Published on 6/08/2020 1:04:54 PM | Source: ICICI Securities Ltd

Reduce South Indian Bank Ltd For Target Rs.7 - ICICI Securities

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Core performance muted; lingering elevated credit cost to delay profitability improvement

South Indian Bank (SIB) has reported muted core operating performance in Q1FY21 with pre-provisioning profit falling 24% QoQ largely due to muted NII growth (down 1.5% QoQ) coupled with lower other income. However, lower provisions at Rs2.9bn vs Rs7.2bn in Q4FY20 enabled its reporting PAT at Rs0.8bn vs net loss of Rs1.4bn in Q4FY20. Surprisingly, portfolio under Morat 2.0 remained static at 36% across segments. Management’s successful execution of ‘Retailisation Strategy’ (its share increased to 72% in June’20 from 64% in June’18) is likely to stabilise earnings and increase profitability in the longer run. However, higher share of Rs1bn) at 9%, relatively lower Covid-related contingency buffer (~15bps of loans) and extremely low PCR at 39% – credit cost will likely remain elevated and RoA restricted to 0.3% even in FY22E. Further, tier-1 capital at 10.8% hampers SIB’s capacity to absorb shocks during severe crises and constrains its return to growth when the economy revives. Maintain REDUCE.

* Advances remained flat sequentially, while strong traction in gold loan continued. Retail loan growth continued to be higher at 11% YoY driven by agri (up 15% YoY), gold loan (up 33% YoY), housing (up 12% YoY) and loan against deposit (up 16% YoY). Due to on-going consolidation in corporate segment, SIB continued to exit or run down, higher ticket-sized loans, corporate portfolio fell 10% YoY in Q1FY21. Overall loan growth therefore, remained subdued at 3% YoY/0.5% QoQ. Geographically, SIB continued to maintain its leadership in South India as reflected in 8% YoY growth in South-based portfolio, while the rest-of-India portfolio shrunk 8% YoY.

* NII fell 2% QoQ; higher treasury profit at Rs1.4bn supported earnings in Q1FY21. NII fell 2% QoQ due to subdued credit growth and 5bps QoQ margin contraction due to 24bps QoQ asset yield compression with only 22bps QoQ decline in cost of deposit. Other income is up 57% YoY driven mainly by significantly higher treasury income at Rs1.4bn vs Rs0.5bn in Q1FY20.

* Asset quality improved marginally, portfolio under Morat 2.0 remained static across segments. Considering the on-going moratorium, fresh slippages at Rs1.6bn (lower sequentially) appear higher but also reflect management’s conservatism in recognizing already stressed accounts which they feel are less likely to survive even in post Covid-19 era. Portfolio under moratorium 2.0 remained static at 36% across segment, especially in retail at 46%.

* High credit cost to restrict RoA at 0.3% even in FY22E. While we believe SIB is moving in the right direction by focusing on retail business, the significantly lower PCR at 38%, higher share of  <BBB rated corporate book, lower Covid-19 contingency buffer (~15bps of loans) and standard restructured book at 1.7% of loans poses risk of higher credit cost spilling over to FY21E/22E. Maintain REDUCE with an unchanged target price of Rs7.


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