Published on 8/02/2019 10:28:59 AM | Source: Choice Broking Pvt Ltd

Option Strategy South Indian Bank Ltd by Choice Broking

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* South Indian Bank Ltd. (SIB) reported Rs6.6 bn of gross slippage (slippage rate of 1.2%) in Q3FY19, which was higher than guidance; however it was mainly driven by IL&FS group exposure. During the quarter, SIB recognized Rs5.0 bn of exposure (two corporate accounts, IL&FS:Rs4.0 bn, EPC contractor a/c: Rs1.04 bn) as NPA and thus GNPA increased by 27bps QoQ to 4.9%. Adjusting with this, quarterly slippage rate was in line with guidance. Restructuring book also increased to Rs2.0 bn (Rs0.2 bn in Q2FY19) owing to addition of Rs1.78 bn, the proceed is related to the recent flood affected districts of Kerala and under the RBI dispensation mode of natural calamity. SMA2 book was reduced to Rs18.9 bn (3.2% of loan book v/s 4.2% in Q2FY19), but still high compared to peers. Half of the SMA2 book is exposed to retail, which as per the mgmt is highly secured accompanying with less default risk. Although exposure to stressed sector has reduced to Rs20 bn (Rs~70 bn by FY14), A and above rated a/c exposure increased to 58% providing comfort on assets quality front. Considering high SMA2 book, low PCR and ~17% exposure to <BBB rated corporates, we expect higher slippage rate of ~2.35% and credit cost of over 1% for the next two fiscals. During the quarter, advances grew by 15% YoY and NIM expanded by 5bps QoQ to 2.7%. As per mgmt, margin will expand in coming quarters with the better transmission on latest increase in MCLR, likely improvement in CASA. Mgmt also maintained its advances growth guidance at 20% for the next fiscal. On valuation front, SIB’s stock is trading at one-year forward multiple of 0.7(x) which is 36% discount to 3Y average multiple. We maintain our ‘Buy’ rating on the stock with potential price of 18.6 (available at 0.9x of P/ABV of FY21E adj. BVPS of Rs20.9).


* Q3FY19 Result Analysis: 

NII grew by 2.0% YoY and 2.6% QoQ (0.6% YoY and 2.5% QoQ). The growth continued to remain sluggish due to higher increase in interest cost and low C/D ratio at ~75% also made the cost impact severe on margin. Meanwhile, NIM expanded by 5 bps QoQ to 2.66% and mgmt is confident of further expansion due to transmission of latest increase in MCLR, likely improvement in CASA share and lowering slippage. Other income growth remained healthy at 17.6% YoY and 18.3% QoQ (-43.7% YoY in Q2FY18) due to strong fee income. While, Opex grew by 10.7% YoY (9.6% YoY in Q2FY19), despite this C/I improved 4bps QoQ to 53.0%. P&C increased by 31.7% YoY as the bank created provision against IL&FS exposure and raised PCR to 15% against this a/c. Net profit reported at Rs8.4 bn in Q3FY19 as compared to Rs7.0 bn in Q2FY19


* Balance Sheet Growth:

Advances grew by 14.8% YoY and 4.7% QoQ (15.6% YoY and 2.0% QoQ in Q2FY19) driven by strong growth in retail book which grew by ~29.4% YoY. However growth in other segments remained low (SME:5.8% YoY, corporate:~13.5% YoY). Mgmt indicated that growth in other segments would pick up going forward once the centralised system of loan sanctions is completely installed. Till now, it is installed only for retail and large corporates. Deposits also grew by 14.0% YoY and 3.7% QoQ and C/D ratio stood at 76.3% in the quarter under review v/s 75.5% in Q2FY19. CASA growth at 11.7% YoY remained lower than term deposits and its share stood at 24.3% v/s 24.5% in Q2FY19.


* Assets Quality Update

Gross slippage was reported at Rs6.6 bn (slippage rate:1.2%) mainly driven by IL&FS and EPC a/c. After R&U and write-off, net addition to GNPA was Rs2.8 bn. Slippage was Rs2.1 bn in the previous quarter. Owing to the higher slippage, GNPA and NNPA rose to 4.9% and 3.5% in Q3FY19 v/s 4.6% and 3.2% in the previous quarter. Coverage ratio remained low at 28.3% (32.6% in Q2FY19). Going forward, assets quality is expected to improve on the back of likely improvement on slippage front.



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