Narrower spreads and lower Treasury income led to South Indian Bank’s weak operating performance this quarter. On a positive note, lower slippages led to stabilising asset quality.
Narrower spreads and lower Treasury income led to South Indian Bank’s weak operating performance this quarter. On a positive note, lower slippages led to stabilising asset quality. Though we believe it is set for high-teen credit growth through FY19-20, with expected higher slippages and its low PCR, we expect credit cost to be high, keeping medium-term profitability subdued. We retain a Hold.
Slippages eased to Rs 2.1 billion (1.5% of the loan book, a many-quarter low), and management guides to `5 billion slippages in the next two quarters. We expect the slippages, however, to be higher in coming quarters as a) 20% of the corporate book is below investment grade, b) SMA-2 is 4.2% of the loan book and c) higher slippages are anticipated from the IL&FS exposure. We model gross slippage at 3% for FY19 and 1.5% for FY20.
Management is looking at 20% credit growth in FY19 and aims for further growth from the corporate and SME segments. In a rising interest-rate environment, the bank’s lower pricing power and focus on better-rated corporate bodies, we do not expect NIM to expand from present levels (2.6%). Besides, with it current low PCR (33%), we expect credit cost to be high, keeping medium- term profitability low. We have modelled credit FY19-20 costs at 120bps. Our Oct’19 target of `18 is based on the two-stage DDM model. This implies a 0.8x P/ABV multiple on its FY20 book. Risks: Lumpy delinquencies from the corporate book, lower-than-expected loan growth.
We are positive about the bank’s loan-growth prospects, driven by its retail, agri and MSME loans. We estimate 15% loan growth over FY19-FY20. Chunky slippages from the corporate loan book could lead to higher credit costs.The bank has guided to 20% loan growth over FY19-FY20. If unachievable, it may materially affect our forecasts.
By Anand Rathi