Its strategic exercise has put the bank on firm footing; risk-reward favourable; TP up to Rs 44 with rollover to FY20e
South Indian Bank’s (SIB’s) Q3FY18 performance improved anchored by improved growth momentum and steady asset quality. Key highlights: (i) slippages normalised, as expected, to 2.1% versus 4.0% in past 6 quarters; (ii) loan growth momentum improved (up 16% y-o-y) with sustained build-up on granular portfolio with focus on SME/retail; and (iii) opex growth was relatively higher (up 10% q-o-q) following wage revision & DA impact (trend likely in other PSU banks as well). Key monitorable — softer traction in CASA (sub-3% growth) at <25%. As highlighted in our earlier note, the strategic exercise —centralisation of processes, getting more granular — has put SIB on a firm footing and is expected to propel core operating profit CAGR of 30% and generate RoA/RoE of 0.8%/13.5% by FY20e. Trading at 1.0x FY20e ABV, the stock is attractively positioned from the risk-reward perspective. Maintain Buy.
Steady asset quality
Slippages came in at Rs 2.6 bn (2.1% versus past six quarters’ 4.0% run rate). While fresh slippages were restricted to Rs 980 mn (in line with guidance), devolvement of non-fund-based exposure (pharma sector) of Rs 1.52 bn led to elevated slippages. However, the impact on credit cost was restricted as SIB had already provided for >50% earlier (now have 100% towards this account). SIB maintained its “zero” watch list claim in corporate exposure. Furthermore, lower stock of 5:25/SDR/S4A/restructured book indicates lower incremental stress. We believe, rising provisions on NCLT (41% currently) with lower NPL coverage ratio at 31% is likely to lead to elevated credit cost.
Growth momentum coming to the fore
NII gained traction at Rs 5 bn (up 22% y-o-y) following improved loan growth (up 16% y-o-y, driven by retail/SME segments). NIMs came in at 2.88% (down 7bps q-o-q) on lower lending yields (down 15bps q-o-q, conversion to MCLR regime & move towards better rated corporate forming 46% versus 30% a year ago) even as funding cost benefit lent support. Henceforth, transition to MCLR regime and limited cushion on funding cost (hardening interest rate with soft CASA growth) will likely put some pressure on NIMs.
Outlook and valuations:
SIB’s endeavour to derisk its balance sheet by shifting to the retail segment, stable asset quality, valuations at 1.0x FY20e P/ABV for RoA/RoE of 0.8%/13.5% (post capital raising) and healthy earnings CAGR of >30% (albeit on low base) over FY17-20e, lend comfort. We roll over to FY20e earnings and peg our target price at Rs 44 (Rs 40 earlier). Maintain Buy.