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Robust growth and improved profitability

South Indian Bank, is a private sector bank headquartered in Kerala. The bank has 955 branches, with majority of them in South India. Currently, the bank has a loan book size of Rs.82,580cr and a deposit base of Rs.103,532cr.

* The bank reported strong Q1 results, with key business parameters such as advance growth, asset quality, and PCR showing improvement.

* Advances have remained strong, growing 11%YoY during Q1FY25, driven by strong disbursements in corporate book.

* PAT grew by 46%YoY, aided by strong growth in fee income and lower provisions. Additionally, NIM stabilized at 3.4% as stress from the cost of deposits was passed on.

* Asset quality improved, with GNPA/NNPA at 4.5%/1.4%. The Provision Coverage Ratio (PCR) increased to 79.2% compared to 76.5% in Q1FY24.

* With stress from legacy books decreasing, the focus now shifts to profitability. We expect the bank to deliver more than a 1% ROA in the medium term. We give an Accumulate rating with a target price of Rs.32 based on 0.75x FY26E BVPS .

Strong advance growth and corporate disbursements

The bank continued to showcase improvement in its key business parameters. Growth has accelerated with disbursement of Rs.33,482cr compared to Rs.22,108cr during Q1FY24. Total advances grew by 11% YoY to Rs.82,580cr, with corporate segment constituting 41% of the loan book, growing at 23% YoY, and gold loans constituting 20%, growing at 13%YoY. The bank has churned the large corporate books with better rated corporates. The share of A and above-rated large corporates stands at 98% in Q1FY25. The bank’s deposit lagged behind, increasing 8.4%YoY, with retail deposits (96% of total deposit) growing at 8%YoY. The CASA ratio stands at 32% in Q1FY25. We expect advances to grow at 15% over FY25-26E, while deposits are estimated to grow at 13% over the same period.

NII and PAT expands

With strong advance growth and improving asset quality, interest income grew by 14%YoY. The yield on advance remained stable at 9.17%, while the cost of deposits has increased to 5.40% from 4.85% in Q1FY24. NII during Q1FY25 stood at Rs.865.77cr compared to Rs.807.8cr during Q1FY24. The bank’s PAT increased by 46%YoY to Rs.202cr. As of Q1FY25, total slippages stood at Rs.346cr. The cost-to-income ratio of the bank decreased to 60.57% sequentially.

Reduced stress and enhanced loan quality

The bank has successfully improved the quality of its advance book, with the new loan book (73% of total book) witnessing a lower NNPA of only 0.1%. GNPA/NNPA stands at 4.5%/1.39%, improving from 5.13%/1.79% in Q1FY24. The Provision Coverage Ratio increased from 76.5% in Q1FY24 to 79.2% this quarter. Management envisions diversifying the loan portfolio by increasing proportion of the high yielding assets like auto loans, housing loans, and so on.

Outlook & valuation.

Under the new management, SIB has been realigning their balance sheet with quality lending and an improved CASA mix. The new book has seen higher yields with low slippages. We expect credit growth of 15% during FY25-26. As the percentage of new book increases, ROE is expected to be 14% by FY26. Hence, we give an Accumulate rating with a revised target price of Rs.32 based on 0.75x FY26E BVPS.

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