>SOUTH INDIAN BANK LIMITED (FINQUEST)

Investment Rationale

■ Being conservative in FY09 due to bleak economic scenario has led SIB in strong footing to capitalise on better economic prospects ahead. We expect SIB's advances and NII to grow at a CAGR of 20% (vs 16% in FY09) and 16% respectively over FY09-FY11E. We believe that faster re-pricing of deposits coupled with strong growth in advances will stablise NIMs at 2.8 % levels.

■ In Q4FY09, NPA have shown steep rise due to a technical slippage of INR 1bn in one major account. However, the account has become performing and has been upgraded in the current quarter. Going forward, we expect that the aggressive recovery policy and cautious lending will keep NPA under check.

■ The bank has large number of loyal NRI clients that contribute about ~20% to the bank's deposits. About 45% of its deposits comprise of low-cost CASA deposits and NRE deposits. SIB is planning to open 45 more branches mainly in northern states which will improve CASA ratio.

■ We expect SIB's fee income to grow at a CAGR of 18% and overall non interest income to grow at a CAGR of 12% over FY09-FY11E. The bank has recently tied up with LIC, Mutual Funds and Insurance companies to distribute their products and is targeting income of INR 1bn from distribution of these products. We also expect increase in volumes of remittances and forex to boost fee income growth.

■ We expect SIB's earnings to grow at CAGR of 19% over FY09-FY11E led by 16% CAGR growth in net interest income. Resultantly, ROE will increase to 17 %( by FY11E) whereas RoA will remain above of 1% levels.

Valuations
SIB is trading at an attractive valuation of 0.7x FY10E ABV. Peer banks like KTK Bank, KVB etc continue to trade at 1x FY10 ABV, although operational parameters are comparable with SIB. We therefore believe that SIB’s valuations will catch up with peer banks. Our target price of INR 120 for the stock (based on DDM model) discounts 1x FY10E ABV. We recommend Buy on the stock.

To see full report: SOUTH INDIAN BANK