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The stock of Syndicate Bank corrected sharply by almost 20% in
recent sessions primarily led by concerns over deterioration in
asset quality. In line with these concerns, we have also reduced
our earnings estimates by 6.5% and 16% for FY12 and FY13
respectively. Accordingly we have also reduced our target price
by 18% to Rs 122 at 0.9x ABV FY13.
However, we also believe that the current valuations (stock price)
is reflecting a collapse of profitablity and return ratios, which we
find too pessimistic. Our reverse calculations suggest that the
market is building in RoAA and RoAE of 0.3-0.35% and 8.5-9.5%
respectively. This appears extremely unlikely to us even in the
most pessimistic scenarios. Even in the worst of the times over
the last decade, the bank always reported RoAA of more than
0.6%. We reiterate our BUY rating on the stock based on following
rationale :
Credit book expansion much slower than industry in last couple
of years, hence we see lower risk verse peers on deterioration
of book
Build-up in gross slippages least among peers in recent quarterly
results
Continuous maintainence or step up in NPL coverage even in
most strained times; PCR (including technical write-offs) is
relatively higher at 79% among peers
Deposit rebalancing aiding margin
Management willing to sacrifice balance-sheet size for quality;
foresees bottom-line growth at 25% in FY12. There would be a
top management change in February’12, considering the track
record of incoming CMD (Mr. M. G. Sanghvi, current ED at Bank
of Maharashtra), we believe that the bank’s policy of
conservatism would continue
Expectation of capital infusion in FY13 considering lower Tier I
The stock quotes at historically cheap valuation at 0.6x FY13
ABV with 5.5% dividend yield (on FY12’s dividend)
Credit book expansion much slower than industry in last couple
of years: Syndicate bank prudently reduced its credit expansion pace
from FY10 onwards. The bank also moderated its leveraging of balancesheet
on the back of lesser credit book expansion and equity infusion.
In the current fiscal year, the bank’s management expects credit growth
in proximity of 18% YoY
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