Analyst corner: Maintain ‘hold’ on South Indian Bank

New Delhi | Published: October 20, 2018 2:56:54 AM

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.

south indian bank, banking sector, banking industryManagement is looking at 20% credit growth in FY19 and aims for further growth from the corporate and SME segments.

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

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