South Indian Bank’s (SIB) Q4FY16 PAT at Rs 730 million was lower than our estimate on slower revenue momentum and higher credit cost. Key highlights were: asset quality pressure persisted as slippages spiked to 8.5% driven by corporate segment; this dented NIMs (down >25bps q-o-q) leading to muted NII growth (down 8% q-o-q); and while core fee continued to be soft, lower opex cushioned profitability. Though we remain cautious on regional banks amidst a changing competitive landscape, higher share of retail (>50%) and valuation of 0.7x FY18E P/ABV lend comfort on SIB. Maintain ‘buy’.
Asset quality has been a volatile piece for SIB; Q4FY16 was no different—GNPLs rose to 3.77% (2.75% in Q3FY16). Slippages spiked to Rs 8.5 billion (8.5% versus run rate of >2% over past 6 quarters), largely driven by corporate segment (iron & steel sector and EPC segment). Segment-wise analysis indicates rise in retail book (albeit still lower, at 0.86% versus <0.20% run rate) a trend that warrants monitoring, especially in the backdrop of stress percolating to NRI flows. No major restructuring along with Rs 6.7 billion moving out on account of conversion to SEB bonds pushed restructured book down to 2.3%. Management stated that controlled incremental stress and focus on recoveries will help reduce headline GNPLs.
NII growth was soft (down 8% q-o-q) on below industry loan growth and lower NIMs (down >25bps q-o-q, partially a derivative of higher interest income reversal). This, along with softer core fee, led to revenue drag.
However, lower opex (down >4% y-o-y) supported profitability. Given challenges on fee income and lower NIMs, we anticipate operating profitability to remain under pressure. Though we expect near-term growth to be slower, we estimate the momentum to build up as retail and SME start defining large part of the book.