We upgrade South Indian Bank (SIB) to ëBUYí after remaining cautiousfor the last
nine months as (1) Some of the structural issues we have been highlighting have
played out with the impactrunning through the P&L now (2) We do notseeNBFCs‐
like risk to SIBís gold book and Infra book risks also seem limited (3) Moderation of
return ratios and possible asset quality risks have been more than factored in with
~30% drop in P/B multiples. Upgrade to ëBUYí with a PT of Rs28/share implying
1.1x Sep‐14 book (~30% upside).
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nine months as (1) Some of the structural issues we have been highlighting have
played out with the impactrunning through the P&L now (2) We do notseeNBFCs‐
like risk to SIBís gold book and Infra book risks also seem limited (3) Moderation of
return ratios and possible asset quality risks have been more than factored in with
~30% drop in P/B multiples. Upgrade to ëBUYí with a PT of Rs28/share implying
1.1x Sep‐14 book (~30% upside).
! Large part of structural challenges recognized: Structural issues like low CASA,
NRI deposit de-reg, low PSL compliance and high dependence on low credit
costs to deliver ROAs were the key reasons for our UW rating for the last nine
months. Though low CASA remains, issues like NRI de-reg deposit is fully
recognised and ~60bps of credit costs in FY13 has led to consensus increasing
their credit costs expectations. Also, PSL compliance has improved from FY12
(31% from <25 a="" and="" expects="" from="" here="" levels="" mgt.="" nbsp="" on.="" p="" recovery="" steady="">! Asset quality manageable; Gold book risk not as high as NBFCs: (1) SIB's Infra
book is <20 and="" disclosures="" exposure="" limited="" on="" p="" power="" private="" risk="" road="" shows="">(2) Ex-NAFED, corporate book asset quality remained robust, given high share of
secured funding (3) Gold portfolio at ~20% of loans remains a risk with falling
gold prices. However, management discussions indicate that >90% LTV portfolio
is "nil" currently and hence, risk in that book is lower than that for NBFCs.
! Return ratios come‐off but valuations down further; Upgrade to ëBUYí: In line
with our earlier expectations, ROAs for SIBs have come down to <1 1.15="" from="" nbsp="" p="">in FY11-13. However, ~30% fall in valuations in the last nine months does reflect
the ROA deterioration and asset quality risks. Admittedly, leverage levels for SIB
remain unsustainable (no risk weight on gold loans currently) but even adjusting
for that, we believe ROEs of ~15-16% is reasonable considering valuations at
0.75x Mar-15 book. Upgrade to ëBUYí, with PT of Rs28/share (~30% upside)
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