Multiple challenges
South Indian Bank (SIB) has a plateful of challenges, with little
diversification outside its home state Kerala, a weak liability franchise,
no improvement on fee income generation, slowing asset growth and
rising credit costs. The bank has a 57% exposure to corporate loans
and a coverage ratio of 29%, and thus, it has a small margin of error
on asset quality. We expect SIB’s financial performance to be volatile
and we expect RoAs to fall below 1% in the near term. We change our
stance to SELL.
Competitive position: WEAK Changes to this position: NEGATIVE
Fares poorly in comparison to peers: As discussed in the thematic section,
SIB emerges as the weakest franchise among its regional bank peers. A high
geographical concentration in the intensely competitive state of Kerala had led
to a weak liability franchise (CA: 3.5%, CASA: 21%). SIB has made little
progress on its longstanding weakness in fee income generation (fee income
to assets below 60bps). With a 57% exposure to corporate loans and a low
provision coverage ratio of 29%, SIB is weakly cushioned to any adverse asset
quality shocks.
Growth slowdown with subdued profitability: SIB’s FY13 loan growth has
slowed down to 17% from an average of 28% in FY08-12. Excluding gold
loans, growth is even weaker at ~12%. With gold loan growth coming to a
halt, we expect further weakness in growth going forward. We do not expect
any near-term improvement in NIM, as the liability franchise would show no
improvement. Similarly, we expect credit costs to remain elevated at ~68bps
(vs 56bps in FY13 and average 27bps in FY08-12) due to a difficult external
environment and high exposure to corporate loans.
Management change due in September 2014: The six-year tenure of the
current MD & CEO, Dr. V. A. Joseph, will end in September 2014. In the year
ahead, the uncertainty on the new MD & CEO and change in strategy post the
transition would add further risk to this franchise.
SELL stance with a target price of `20: We change our stance to SELL with
a valuation of `20 (implied FY14E P/ABV of 0.75x and FY14 P/E of 5.0x) as we
expect profitability to remain subdued (average RoA of ~0.95% over FY14-
15), with slowing asset growth (19% CAGR in FY13-15 vs 25% CAGR in FY10-
13). Our previous valuation for SIB was `29. The 31% drop in our valuation is
driven by lower valuation multiples due to our concerns on multiple structural
issues faced by the bank. Key risks to our SELL stance are a better-thanexpected recovery in the macro-economic environment and takeover interest
from an incumbent or a new banking licence recipient looking to expand in
south India.
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South Indian Bank (SIB) has a plateful of challenges, with little
diversification outside its home state Kerala, a weak liability franchise,
no improvement on fee income generation, slowing asset growth and
rising credit costs. The bank has a 57% exposure to corporate loans
and a coverage ratio of 29%, and thus, it has a small margin of error
on asset quality. We expect SIB’s financial performance to be volatile
and we expect RoAs to fall below 1% in the near term. We change our
stance to SELL.
Competitive position: WEAK Changes to this position: NEGATIVE
Fares poorly in comparison to peers: As discussed in the thematic section,
SIB emerges as the weakest franchise among its regional bank peers. A high
geographical concentration in the intensely competitive state of Kerala had led
to a weak liability franchise (CA: 3.5%, CASA: 21%). SIB has made little
progress on its longstanding weakness in fee income generation (fee income
to assets below 60bps). With a 57% exposure to corporate loans and a low
provision coverage ratio of 29%, SIB is weakly cushioned to any adverse asset
quality shocks.
Growth slowdown with subdued profitability: SIB’s FY13 loan growth has
slowed down to 17% from an average of 28% in FY08-12. Excluding gold
loans, growth is even weaker at ~12%. With gold loan growth coming to a
halt, we expect further weakness in growth going forward. We do not expect
any near-term improvement in NIM, as the liability franchise would show no
improvement. Similarly, we expect credit costs to remain elevated at ~68bps
(vs 56bps in FY13 and average 27bps in FY08-12) due to a difficult external
environment and high exposure to corporate loans.
Management change due in September 2014: The six-year tenure of the
current MD & CEO, Dr. V. A. Joseph, will end in September 2014. In the year
ahead, the uncertainty on the new MD & CEO and change in strategy post the
transition would add further risk to this franchise.
SELL stance with a target price of `20: We change our stance to SELL with
a valuation of `20 (implied FY14E P/ABV of 0.75x and FY14 P/E of 5.0x) as we
expect profitability to remain subdued (average RoA of ~0.95% over FY14-
15), with slowing asset growth (19% CAGR in FY13-15 vs 25% CAGR in FY10-
13). Our previous valuation for SIB was `29. The 31% drop in our valuation is
driven by lower valuation multiples due to our concerns on multiple structural
issues faced by the bank. Key risks to our SELL stance are a better-thanexpected recovery in the macro-economic environment and takeover interest
from an incumbent or a new banking licence recipient looking to expand in
south India.
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