Recommended to Members on: Jul 16, 2009

SOUTH INDIAN BANK

Recommendation       :       Buy

Current Market Price  :       Rs. 97

Target Price           :       Rs. 130

BSE Code : 532218

NSE Code : SOUTHBANK

SIB posted strong set of numbers in Q1FY10. Net interest income grew by 48% YoY to INR 1.5 billion whereas PAT increased by 57% YoY to INR 601 million. Growth in net interest income was primarily driven by expansion of margins which increased to 3.1% (2.5% in Q1FY09). Treasury gain of INR 256.4 million coupled with reversal of investment provisions (INR 300 million) contributed to strong growth in profits.

Key Data:

Market Cap (INR bn)           : 11.0

Market Cap (US$ mn)          : 228.4

52 WK High / Low               : 116/42

Avg Daily Volume (BSE)        : 133776

Face Value (INR)                : 10

Shareholding %       3Q       4Q       1Q

MF/Banks/Indian FIs 14.0     12.0    13.0

FII/ NRIs/ OCBs        40.0    36.0    36.0

Indian Public            46.0    52.0    51.0

Financials (INR mn.)           F09     F10E   F11E

NII                                   5229   5851   6906

PPP                                  3587   4048   4922

PAT                                 1948   2257   2750

ABV                                   103     120     139

Highlights:

Results - Q1FY09:

Margins:

Net interest margins increased by 11 bps sequentially and 66bps YoY to 3.1%. Increase in margins was primarily due to contraction in the cost of deposits (declined by 10 bps sequentially to 6.9%) and increase in loan yields (11.8% from 11.7% in Q4FY09). The Bank has re-priced bulk deposits to the tune of INR13 billion during the quarter and remaining INR 32 billion of high cost deposits are due for re-pricing in the current fiscal. We therefore believe that bank will maintain reported margins in the range of 3% for FY10.

Retail Segment:

Overall business increased 20% YoY with advances and deposits growing at 19% YoY and 21% YoY respectively. Despite slower credit offtake in the system SIB's loan book grew by 4.1% sequentially. Incremental loans were mainly deployed in the retail segment (gold loans). Management plans to increase the gold loan portfolio by 50% and overall loan book by 20% to INR 250 billion in FY10.The CASA deposits increased 17% YoY and accounts for 24.5% of the total deposits. About 40% of the deposits (incl NRI deposits) fall under low cost deposit category.

Asset quality:

Asset quality has improved significantly as gross NPA and net NPA have declined to 1.9% and 0.7% respectively (vs GNPA 2.2% & NNPA 1.1% in Q4FY09). Bank made a recovery of INR 1.2 bn (incl technical slippage of INR 1.0 billion in Q4FY09) which contributed to contraction in NPAs. The total restructured loans (incl INR 1.1 billion in Q1FY10) accounts for 2.8% of the bank's loan book. Management is targeting total recovery of INR 2.3 billion in FY10. We believe that asset quality pressures to be in manageable limits given the SIB's strong track record of recoveries.

Treasury income up by 380% YoY

Non interest income showed a jump of 63%; mainly contributed by treasury income. The treasury income registered five fold increases to INR 256 million (53.7 million in Q1FY09). Fee income (including forex) posted a growth of 18.2% YoY to INR 138 million. We have assumed 17% growth in core fee income for FY10.

Provisions expenses flat YoY

Provision expenses remained flat compared to Q1FY09 mainly due write back of investment provisions to the tune of INR 300 million. The bank made NPL provision of INR 225 million thereby contributing to increase in provision coverage to 64%.

Valuation and Outlook

SIB continues to post strong growth with significant improvement in core operations. SIB is trading at attractive valuations of 0.8x FY10 ABV whereas the peer banks like KTK Bank, KVB etc continue to trade at 1x FY10 ABV. We expect bank to achieve ROE of 17.2% by FY11E and maintain ROA of 1.0%. We maintain our DDM based target price INR 130 for the stock.

Guidelines:

Management is targeting a minimum business growth of 20% and profit growth of 18% (INR 2.3 billion) in the current fiscal. The incremental advances will be focused in secured retail segments (eg gold loans). Bank is planning to expand its gold loans portfolio by 50% (currently INR 18 billion).

The Bank expects net interest to be maintained at 3% levels. SIB has already re- priced INR 13bn of deposits and another INR 32bn deposits are due for re-pricing in the current fiscal. In addition to that NRI deposits are expected to increase by ~35% (currently NRI deposits are INR 35 billion) which will help NIM's sustain at 3% levels.

The bank has not reduced its PLR rates and hence yield on advances have increased to 11.84%. However yield may decline from the Q2FY10 onwards as the lending rates would be aligned to the market rates.

SIB has done recoveries to the tune of INR 1.12 billion during the quarter (incl technical slippage of INR 1bn Q4FY09). Slippages during the quarter amounted to INR 620 million compared to  INR 420million in Q1F09. Bank has restructured a loan of INR 1.1 billion during the quarter thereby increased the total restructured assets to 2.8% of the assets. Management targets to make a total recovery of INR 2.3 billion and recovery from written off accounts worth 600 million in the current fiscal.

SIB has increased provisions on account of wage revision assuming 17.5% hike in wages (previous assumption of 12.5%) thereby contributing to higher operating expenses. So far bank has provided INR 305 million towards wage revision.

Management is planning to open 30 more branches in the current fiscal thereby increasing the total branch tally to 575. Of the new branches 8 will be in the state of Kerala and rest will be in north India.

South Ind Bk held by mutual funds over the last 6 months:

(Source : Money Control)

* For schemes that have not disclosed the number of shares, the same has been calculated on the basis of the closing price of the stock on the BSE/NSE as on the portfolio date. The increase/decrease in the share quantity besides the fund buying or selling the shares from the market, could also be due to any bonus, split, rights, or restructuring in the company.

PLEASE NOTE: This report is based on the month-end portfolios disclosed by AMCs (mutual funds).  For Jun '09, it displays data for 34 out of the total 38 AMCs.

IN-A-NTSHELL:

South Indian Bank, SIB posted strong set of numbers in Q1FY10. Net interest income grew by 48% YoY to INR 1.5 billion whereas PAT increased by 57% YoY to INR 601 million. Growth in net interest income was primarily driven by expansion of margins which increased to 3.1% (2.5% in Q1FY09). Treasury gain of INR 256.4 million coupled with reversal of investment provisions (INR 300 million) contributed to strong growth in profits. Non interest income showed a jump of 63%; mainly contributed by treasury income. The treasury income registered five fold increases to INR 256 million (53.7 million in Q1FY09). Fee income (including forex) posted a growth of 18.2% YoY to INR 138 million. We expect bank to achieve ROE of 17.2% by FY11E and maintain ROA of 1.0%. We maintain our target price INR 130 for the stock.