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Moderate business growth with stable asset quality
South Indian Bank is a private sector bank headquartered at Thrissur in Kerala having 1,401 ATMs and 870 branches, with around 84% of them in South India. Currently, the bank is having a loan book size of ~Rs65,334cr and deposit base of ~Rs80,451cr.
* Advances reported a moderate growth of 9% on a YoY basis with sequential growth in retail ,agriculture and MSME loans.
* Stable growth in deposit at 11% YoY due to 13% YoY increase in retail deposits and improvement in CASA ratio.
* Reduction in corporate segment exposure to 30% of the loan book in Q3FY20 as compared to 35% a year ago reflects the managements strong effort to concentrate more into retail loans.
* Net Interest margin (NII) for the quarter grew by 15.8% YoY and by 3.0% on a sequential basis, while the cost to income ratio (C/I) deteriorated by 280bps to 53.4%.
* Currently Gross/Net NPA stands at 4.96%/3.44% compared to 4.88%/3.54% in Q3FY19, while SMA2 & Provision Coverage Ratio (PCR) improved to 2.71% and 50.4% respectively.
* We value the bank at 0.40x BV of FY21E with a revised target price of Rs13.2. But given the risk profile of the stock, we suggest an ’Accumulate’ rating.
Moderate growth in advances with a YoY de-growth in corporate book
The Net Interest Income (NII) for the quarter grew by 15.8% YoY and by 3.0% on a sequential basis. On account of a general macro-economic slowdown, the loans and advances witnessed a moderate 9% growth on a YoY basis with retail loan growth at 2.9% sequentially & 17.7% on a YoY basis, agricultural loans at 3.3% QoQ & 20.8% YoY, and MSME loans at 3.4% QoQ & 14.4% on a YoY basis. At the same time, the corporate segment witnessed a degrowth of around 7% YoY, and remained almost stable on a sequential basis. In the current quarter, the corporate segment exposure of the bank has reduced to Rs19,713cr, which is 30% of the total loan book mix compared to that of 36% a year ago, reflecting the banks consistent efforts to reduce the corporate exposure and focus on retail, MSME and agriculture segment.
11% YoY growth in deposits with an improvement in CASA mix
Deposits have increased by 11% YoY, with retail deposits growing at 13% over the last one year. Current account-savings account (CASA) deposits reported a growth of 13% YoY and the mix improved from 24.9% in Q2FY20 to 25.2% in Q3FY20. However, bulk deposits reported a degrowth of 3% YoY. NRI deposits continue to grow at 10.1% YoY.Cost of deposit improved mildly from 6.24% in Q2FY20 to 6.14% in Q3FY20.Cost to income ratio deteriorated to 53.4% to Q3FY19 levels.
Sequentially stable asset quality with an improvement in SMA2 & PCR
In the current quarter, the gross NPA has slipped marginally to 4.96% compared to 4.88% in Q3FY19. On the other hand, the net NPA have improved from 3.54% in Q3FY19 to 3.44% in Q1FY20. In the current quarter, the fresh slippages from retail, agriculture, SME and corporate segments are 0.30% (0.19% in Q2FY20), 0.08% (0.17% in Q2FY20), 0.26% (0.63% in Q2FY20) and 1.26% (1.36% in Q2FY20) respectively, thus making the overall slippages 10bps lower sequentially and 54bps lower on a YoY basis. The provision coverage ratio improved to 50.4% compared to 48.1% in the last quarter. The SMA2 portfolio also marked a remarkable improvement from 3.51% in Q2FY20 to 2.71% in Q3FY20.
With declining corporate exposure and increasing retail loan mix to help the bank to improve asset quality going forward. Reduction in SMA2 book and improved PCR to act positively in near to medium term. Hence, we value the bank at 0.40x BV of FY21E with a revised target price of Rs13.2. But given the risk profile of the stock, we suggest an ’Accumulate’ rating.
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