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

South Indian Bank’s (SIB) FY21 performance has to be seen in the context of new management redefining business strategies (hired seven business vertical heads from leading private sector banks) and, on most metrics, delivering results too. Strengthening the liability franchise with an increasingly granular deposit base (CASA at 30% and 55% decline in bulk deposits) and continuous reduction in the lumpy corporate book (its share fell to 25% in FY21 from 30% in FY20) speaks for the management’s successful execution of ‘retailisation strategy’ despite covidled challenges.

However, lower PCR of 34% as at Mar’21-end, coupled with likely higher slippages in H1FY22E due to covid second wave, would keep credit cost elevated and profitability subdued in the near term. We resume coverage on SIB with a HOLD rating and target price of Rs12, valuing the stock at 0.6x FY23E ABV, given FY23E RoA at 34bps and RoE at <10%. Key risks: 1) Stress exceeding anticipated levels and 2) delay in loan growth recovery

* Core performance subdued due to a few one-offs. Balance sheet restructuring, as a part of its renewed strategy to build granular business, resulted in deposits shrinking 1% YoY and advances falling more sharply by 10% YoY. Further, interest derecognition (>Rs1.1bn) due to elevated slippages and higher pension cost (~Rs1.5bn) resulted in PPoP declining 2% YoY while keeping RoA at sub-6bps in FY21.

* Strong traction in gold and agri loans offset by strategic reduction of corporate book, led to 10% YoY fall in advances. With strategic consolidation in corporate segment, SIB continued to run down lumpy loans (>Rs1bn at 5% as at Mar’21-end vs 15% as at Mar’19-end) resulting in ~26% YoY decline in the corporate portfolio. However, strong ~27% YoY growth in gold loans restricted further decline in advances (down 10% YoY). SIB continued to maintain its leadership position in South India with only 4% YoY dip in South-based loans vs 24% YoY decline in the rest of India loans.

* Liability retailisation strategy continued with CASA at all-time high of 30%. Strategic shift towards building a granular liability franchise and concentrated efforts, yielded positive results as reflected in CASA reaching an all-time high of 30% (up 18% YoY). Notably, SIB’s SA rate is one of the lowest in the sector. Further, management highlighted that to leverage its strong customer base, it has set up a separate analytical team to improve ‘product per customer’ by cross-sell / up-sell.

* Incremental stress formation to remain elevated. SIB’s headline asset quality deteriorated with NNPL increasing to 4.7% in Q4FY21 from 4.21% in Q3FY21 due to accelerated write-offs at Rs9.75bn. Collections in Mar’21 remained at 91% (pre-covid level), but is likely to decline in Q1FY22E due to covid second wave. Given restructured loans at 2.2% of total loans (SIB expects ~25% of it to slip over the next couple of years), high exposure to business loans, and 37% share of ‘BBB’ & below in the >Rs1bn corporate segment – is likely to keep incremental stress in FY22E at elevated levels.

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