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Business growth modest; Asset quality set to recover
Credit cost to stay elevated as bank targets PCR of 60%
* In 3QFY20, South Indian Bank’s (SIB) business growth moderated, led by 7% YoY decline in its corporate book, though asset quality remained largely stable. While operating performance was modest (NII, other income, PPoP), credit costs were high – a key overhang on RoA expansion.
* We tweak our estimates slightly, factoring in margin expansion and higher other income, though credit cost is likely to stay elevated. Maintain Buy.
Operating performance remains modest; PCR increases sequentially
* 3QFY20 PAT was up 8% YoY at INR905m (v/s INR838m in 3QFY19), led by higher NII (+16% YoY) and other income (+18% YoY). NIMs expanded 3bp QoQ to 2.72%. Thus, PPoP stood at INR3.8b (+15% YoY). Opex growth at 17% YoY was higher than the total income growth of 16% YoY, resulting in 280bp QoQ increase in the CI ratio (53.4%).
* Loan growth moderated to 9% YoY, led by slowdown in the corporate book, which declined 7% YoY. Retail, MSME and Agri book continued to grow in the range of 15-20%. Deposits were up 9% YoY, led by 12% YoY increase in CA deposits (+10% QoQ) while SA deposits grew 14% YoY. Thus, CASA mix improved by 30bp QoQ to 25.2%.
* Fresh slippages moderated to INR3.6b, resulting in 3.1% QoQ increase in GNPA, while recoveries/upgrades came in at INR450m/INR540m. Write-offs for the quarter stood at INR1.5b. NNPA increased 0.9% QoQ while NNPA ratio declined 4bp QoQ, even as PCR improved ~150bp QoQ to ~32%.
Highlights from management commentary
* Slippages were led by a private HFC and a fitness account. The bank has witnessed significant improvement in its SMA2 accounts from 3.5% in 2QFY20 to 2.7% in 3QFY20; only one account has an exposure >INR0.5b. The bank reported no divergence in its asset quality.
* In 3QFY20, SIB classified three accounts as fraud; of this, one was a road account of a large group and other two accounts were of small amounts.
* SIB has guided for a slippage run-rate of INR2-2.5b per quarter and has a target to reach PCR of 60% by FY21.
Valuation and view
* SIB is focused on improving the granularity of its loan book and is consciously increasing its loan mix comprising retail, agri and MSME loans. The bank’s margin profile has shown early signs of a recovery, aided by moderation in the bulk deposit rates, declining interest reversals and slight improvement in the CASA mix. This coupled with further improvement in productivity levels and moderation in cost ratios should support growth in operating profits. Though slippages are expected to moderate, the bank’s intention to increase PCR to ~60% should keep credit costs elevated. We expect SIB to deliver RoA/RoE of 0.6%/11.2% by FY22. Maintain Buy with an unchanged target price of INR15 (0.6x Sep’21E ABV).
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