price target upwards to Rs31 (1.3x FY14E ABVPS).
m NIM expands by ~44bps QoQ, Loan growth moderates to ~18%: NII grew by 29% YoY led by moderate but healthy credit growth (17.5% YoY) while calculated NIM expanded by 44bps sequentially. NIM improvement can traced to the absence of interest income reversal and benefit of capital raising done recently. Given the anticipated focus on agri advances and diminished benefit of capital raising, Q4FY13 NIMs are likely to normalise downwards.
m Asset quality holds up well: After one-off asset quality shock in the previous quarter, SIB reported improvement in asset quality matrix with 1) %GNPA easing by ~10bps QoQ to 1.65% 2) restructured loans remaining largely stale at 4.6% of loans and 3) slippage rate contained at 0.75%. Importantly, the provisioning coverage ratio has been shored up by ~750bps to 58.6% (w/o tech write offs) by utilizing the healthy core performance. NAFED exposure remains to be resolved with GoI suggesting a 40% haircut (53% provided already with the target to reach 60% by FY13). Broadly, the management expects asset quality to improve going forward on the back of possible resolution of NAFED exposure and recoveries from the branch fraud exposure.
m Loan growth moderates further, despite capital infusion: The advances book grew by 17.5% YoY, a clear moderation from 30%+ growth in FY12 and 23% growth rate in Q2FY13. The moderation in loan growth, despite recent capital infusion stems from 1) management’s cautious stance on asset quality and 2) increased competition from PSBs in the agriculture loan segment which has hampered demand for gold loans (agri related). The current priority sector advances form ~20% of loans with management turning aggressive in shoring up agri portfolio by 1) deploying additional staff for the segment 2) offering better interest rates and 3) exploiting the revised RBI classification of agri advances. Despite these, priority sector compliance remains a challenge with the management guiding for a shortfall of 7-8% for FY13.
m Upgrade to Buy: The stock has seen a smart run up and has given 22% return since our initiation in Aug’12. At the current market price of Rs28, the stock trades at 5.4x FY2014E EPS and 1.2x FY2014E ABVPS. While the current valuation of 1.2x FY14E ABV is well above the 3 yr average, we believe that the stock still leaves decent upside led by strong RoE (~20% currently) and consistency in return ratios over the past seven years. We upgrade the stock to Buy with a revised target price of Rs31 (upside of 10%).
Thanks & Regards,
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