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Improving fundamentals augur higher valuation

South Indian Bank Ltd. is a private sector bank headquartered in Thrissur, Kerala. The bank has 940 branches, with the majority of them in South India

* The bank is currently in a transformation stage, and key business parameters like advance growth, CASA ratio, asset quality, PCR, etc. have been showing significant improvement.

* Advances have grown 16% YoY during Q4FY23, led by strong disbursements in corporate book. Advances are expected to grow by 13.7% over FY23-25E.

* Supported by strong growth in advances, improved asset quality, and higher margins, the bank has reported sharp growth in earnings. PAT stood at a record high of Rs.334cr.

* Asset quality improved with GNPA/NNPA at 5.14%/1.86%. However, the new book, which constitutes 58%, has shown very low slippages, providing confidence in further improvement.

* Hence, we upgrade our rating to BUY with a target price of Rs.21.0 based on 0.6x FY25E Adj P/BV.

Strong disbursement growth led by corporate segment

The bank continued to showcase improvement in its key business parameters, with signs of a turnaround in line with management strategy. The bank showcased its best year of operational performance with a record high profit. SIB recorded its highest ever loan book of Rs. 72,092cr, registering a growth of 16%, led by the corporate book. The bank has churned the large corporate books with better rated corporates. The share of A and above rated large corporates improved from 89% in FY22 to 96% in FY23. The bank’s deposit lagged behind in growth as it grew by 3% YoY, with retail deposits (97.8% of total deposit) growing at 5%. Deposit growth was largely led by term deposits, while CASA deposits grew by 2% YoY, with the CASA ratio at 33.0% compared to 34.5% during the previous quarter. We expect advances to grow at 13.7% over FY23- 25E, while deposits are estimated to grow at 11.4% over the same period

Margin expands with improved loan book

With strong advance growth and improving asset quality, reported NIM witnessed continued improvement from 3.21% in Q3 to 3.67% in Q4FY23. Yield on funds improved from 7.09% to 7.44% in Q4FY23, while cost of funds increased to 4.21% from 4.01% over the period. We expect the NIM to be maintained at a high level, with an improved loan mix and the expectation of lower slippages from the new book. NII stood at Rs.857cr, registering a growth of 43% YoY and 4% QoQ. The bank reported its highest net profit of Rs.334cr registering a growth of 23% YoY. We expect PAT to grow at 16.3% over FY23- 25E.

 Lower stress in the new book

The bank has been successful in improving the quality of the advance book, with the new loan book (57.7% of the total book) witnessing a lower NPA of only 0.09% and SMA-2 of 50cr. Total GNPA/NNPA stands at 5.14%/1.86%, improving from 5.67%/2.51% in the previous quarter. Management expects slippages for FY24 at Rs.1,500cr with majority of it is expected from the restructured book, which currently stands at Rs.1,516cr. Management has guided for a credit cost of 1.00-1.25% for FY24. The bank has also increased their PCR to 65.% from 57% in the previous quarter and aims to bring it to 70% by the end of FY24

Outlook & Valuation

SIB, under the new management, has been successfully realigning their balance sheet with quality lending and improved margins. The new book has seen higher yields with low slippages, taking margins higher. On the outset of the resignation of the current MD, successful implementation of the succession planning would be a key factor. We expect credit growth of 14% during FY23-25E. With improved fundamentals, ROE is expected to be 13.1% by FY25. We upgrade our rating to BUY with an upward revised target price of Rs 21.0 based on 0.6x FY25E Adj P/BV

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