South Indian Bank. CMP: INR23 TP: INR30 (+35%) Buy. Weak asset quality continues to impact profitability; valuations attractive

Transcription

1 BSE SENSEX S&P CNX 27,36 8,275 Bloomberg SIB IN Equity Shares (m) M.Cap. (INR b)/(usd b) 30.3/ Week Range (INR) 32 /19 1, 6, 12 Rel. Per (%) 3/-8/-18 12M Avg Val (INR M) 113 Free float (%) Financials & Valuation (INR Billion) Y/E Mar 2016E 2017E 2018E NII OP NP NIM (%) EPS (INR) EPS Gr. (%) BV/Sh (INR) RoE (%) RoA (%) Payout (%) Valuations P/E (x) P/BV (x) Div Yield (%) October QFY16 Results Update Sector: Financials CMP: INR23 TP: INR30 (+35%) Buy Weak asset quality continues to impact profitability; valuations attractive s (SIB) 2QFY16 PAT grew 22% YoY to INR934m, led by ~INR379m one-off provision reversal on restructured loans partially offset by one-off staff costs (INR100m); adj. PAT declined 14% YoY v/s -48% YoY in 1QFY16. GNPA increased 25% QoQ to INR8.9b (2.2% of loans v/s 1.85% a quarter ago). Slippages increased QoQ to INR2.2b (2.5% of loans annualized; pharma sector account of INR1.2b slipped from restructured book). SIB restructured a road sector exposure (INR950m) during the quarter impacted by a shift in DCCO. Loan growth increased 12% YoY (+3% QoQ), led by improved momentum in SME and agri segments (+7% QoQ, +26% YoY). Gold loans continued to decline (-5% QoQ, -29% YoY) and now form just 10% of loan book. Other highlights: (a) NIM improved 27bp QoQ to 2.81%, led by 36bp improvement in cost of funds, (b) core fee income growth remained muted at -1% YoY (-7% QoQ), (c) adj. cost-to-income ratio improved 300bp QoQ to 56.2%; management expects these levels to sustain for 2HFY16, (d) RWA/assets ratio increased to 57% v/s 55.6% in 1Q (53% in FY15); Tier I ratio now stands at 9.6% lowest since FY07. Valuation and view: While slippages remain elevated, management guidance of decline in stress addition over the coming quarters is encouraging. SIB continues to focus on recoveries and diversify the loan mix, which will aid earnings in the ensuing quarters. While earnings growth was weak in FY15, improvement in loan growth and asset quality are likely to lead to earnings CAGR of 17% over FY15/18. RoAs are expected to improve to 0.6% and RoEs to 11.4% by FY18. We expect SIB to report EPS of INR2.5/INR3.1 and BV of INR29/31 in FY16/17. The stock currently trades at 0.7x FY17E BV. Maintain Buy with a TP of INR30 (1x FY17E BV). Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Dhaval Gada (Dhaval.Gada@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Margins expected to remain largely stable in 2HFY16 NIM expanded 27bp QoQ at 2.81% in 2QFY16. However, management expects margins to remain largely stable at % in FY16 led by (a) lower interest income on account of expected improvement in asset quality, (b) focus on highyielding retail segment and (c) de-bulking of liability book. Overall yield on advances decreased 11bp QoQ to 11.4% while the cost of deposits declined 32bp QoQ to 7.5%. Overall NII grew 8% YoY v/s flat growth in 1QFY16. CASA deposits increased 4% QoQ and 17% YoY, led by 6% QoQ growth in CA deposits (+16% YoY). Overall CASA ratio improved to 22.8% (+46bp QoQ). Moderate loan growth; gold loans continue to be a drag Loan growth was moderate at 12% YoY (+4% QoQ), higher than industry growth (+9.5% YoY) led by strong growth in SME and agri loans (26% YoY and +7% QoQ) and corporate loans (+17% YoY, +3% QoQ). Management has guided for 16-18% loan growth in FY16, led by focus on SME/agri segments (20% YoY). Corporate loan growth is expected to remain moderate at 12% YoY, driven by working capital facilities. Credit costs increased to 92bp v/s 44bp a quarter ago GNPA up 25% QoQ; PCR largely stable Slippages increased QoQ to INR2.2b (one pharma sector account of INR1.2b). Overall corporate slippages increased to 0.95% of loans v/s 0.6% in the last quarter; retail, agri and SME slippages remained largely stable. Management expects recoveries/upgrade (INR438m) to improve in 2HFY16. GNPA increased 25% QoQ to INR8.9b during the quarter. GNPA% increased to 2.2% (1.85% in 1QFY16) and NNPA% increased to 1.4% (1.2% in 1QFY16). Reported PCR remained largely stable QoQ at ~55%. Conference call highlights Guidance for FY16 Expect cost to income ratio to moderate to 56% by FY16 with medium term target of 50% Expects 20% loan growth in Agri and MSME book in FY16 Corporate loan growth expected to grow by 12% in FY16 Expects current level of NIMs to sustain in coming quarters GNPA ratio expected to be ~2% by Mar-16 P&L Related INR100m one-off staff costs in 2Q of which INR50m was on account of prior year medical cost benefits and INR50m of other one-off other staff expenses Yield on advances: MSME %, corporate % BS Related Loans in MSME/Agri backed by gold were 17% as of 2QFY % of gold loans with 1-3 month tenure 19 October

