Published on 31/10/2019 9:34:55 AM | Source: ICICI Securities Ltd

Option Strategy South Indian Bank Ltd by ICICI Securities

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Credit costs to remain elevated

South Indian Bank’s (SIB) Q2FY20 reported earnings are up 15% QoQ to Rs845mn reflecting improvement in the core business, but asset quality challenges remain. Provision coverage ratio (excluding write-offs) fell to 30% despite 49% QoQ rise in provisions, but higher write-offs were the dampener. Sharp 16bps QoQ improvement in margins was offset by spike in credit cost to 1.9% (annualised) vs 1.3% in Q1FY20. As a result, RoA remained subdued at 0.35% with little near-term visibility of meaningful improvement. Fresh slippages remained elevated at Rs4.3bn driven by one large textile industry account. Higher share of BBB and below-BBB rated exposures in corporate segment is likely to keep slippages elevated in the near term, but the management expects moderation going forward. Retain BUY with a revised target price of Rs15 (earlier: Rs18) as we believe the current valuation factors-in near-term negatives (P/BV 0.3x FY21E).

* Loan growth moderated to 11% YoY; retail growth strong at 19% YoY. Loan growth moderated to 11% YoY, lowest in past eight quarters, but growth in retail segment remained strong at 19% YoY. Due to the ongoing consolidation in corporate segment, SIB continued to exit, or run down, higher ticket-size loans leading to 4% QoQ decline in the corporate loanbook. Management cut its credit growth guidance to 15% for FY20 vs earlier guidance of 18-20% on the back of general economic slowdown and ongoing consolidation in corporate segment. Margins improved 16bps sequentially due to 8bps QoQ increase in YoA and 10bps QoQ decline in CoF. Management expects FY20e NIM to settle around 2.70%.

* Asset quality challenges persist. Quarterly volatility in fresh stressed asset formation continued to dent profitability as well as overall asset quality. Fresh slippages, after showing improvement in Q1FY20, jumped to Rs4.3bn driven by one large textile industry account worth Rs2.8bn. Worryingly, this account was not part of the watchlist. Furthermore, restructured book expanded to Rs4.89bn due to floodrelated dispensation. Calculated coverage ratio dipped to 30% vs 32% in Q1FY20 due to aggressive write-off of Rs3.5bn vs provision of Rs3bn. Management is guiding for lower slippages in H2FY20; however, further downgrades in below-BBB category exposures (~30%) in the corporate segment could act as upside risk.

* Expect gradual improvement in RoA by FY21E; maintain BUY. While we believe SIB is moving in the right direction by focusing on expanding its retail business, we expect improvement in return ratios to be only gradual given the significantly lower coverage ratio at 30%. Given that the current valuation is inexpensive, we maintain our BUY rating on the stock with a revised target price of Rs15 (earlier: Rs18), valuing it at 0.5x Sep’20E P/BV implying 0.4x FY21E P/ABV. 


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