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Published on 15/05/2019 11:38:52 AM | Source: Prabhudas Lilladher Ltd

Option Strategy South Indian Bank Ltd by Prabhudas Lilladher

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Weak on all fronts

Quick Pointers

* High Agri slippages & lower recoveries dented asset quality

* Margins came under tremendous pressure

SIB’s earnings were below expectations on back of (i) Muted NII on sharp decline in NIMs and (ii) continued provisions to improve PCR and provide on fresh slippages. Slippages in most segments were lower barring Agri and one a/c in corporate (from medical college in Kerala). SMA-2 book came off further to 1.71% from 2.2% in Mar’18. PPOP growth of 5.4% YoY was supported by better other income, while expenses control though helped are not reflecting in ratios. Management has to significantly work on improving PCR which stood at 31% (42.5% incl. technical w.off) and hence credit cost will remain high, while has to also work on improving pricing power to improve NIMs. Stock trades at 0.7x Mar-21 ABV which is cheap especially given the asset quality issues will be lower. We maintain BUY with TP of Rs18 (from Rs22) based on 0.8x Mar-21 ABV (rolled over from 1.0x Sep-20).

 

Weak on operational front:

NII growth was muted at 1.5% YoY on sharp decline in NIM of 20bps QoQ to 2.46% and despite loan growth being better at 15% YoY driven by 34% growth in retail book. Bank opted for higher cost of funding especially raising the Tier-II B3 bonds at 11.5% to shore up capital, while MCLR changes are not reflecting in yields. Management expects NIM to improve from hereon as liabilities funding get stabilized, while bias on retail/SME will help yields improvement.

 

Loan growth momentum in line:

Loans growth 14.9% was driven by 34%YoY growth in retail, 16%YoY growth in MSME. Corporate book saw 5%YoY growth. Retail was largely driven by Gold loan, housing loan, LAP. On liabilities front, CASA mix was steady at 24% with growth of 14% YoY but was better than TDs growth of 11.4% YoY. Branch expansion increased other expense: Bank added 13 branches during the quarter (9 in Kerala). This is to build up liability franchise and support loan growth from unchartered territories. We note that bank merely added 7 branches in last 7 quarters. Other expenses spiked 17% YoY.

 

Treasury income supported income growth:

Treasury income rose 4x YoY to 650mn from quarterly average trend of 170mn. Provision pertaining to investment depreciation increased to 397mn from -73mn in 3Q19. We believe bank preferred to liquidate some portion of high duration book.

 

Asset quality deteriorates on low recoveries; SMA2 book exhibiting encouraging trend:

Bank’s recognized slippages of Rs3.68bn of which corporate (Medical college – Rs1.14bn) and MSME (Rs1.13bn) were major contributors. R&U came at Rs1.66bn (56% QoQ decline). SMA 2 book came at 1.7% (v/s 2.2% 4Q18). Bank slightly increased its PCR to 42.5% (incl TWO). Bank aims to reach 60% in FY20 and hence will keep credit cost higher.

 

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