>SOUTH INDIAN BANK (ICICI DIRECT)

Compelling valuations …
With consistent business growth over FY06-FY09 coupled with reasonable RoEs of 16%, we believe South Indian Bank is relatively undervalued in the midcap banking space and, therefore, deserves a re-rating.

■ Consistent business growth coupled with high NIMs
The bank has grown its core business by 20% over FY02-09. The loan book is highly retail centric with retail loans forming 58% of the total book. This has helped the bank to maintain higher yield on assets. Also, the bank has a good amount of NRE deposits as it is based in Kerala. NRE deposits do relatively carry less cost compared to term deposits. This, along with CASA deposits of 25%, has helped the bank to contain its NIMS at 3% levels. Going forward, we expect the bank to maintain its business growth of 20% and NIMs of 2.9-3% levels over FY09-11.

■ Comfortable asset quality
Over a period of time, the asset quality of the bank has improved significantly. As of Q1FY10, the GNPA and NNPA stood at 1.9% and 0.7%, respectively. Also, the restructured loans as of Q1FY10 were at 2.7% of the total loan book, which is well below the industry average. Going
forward, we believe there may be little incremental slippage in its asset
quality, which is already built in the stock price.

■ Sufficient capital adequacy to keep growth ticking
The capital adequacy of the bank as of Q1FY10 stood at 15.1% with Tier I capital at 13.7%. This provides significant room to the management to concentrate on the growth trajectory, going forward.

■ Can be a takeover target if consolidation in industry begins.
A strong base in southern India (86% branches in South India), vast technology enabled network, a loyal customer base and no promoter ownership makes South Indian Bank a good acquisition target when the consolidation in the India banking sector unfolds.

Valuation
At the CMP of Rs 125, the stock is trading at 0.9x and 0.85x its FY10E and FY11E ABV, respectively. We believe that with such business credential and consistency in generating reasonable return ratios, the stock deserves a higher investment multiple. We are assigning a target of Rs 138 to the stock representing a 10% upside over three months.

To see full report: SOUTH INDIAN BANK