>SYNDICATE BANK: Margin expansion continues (EDELWEISS)

Syndicate Bank (SNDB) reported a PAT of INR 1,682 mn against our estimate of INR 2,226 mn on account of higher provisioning and tax rate. However, NII grew ahead of our estimate at 53% Y-o-Y and 20% Q-o-Q to INR 8,597 mn. While gross NPAs remained flat Q-o-Q, provision coverage dropped with slippages running high. Business growth picked up with advances growing 10% Q-o-Q to INR 914 bn. NIMs (cal) improved during the quarter by 33bps to 2.62%, in line with most PSU banks.

■ Business growth picks up; NIMs expand
After a muted growth over 9mFY10, growth eventually picked up for SNDB as its advances grew 10% Q-o-Q and 11% Y-o-Y to INR 914 bn; CD ratio improved 160bps sequentially to 78%. We expect the bank to grow its loan book at 20% over FY11-12E. Margin expansion continued for second consecutive quarter as the bank recorded 33bps improvement in NIM (cal) (against 37bps in Q3FY10) primarily benefiting from decline in cost of deposits (53bps), offsetting the
decline in yield on advances (21bps). We expect margins to expand further over FY11 benefitting from improvement in yield on advances as credit growth picks up. We build in 2.3% NIMs over FY11-12E.

■ Asset quality deteriorates marginally; provision coverage drops (ex tech write offs) to 51%
SNDB’s gross NPA remained flat Q-o-Q at INR 20 bn (2.2% of loans). However, net NPAs grew 17% to INR 9.7 bn (1.1% of loans) resulting in 730bps decline in provision coverage (ex tech write offs) to 51%. The bank restructured its loan book further, with restructured assets growing 7.7% sequentially to INR 45 bn (4.92% of loans). Slippages in restructured books touched 13.3% in Q4FY10 against 6% in Q3FY10.

■ Outlook and valuations: Core performance improves; maintain ‘BUY’
Margin expansion playing well in line with declining cost of funds is a trend witnessed across all PSU peers. Reliance on treasury income has receded and core earnings are supporting earnings. However, asset quality woes continue. We have broadly maintained our numbers for FY10-11, factoring in credit growth performance and higher non-loan related provisions. On revised numbers, the stock is trading at 0.8x FY11E adjusted book and 4.6x FY11E earnings, delivering RoEs of around 18%. The risk-reward continues to remain favorable at current valuations. We maintain ‘BUY’ on the stock and rate it ‘Sector Performer’ on relative return basis.


To read the full report: SYNDICATE BANK