3 Asset Quality Slippages include one large Pharma sector account (INR1.2b) which slipped from restructured loans; Also, a INR370m corporate loan slipped during the quarter Fresh addition to restructured book includes INR950m road sector account, impacted by shift in DCCO 44% of restructured loans in power sector Recoveries and upgrades are likely to improve in 2HFY16 No 5:25 rescheduling done in 2Q; no pipeline at the moment 11 accounts above INR500m in standard restructured loan book Have reasonably good exposure to Amtek Auto Standard restructured loans in Iron and Steel sector: INR1.31b Other highlights Have taken necessary approvals for fresh equity capital raising 150 Green channel branches have been identified with increased focus on MSME business; further, 150 branches have been identified to improve gold loan business May look at strategic alliance to compete against payment banks Internet banking volume in 2Q was INR18.9b and INR1b in mobile banking Maintain Buy with a TP of INR30 (1x FY17E BV) Valuation and view While slippages have remained elevated, management guidance of decline stress additions in the near term is encouraging. SIB continues to focus on recoveries from written off accounts. Diversifying the loan mix will aid earnings in the ensuing quarters. While earnings growth was weak in FY15, improvement in loan growth and asset quality is likely to lead to 17% earnings CAGR over FY15/18. RoAs to improve to 0.6% and RoEs to improve to 11% by FY18. We expect SIB to report EPS of INR2.5/INR3.1 and BV of INR28.5/31 in FY16E/17E. The stock currently trades at P/BV 0.7x FY17E BV. We assume 12.7% cost of equity; based on residual income, our target multiple is 1x FY17 BV INR30 (35% upside). Maintain Buy. 19 October

4 Exhibit 1: We increase FY16E earnings by 16%, led by one-off provision reversal; reduce FY17/18E by 1-10% led by higher credit costs INR B Old Est Revised Est FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Loans Deposits Margins Credit Cost RoA RoE Source: MOSL, Company Exhibit 2: One year forward P/BV PB (x) Peak(x) Avg(x) Min(x) Exhibit 3: One year forward P/E PE (x) Peak(x) Avg(x) Min(x) Oct-05 Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15 Oct-05 Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15 Source: MOSL, Company Source: MOSL, Company 19 October

5 Exhibit 4: DuPont Analysis: Gradual improvement in RoA led by lower provisions (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Interest income Interest expense Net interest income Fee income Core income Operating costs Cost to core income ratio Employee Costs Other Expenses Core Operating Profit Treasury Income Operating Profit Provisions NPA Provisions Other provisions PBT Tax Tax Rate ROA Leverage (x) ROE Source: MOSL, Company Exhibit 5: DuPont Analysis: Higher core income led to improved profitability 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Interest income Interest expenses Net interest income Fee income Core Income Operating cost Employee Expenses Other Expenses Core operating profit Fx and other non-core Income Operating Profit Provisions Tax ROAA Leverage (x) ROAE Source: MOSL, Company 19 October

