SOUTH INDIAN BANK (Sept qtr) Beat on core – led by margins:: Edelweiss

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􀂄 Strong core operating performance
South Indian Bank (SIB) reported strong core operating performance in Q2FY11.
Net interest income (NII), after adjusting for extraordinary interest cost in
Q2FY10, grew 40% Y-o-Y (much ahead of our expectations), to INR 1.97 bn;
this was led by 36% advance growth and better margins at 3% (against 2.83%
in Q1FY11), a function of higher average CD ratio during the quarter.
Provisioning also surprised positively with credit cost coming lower at 0.12%
(against 0.31% in FY10) as gross NPLs came off to 1.27% (from 1.33% in
Q1FY11). Core fee income, at INR 386 mn (up 34% Y-o-Y and 19% Q-o-Q), was
ahead of our estimates. PAT stood at INR 770 mn against INR 588 mn in
Q2FY10, after adjusting for extraordinary interest cost and staff expenses
(reported PAT at INR 726mn). During the quarter, the bank made good use of
the strong core income to make provisions towards pension and gratuity,
reflecting in higher staff costs.
􀂄 Healthy business growth; margins revert
SIB’s business growth continued to show strong traction, with advances growth
at ~36% Y-o-Y and 6% Q-o-Q, to INR 177 bn. Gold loans grew 14% Q-o-Q
(62% Y-o-Y), to INR 33 bn (equivalent to 19% of loan book), followed by SSI
growing at 60% Y-o-Y. Deposits grew 27% Y-o-Y and 7.4% Q-o-Q, to INR 250
bn. However, SIB’s CASA ratio declined 124bps Q-o-Q, to 24%, while low cost
NRI deposits contributed 6.3% to deposits (against 6.8% in Q1FY11). Total
contribution of NRI deposit (including high cost) declined 111bps Q-o-Q, to
14.7%. Reported NIMs improved 17bps Q-o-Q, to 3% in Q2FY11 (against 2.77%
in FY10). While CD ratio dropped 100bps Q-o-Q to 70.7%, management
indicated that average CD ratio during Q2FY11 remained above 72%, leading to
margin uptick. We are building in loan book CAGR of 27% over FY11-12E and
stable NIM of 2.8% (calculated).
􀂄 Outlook and valuation: Back on track; maintain ‘BUY’
SIB reported strong core operating performance in Q2FY11. Business growth
remained healthy and above industry, while margins rebounded strongly after
deteriorating in Q4FY10. Provision coverage was stable, while restructured
assets were below industry average. We are revising our estimate by 7%, and
the stock is currently trading at 1.6x FY12E book, reasonably attractive for a
bank delivering ROE of 19%. We maintain ‘BUY’ on SIB and rate it ‘Sector
Performer’ on relative returns.