Key Highlights of South Indian Bank's Q1FY2018 Result
South Indian Bank's Q1FY2018 result was quite below our expectations, however we continue to reiterate our BUY on the stock looking at its attractive valuations and the receding asset quality stress
* South Indian Bank (SIB) reported mere 6.7% rise in its net profit for Q1FY2018 to Rs.101.47 crore as compared to Rs.95.06 crore reported in Q1FY2017 mainly because of a 96.6% rise in provisions during the quarter;
* However, Net Interest Income for the quarter grew by 23.3% yoy to Rs.460.71 crore as compared to Rs.373.63 crore;
* Quarter on quarter, SIB has reported a 34.3% rise in the net profit from Rs.75.54 crore mainly because of higher Other Income. Other income grew by 59.2% qoq;
* Net interest income qoq grew by 4.9% from Rs.439.10 crore reported in Q4FY2017;
We believe that this 6.7% yoy growth in net profits should not be a cause of major concern. At the current market price, the bank still trades at attractive valuation of 1.4x its current adjusted book value as compared to its some of its peers which trade at 2.4-2.6x its P/Adj.Book Value.
* The Net NPA for the quarter stood at 2.54% compared to 1.45% in Q4FY2017. We believe the asset quality stress has largely been recognized and provided for;
* SIB reported a 12.9% yoy rise in its advances in FY2017, much better than the industry's credit growth of around 6%. Advances growth is picking up led by low risk retail loans as the bank steadily shifts its loan mix to retail, and corporate now form 38% of the book compared to 40% in 3QFY2017. We like the management's focus on granular low-ticket retail/SME loans, improving Cost/ Income ratio, and a steady approach to balance sheet cleanup which will help asset quality improve substantially;
With adjusted Book Value of Rs.19 per share. SIB trades at 1.4x at the current price of Rs.27.50. SIB's business (Advances + Deposits) crossed the benchmark figure of Rs.1 lakh crore to touch Rs.1.12 lakh crore in FY2017.
Valuation & Recommendation
We believe the asset quality stress has largely been recognized and provided for. Based on the remaining quantum of stress on the books, the amount of provisioning already done, we believe that slippages/ credit costs should be controlled from here. Post the consolidation of business (FY2015) and realigning its balance sheet, SIB today stands poised to tread on a growth path. The structural metamorphosis of business with loan mix tilting towards higher yielding retail and SME products should aid bank to mitigate incremental stress, resulting in lower provisions and lower interest reversals. Furthermore, reducing corporate exposure, collateral based retail/SME lending, expected robust loan CAGR, thrust on high-value NRE deposits, should translate into healthy return ratios. Within OPSB segment, SIB is relatively cheapest stock in terms of both Price to Adjusted Book Value and also market cap to business size. In view of stressed asset resolutions, comfortable capital position and improved profitability, we continue to maintain a BUY on the stock with a target price of Rs.33.30 (1.3x its FY2019E Adj. BV of Rs.25.5).
Risk to our View
In our view, any possible major failure of monsoon could impact the banking sector including South Indian Bank. Any further massive fall in oil price also could impact this bank as it derives a significant portion of business from the Indians working in oil producing regions.
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