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Recommendations India

South Indian Bank Q1FY15 results update

July 18, 2014, Friday, 06:09 GMT | 02:09 EST | 10:39 IST | 13:09 SGT
Contributed by Nirmal Bang

South Indian Bank Ltd (SIB) reported weak set of numbers both on operational level as well as on asset quality front. After witnessing an improvement for the last 2 quarters, asset quality deteriorated in Q1FY15 with higher slippages. The bank has changed its accounting policy for depreciation and has reversed excess depreciation (net of tax) of Rs 43.39 cr and has reported that under exceptional items. Adjusting for it; PAT stood at Rs 83.3 cr; down 27.5% YoY and 33.2% QoQ.

Loan growth of 11.2% YoY was driven by SME and Agri (+42.2% YoY, 30% of total loan book) and Corporate book (+19.3% YoY, 40% of total loan book). Retail book witnessed decline of 17.9% YoY which was primarily due to declining share of gold loans. We expect loan growth of ~17% for FY15-16E.

CASA ratio witnessed improvement both on QoQ and YoY basis at 22.1% led by growth in Savings account. Management targets to improve CASA ratio by 1% per annum. We expect CASA ratio to be at 22.9% by FY16E.

Lower share of high yielding gold loan book led to decline in margins on YoY basis at 2.82% (vs 2.93% in Q1FY14). Management guided for 3%+ margins. We believe that with increasing share of CASA ratio; NIMs should be sustainable at current levels. We expect NIMs to be at 2.8% for FY15-16E.

Asset quality deteriorated in Q1FY15; which came in as surprise after witnessing improvement for 2 quarters. Slippages stood at Rs 97 cr (higher than Rs 47 cr last quarter). Slippages included Rs 29 cr which was restructured earlier. Recovery and upgrades stood at mere Rs 13 cr. There was no write offs during the quarter. Nevertheless, despite witnessing deterioration in asset quality on QoQ basis, it still witnessed improvement on YoY basis. SIB restructured assets to the tune of Rs 96 cr (vs 223 cr last quarter). The bank’s outstanding standard restructured book stood at Rs 1,661 cr (4.8% of loans).

Cost to income ratio witnessed improvement sequentially.

Fee income growth was strong; however lower treasury and forex income resulted in decline in non interest income

SIB is targeting an improvement in the CASA ratio which will drive stable margins in the long term. SIB is looking to derive value from planned branch expansion and increased penetration. Extensive branch expansion will strengthen its asset base leading to higher growth and increase its low cost deposits thereby enhancing the bank’s CASA share.

We expect PAT to witness CAGR growth of 12.5% over FY14-FY16E (vs 1.2% YoY growth reported in FY14) with RoE of 15.9% in FY16E. SIB has generated returns of ~65% since our recommendation and therefore we recommend investors to book partial profit at current levels. Further improvement in asset quality along with improvement in operational performance would drive the future performance of the stock. At CMP, SIB is trading at a PE of 7.89x and 6.91x of FY15E and FY16E EPS and at P/ABV of 1.30x and 1.16x FY15E and FY16E Adj BV. Our target price of Rs 34 (1.2x FY16E ABV) suggests limited upside from current levels and we recommend investors to re-enter at lower levels.