Analyst Corner: ‘Hold’ on SIB – high credit cost may hit profitability

Published: January 24, 2019 12:24:03 AM

High credit cost and flat income growth led to South Indian Bank’s (SIB’s) weak earnings in Q3. Higher slippages from the corporate portfolio led to deterioration in asset quality.

south indian bankAnalyst Corner: ‘Hold’ on SIB; high credit cost may hit profitability

By Anandrathi

High credit cost and flat income growth led to South Indian Bank’s (SIB’s) weak earnings in Q3. Higher slippages from the corporate portfolio led to deterioration in asset quality.

Though we believe it is set for high-teen credit growth in the medium term, with its low PCR we expect credit cost to be high, keeping medium-term profitability subdued. We retain ‘Hold’.

Of the `6.6-bn slippages in the quarter (4.4% of the loan book), `5 bn stemmed from two corporate accounts (IL&FS-`4 bn, Road account `1 bn). Stressed assets (GNPA + standard restructured loans) are now 5.2% of loans (up 133bps yoy, 56bps qoq). Although management expects slippages of up to `10 bn in FY20, we factor in a higher slippage ratio as SMA-2 is 3% (of the loan book) and ~17% of the corporate book (above `250 m) is below investment grade.

Given the bank’s lower current PCR of 28% excl. write-offs (one of the lowest in the system) and the intent of the management to increase it to 60%, we expect credit cost to be elevated in the medium term, thereby constraining profitability.

The bank is targeting 20% loan growth in the medium term; however, with current tier-1 at 9.7%, raising capital would be required in the short term to comply with the RBI’s norm.

Although the management states it would not slow down loan growth, its ability to raise the desired capital in the medium term would be a key monitorable. Our Jan’20 target of `18 is based on the two-stage DDM model. This implies a ~0.7x P/ABV multiple on its FY21 book. Risks: Lumpy delinquencies from the corporate book, lower-than-expected loan growth. Our Jan’20 target of `18 is based on the two-stage DDM model. This implies a 0.7x P/ABV multiple on its FY21 book.

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