6 Story in charts Exhibit 6: Uptick in loan growth led by SME and Agri segments Loans (INR b) YoY Loan Growth (%) Exhibit 7: Pick up CASA growth continued in 2Q led by strong CA growth (+6% QoQ, 16% YoY) CASA Ratio (%) YoY Growth (%) QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 Source: Company, MOSL Source: Company, MOSL Exhibit 8: Sharp up-tick in margins led by lower cost of funds; Mgmt. expects current levels to sustain (%) Exhibit 9: Muted fee income growth Fee income (INR m) YoY growth (%) (15) (1) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY Source: Company, MOSL Source: Company, MOSL Exhibit 10: Rising trend in slippages is concerning Slippage Ratio (%) Exhibit 11: Reported PCR was stable QoQ at 55% GNPA (%) NNPA (%) Calc. PCR (%) QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 1QFY HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY MFY15 FY15 1QFY16 1HFY16 Source: Company, MOSL Source: Company, MOSL 19 October

7 Exhibit 12: Quarterly Snapshot (INR b) FY14 FY15 FY16 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY Profit and Loss (INR m) Net Interest Income 3,276 3,561 3,505 3,647 3,409 3,584 3,199 3,471 3,403 3, Other Income 1, , ,603 1,219 1,038 1, Trading profits Forex Income Others Total Income 4,453 4,256 4,351 4,613 4,620 4,520 4,803 4,690 4,442 5, Operating Expenses 1,938 2,136 2,192 2,563 1,977 2,411 2,608 3,041 2,633 2, Employee 1,172 1,233 1,274 1,611 1,459 1,349 1,550 1,979 1,574 1, Others ,061 1,058 1,062 1,059 1, Operating Profits 2,516 2,120 2,159 2,049 2,643 2,109 2,194 1,650 1,809 2, Provisions 1, , NPA provisions 1, Provisions on Invst NM NM Others NM NM PBT 1,462 1,922 2,139 1,766 1,697 1,152 1, ,014 1, Taxes PAT 1,148 1,268 1,413 1,246 1, Asset Quality GNPA 4,926 6,143 5,546 4,326 5,173 5,532 6,613 6,435 7,138 8, NNPA 3,484 4,399 3,919 2,817 3,105 3,184 3,796 3,571 4,640 5, GNPA (%) NNPA (%) PCR (Calculated, %) Credit Cost (bp) Ratios (%) Non Int. to Total Income Cost to Core Income Tax Rate Loan/Deposit CASA Reported CAR Tier I Reported NIMs (%) - Cumulative Yield on loans Cost of Deposits Margins Balance Sheet (INR B) Gross Advances Deposits CASA Deposits Source: MOSL, Company 19 October

8 Corporate profile: South India Bank Company description One of the earliest banks in Southern part of India, (SIB) was incorporated in 1928 at Thrissur in Kerala. Under the RBI Act, SIB was the first private sector bank in Kerala to become a Scheduled Commercial Bank in Currently, the bank is led by Mr. V. G. Mathew, MD & CEO. The bank has a strong presence in South India (80%+ branches). As on September 2015, the bank had a network of 831 branches and 1,260 ATMs. Exhibit 12: Sensex rebased Exhibit 13: Shareholding pattern (%) Jun-15 Mar-15 Jun-14 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 15: Top management Name Designation V.G. Mathew MD & CEO Joseph George Kavalam Senior Vice President Varughese A.G Senior Vice President Thomas Joseph K Chief General Manager Exhibit 14: Top holders Holder Name % Holding First Carlyle Ventures Mauritius 4.9 LIC of India 4.8 Yusuffali Musaliam Veettil Abdul Kader 3.7 GKFF Ventures 3.2 CX Securities Ltd 3.2 Exhibit 16: Directors Name Amitabha Guha V G Mathew Mohan Alapatt* K Thomas Jacob* Salim Gangadharan* Name John Joseph Alapatt* Francis Alapatt* Cheryan Varkey Ranjana Salgaocar Parayil George John Tharakan *Independent Exhibit 17: Auditors Name S R Batliboi & Associates LLP Type Statutory Exhibit 18: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY October

9 Exhibit 19: Financials - Valuation metrics 66Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) (INR) (USDb) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 ICICIBC* Buy HDFCB Buy 1, AXSB Buy KMB* Neutral YES Buy IIB Buy DCBB Sell FB Buy JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Buy BOI Neutral BOB Buy CBK Buy UNBK Buy OBC Buy INBK Buy CRPBK Neutral ANDB Buy IDBI Neutral DBNK Neutral Public Aggregate HDFC* Buy 1, LICHF Buy DEWH Buy IHFL Buy GRHF Buy REPCO Buy IDFC Buy RECL Buy POWF Buy SHTF Buy MMFS Buy BAF Buy 5, ,350 1, MUTH Buy NBFC Aggregate *Multiples adj. for value of key ventures/investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries 19 October

