Asset quality pressure dents profitability… • South Indian Bank :: ICICI Securities

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Asset quality pressure dents profitability…
• South Indian Bank’s (SIB) PAT was below estimates (| 110 crore) at
| 88 crore (de-grew 38% YoY) due to lower-than-expected NII of
| 320 crore (down 8.7% YoY) owing to | 38 crore interest reversal.
Higher opex due to enhanced staff cost also impacted PAT
• However, strong traction of 90% YoY to | 160 crore was largely due
to strong treasury gains of | 78 crore vs. | 58 crore in H1FY15,
supporting profitability
• Asset quality weakened further. Fresh slippages were to the tune of
| 164 crore vs. | 80 crore in Q2FY15. GNPA ratio rose to 1.8% from
1.55% in Q2FY15
• Business growth remained sluggish at 8.3% YoY
Strategic location in South India benefits but business growth dawdling
SIB is an 84-year old bank based out of Thrissur, Kerala. It generates
~50% of its business from Kerala and Tamil Nadu. Due to its strategic
location, it gets advantage of NRI deposits that form ~20% (~| 10742
crore) of total deposit. Similarly, gold loan demand (~| 5700 crore, 16%
of SIB’s credit) is high in this region. In the past, SIB has grown at a strong
25% CAGR in credit to | 31815 crore with 24% deposit CAGR to | 44262
crore in FY08-13. Strong business growth supported NII CAGR of 27.8%
to | 1280 crore in FY08-13. However, business growth significantly
moderated in FY14 due to the economic slowdown. Credit grew 7.9%
YoY to | 33394 crore while deposits grew 8.5% YoY to | 48459 crore in
Q3FY15. Going ahead, we revised our estimate for credit, deposit CAGR
of 12%, 13% to | 45714 crore, | 61057 crore, respectively, in FY14-16E as
gold loan traction weakens.
Loan book well diversified, NIM to be maintained at ~2.6-2.7%
About 40% (~| 15000 crore) of SIB’s credit book comprises the corporate
sector wherein yields are low and, hence, earn relatively low NIM of 2.7-
2.8% compared to peer’s earning of 3.3-3.5%. Other than corporate, agri
& SME credit constitute 33% (| 12113 crore) of credit while retail credit
forms 27% (| 9833 crore) of credit. Going ahead, the management has
guided at reducing its corporate book proportion. Major growth will be
led by the retail & SME segment for FY15E & FY16E, respectively. In the
past, NIM has stayed in the range of 2-3%. With increased focus on high
yielding retail loans, NIM is expected to be maintained at ~2.7%.
Asset quality key to watch; provision adjustment to eat up profits
SIB has suffered significant asset quality deterioration in Q1FY13-H2FY14
wherein its GNPA mounted from | 267 crore to | 614 crore as a few large
corporate accounts had slipped to the NPA category. Similarly, its NNPA
increased from | 77 crore to | 440 crore. In Q3FY15, GNPA surged to
| 661 crore while fresh slippages were to the tune of | 164 crore. We
factor in GNPA ratio of 1.8%, NNPA ratio of 1% by FY16E. SIB has to
provide | 75 crore as FITL provision, which will erode FY15E profits.
Valuations reasonable considering modest return ratios; maintain HOLD
SIB’s performance in terms of major parameters like business growth,
margins, asset quality and profitability has been impaired in the past two
or three quarters. As per management, NPA pressure would continue in
Q4FY15 though slightly at a lower pace than in Q3FY15. PAT is expected
to remain subdued. Hence, RoA may decline to 0.7% by FY16E. SIB is
trading at a discount to peers as its RoA is low and has a restructured
book of 5.2% of credit. We maintain the multiple at 1x but raise the TP to
| 29 as we roll over to FY17E ABV. We maintain HOLD rating.

LINK
http://content.icicidirect.com/mailimages/IDirect_SouthIndianBank_Q3FY15.pdf