Sunday, January 29, 2012

>SOUTH INDIAN BANK: Q3FY12 Earnings Review

Background: South Indian Bank (SIB), among the midsized banks in the private sector space, operates a network of about 674branches and about 614 ATMs. With about half of its branches located in Kerala the bank’s business is largely skewed towards the Southern state.
SIB has established a strong brand recall among the Keralite-NRI diaspora. The bank plans to foray into newer geographies by expanding its footprint in the Northern and North - Eastern regions. With no identifiable promoters SIB is run by a team of professionals. A slew of FII’s hold a 42% stake in the bank.

■ Net interest income leads growth
South Indian Bank's (SIB's) topline and operating profit were along expected lines. PAT was up 35.7%YoY at Rs 1.02bn the highest in the bank’s history. Credit growth continued to drive topline. Net interest income continued to drive operating profits; non-interest income also chipped in with a 20%YoY growth. Asset quality continued to be resilient despite the aggressive credit growth in the recent quarters.

■ Valuation
At current levels the stock trades at 1.2X times its FY13E book value and 5.4X times its FY13E EPS. We reiterate our MARKETPERFOMER rating on the stock with a target price of Rs 26.3. Key risks include a surge in delinquencies. South Indian Bank is among the inexpensive stocks in the private banking space with a commendable return on assets and return on equity.

■ Business growth outpaces that of system
South Indian Bank continued to maintain momentum on the balance sheet front. The bank outperformed the industry by reporting a 30.8% YoY growth in the loan book vis-à-vis the system growth of 15.9%. Loan book was reported at Rs 250.50bn. Deposit growth also was strong at 25.3%YoY as against the industry growth of 16.9%. Deposits were reported at Rs 338.34bn. Credit appears to have grown at the cost of the investment book. The credit-deposit ratio was reported at 74%, amongst the highest in recent quarters. CASA ratios continued to remain under strain; a slowdown in growth of demand deposits was noted. Term deposits were
up 26.8% at Rs 265.54bn. Balance sheet continued to grow at a healthy pace of ~25%YoY.

■ Net interest margin stays put at 3% 
Yields and costs were higher, while margins improved to 3.05%. A 5 bps rise in margins along with a ~25%YoY balance sheet growth contributed to a 33.5%YoY growth in net interest income. The bank appears to have passed on much of the higher cost of funds contributing to healthy spreads. Yield on the loan book was reported at 12.3% vs 10.7% in the December 2010 quarter, while cost of deposits was reported at 7.8% vs 6.4%.

To read the full report: SIB