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Recommendations India

South Indian Bank Q4FY14 results update

April 28, 2014, Monday, 16:04 GMT | 11:04 EST | 20:34 IST | 23:04 SGT
Contributed by Nirmal Bang

South Indian Bank Ltd (SIB) operational results were below expectations; however asset quality continued to witness improvement for the second consecutive quarter. Higher recovery coupled with lower slippages yielded in improvement in asset quality. Provision Coverage Ratio also witnessed improvement on QoQ basis. However, higher operating expenses kept the cost to income ratio on the higher side. CASA ratio increased 210bps YoY to 20.7%. The bank reported 19% YoY decline in PAT led by higher tax expenses as compared to tax write back last year. SIB declared dividend of Rs 0.8 per share.

- Loan growth of 13.9% YoY was driven by SME and Agri (+38% YoY, 28% of total loan book) and Corporate book (+17.1% YoY, 50% of total loan book). Retail book witnessed decline of 12.4% YoY which was primarily due to declining share of gold loans. We expect loan growth of ~17% for FY15-16E largely driven by retail/ SME loans.

- CASA ratio witnessed improvement on YoY basis at 20.7% led by growth in Savings account. Moreover, the bank shed bulk deposits of Rs 5000 cr during the year which also led to improvement in CASA ratio. Management targets to improve CASA ratio by 1% per annum. We expect CASA ratio to be at 21.7% by FY16E.

- Lower share of high yielding gold loan book led to decline in margins on YoY basis at 3.02% (vs 3.2% in Q4FY13). 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 2.9% for FY15-16E.

- Asset quality continued to improve in Q4FY14; much in line with management commentary given last quarter. Slippages stood at Rs 47 cr (lower than Rs 103 cr last quarter). Higher recovery and upgrades also led to decline in Gross NPA. SIB restructured assets to the tune of Rs 223 cr which included one large infra account of Rs 162 cr and one textile account of Rs 40 cr. The bank’s outstanding standard restructured book stood at Rs 1,633 cr (4.5% of loans).

- The bank’s management is slated for change in Sept 2014.

We believe that the efforts taken by SIB to improve its asset quality, CASA ratio and focusing on higher growth in fee income will lead to increase in earnings growth. We expect PAT to witness CAGR growth of 13.9% over FY14-FY16E (vs 1.2% YoY growth reported in FY14). We expect RoE to be at 16.2% and RoA to be at 1.0% in FY16E. SIB has generated returns of ~24% since our recommendation.

However, we continue to believe that sustainable improvement in asset quality coupled with focus on improving the operational parameters would drive the future performance. At CMP, SIB is trading at a PE of 5.55x and 4.9x of FY15E and FY16E EPS and at P/ABV of 0.94x and 0.83x FY15E and FY16E Adj BV. Considering the recent run up in the stock we have revised our rating from BUY to HOLD with a TP of Rs 27; a further upside of 12.6% from current levels.

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