SOUTH INDIAN BANK 2QFY11: Above estimates; Margins improve sharply QoQ; Buy:: Motilal oswal

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SOUTH INDIAN BANK 2QFY11: Above estimates; Strong business growth continues; Margins improve sharply QoQ; Buy

-          South Indian Bank’s (SIB IN, Mkt Cap US$700m, CMP Rs28, Buy) 2QFY11 reported net profit increased 6% YoY (32% QoQ) to Rs770m (27% higher than estimates), and up 35% YoY on an adjusted basis.

-          Earnings were better than expected led by higher net interest income and lower provisions due to strong asset quality.

-          Bank has made an additional provision of Rs175m on account of 2nd pension option and other provisions of Rs50m; else profit growth would have been much higher.

Key highlights

-          Strong loan growth and sharp improvement in margins led to 19% YoY growth in NII to Rs1.97b (14% higher than est). However, adjusting for the proportionate understatement of interest expenses in 9MFY10, NII growth would have been higher at 39% YoY.

-          Loan growth remained strong at 35% YoY and 7% QoQ to Rs180b. Deposits grew 7% QoQ and 27% YoY. CD ratio remained largely stable QoQ at 72%.

-          For 1HFY11, NIMs improved to 3% v/s 2.64% (adjusted) in 1HFY10 and 2.83% for 1QFY11. In our view, 2QFY11 NIM stood at 3.17% (Up 34bp QoQ)

-          On back of strong profitability the bank made additional provision of Rs176m for 2nd pension option and ad hoc provisions of Rs50m.

-          Gross NPAs increased just 2% sequentially in absolute terms. In % terms it improved 6bp QoQ. Net NPAs increased 4% QoQ while provision coverage remained steady at 71%. SIB continues to have excess capitalization with CAR at 16% and Tier I CAR of ~13%.

Buoyancy in loan growth continues

-          Loans grew 7% QoQ and 35% YoY to Rs180b while deposits grew 7% QoQ and 27% YoY to Rs250b. CD ratio remained largely stable at ~72%.

-          CASA growth is strong at 25% YoY (2% QoQ) and savings deposits growth stood at 29% YoY (3.4% QoQ). CASA ratio stood at ~24% vs ~25% a quarter ago. Including NRE deposits, low cost deposits stood at ~30%.

Asset quality remains strong

-          Gross NPAs increased just 2% sequentially in absolute terms. In % terms it improved 6bp QoQ. Slippages during the quarter stood at Rs260m (annualized slippage ratio of 65bp in 2Q and 1H). Recoveries were also equally strong at ~Rs210m

-          Net NPAs increased 4% QoQ while provision coverage remained steady at 71%.

Trades at P/BV of 1.6x FY12E; RoA of ~1% and RoE of ~18%; Buy

-          We have upgraded our earnings estimates by ~12% for FY11/12 to factor in better than expected margins and lower credit cost. We expect SIB to report FY11 EPS of Rs2.6 and BV of Rs15.1 and FY12 EPS of Rs3.2 and BV of Rs17.5.

-          SIB has shown consistent improvement in its operating performance. We expect its ROAs to sustain at ~1% whereas increased leverage would help drive ROEs to ~18% by FY12. SIB is planning to add 60 new branches every year and to increase number of branches to 750 by FY13.

-          Strong loan growth and improving core operating performance will continue re-rating, in our view. We maintain Buy with a target price of Rs31.6 (1.8x FY12E BV).