10 Financials and valuations Income Statement (INR Million) Y/E March E 2017E 2018E Interest Income 19,357 24,460 35,834 44,343 50,151 52,862 57,134 63,007 72,845 Interest Expense 13,674 16,549 25,617 31,535 36,163 39,200 41,718 45,122 51,803 Net Interest Income 5,683 7,911 10,217 12,808 13,988 13,662 15,416 17,884 21,041 Change (%) Non-Interest Income 2,085 1,967 2,471 3,349 3,685 4,970 5,141 5,687 6,315 Net Income 7,768 9,878 12,688 16,158 17,672 18,632 20,556 23,571 27,356 Change (%) Operating Expenses 3,662 4,625 6,173 7,672 8,829 9,813 11,814 13,511 15,462 Pre Provision Profits 4,106 5,253 6,515 8,486 8,843 8,819 8,743 10,060 11,894 Change (%) Provisions (excl tax) ,927 1,554 4,570 3,451 3,771 4,368 PBT 3,673 4,455 5,723 6,559 7,289 4,249 5,291 6,289 7,526 Tax 1,336 1,529 1,707 1,536 2,214 1,608 1,852 2,138 2,559 Tax Rate (%) Extra-Ordinary Item Profits Post EO 2,338 2,926 4,017 5,023 5,075 3,071 3,439 4,151 4,967 Change (%) Equity Dividend (Incl tax) ,094 1, ,157 Core PPP* 3,326 4,859 6,107 7,909 8,145 7,179 7,243 8,560 10,394 Change (%) *Core PPP is (NII+Fee income-opex) Balance Sheet (INR Million) Y/E March E 2017E 2018E Equity Share Capital 1,130 1,130 1,134 1,339 1,344 1,350 1,350 1,350 1,350 Reserves & Surplus 13,723 17,343 20,570 28,724 32,360 34,544 38,579 41,763 45,573 Net Worth 14,853 18,473 21,704 30,062 33,704 35,894 39,929 43,113 46,923 Deposits 230, , , , , , , , ,614 Change (%) of which CASA Dep 53,233 64,041 71,793 82,328 98, , , , ,447 Change (%) Borrowings 3,310 2,903 5,882 12,846 27,308 22,325 27,143 30,094 33,189 Other Liabilities & Prov. 7,063 9,615 11,109 12,420 13,937 13,819 15,563 17,256 19,203 Total Liabilities 255, , , , , , , , ,929 Current Assets 19,877 24,661 26,405 43,359 32,179 35,951 41,830 49,029 54,112 Investments 71,556 89,238 93, , , , , , ,460 Change (%) Loans 158, , , , , , , , ,471 Change (%) Fixed Assets 1,525 3,568 3,775 3,961 4,122 4,790 5,148 5,705 6,463 Other Assets 4,153 5,847 6,714 7,240 7,742 9,334 10,267 11,294 12,423 Total Assets 255, , , , , , , , ,929 Asset Quality (%) GNPA (INR m) 2,110 2,303 2,672 4,339 4,326 6,435 10,109 12,396 14,100 NNPA (INR m) ,495 2,817 3,602 5,975 7,000 6,970 GNPA Ratio NNPA Ratio PCR (Excl Tech. write off) E: MOSL Estimates 19 October

11 Financials and valuations Ratios Y/E March E 2017E 2018E Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA Int. Expense/Int.Income Fee Income/Net Income Non Int. Inc./Net Income Efficiency Ratios (%) Cost/Income* Empl. Cost/Op. Exps Busi. per Empl. (INR m) NP per Empl. (INR lac) * ex treasury and recoveries Asset-Liability Profile (%) Loans/Deposit Ratio CASA Ratio Investment/Deposit Ratio G-Sec/Investment Ratio CAR Tier Valuation Book Value (INR) Change (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Change (%) Price-Earnings (x) Dividend Per Share (INR) Dividend Yield (%) E: MOSL Estimates 19 October

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