South Indian Bank. Result Update. Buy

Transcription

1 Result Update South Indian Bank Buy "Formidable B/S in making Q2FY18 PAT took a major hit owing to upfront provisioning on value diminution of SRs issued by ARCs. The PAT at ` 43.2mn mounted YoY by huge percentage with provisions doubling to ` 4.5bn led by ` 2.52 bn exceptional provisioning. Had it not been for these one-offs, normalised PAT should be ` 1.7bn as against our estimates of ` 1.2bn. What continues to maintain our confidence is the stark improvement in asset quality with 63% QoQ dip in slippages to ` 2.5bn from ` 6.86bn (Q1FY18); GNPAs stood flat QoQ at 3.6% as the bank shifted to daily NPA recognition norm. Subsequently, interest reversals turned out to be lower driving NIMs to 2.87%. Notably, operating metrics strengthened with PPoP growing 55% YoY led by healthy NII (in-line at ` 5.0bn vs our estimates of ` 5.5bn with a growth of 13% YoY), strong other income show (transaction fee income grew 19% QoQ; treasury stood down 24% QoQ) and cost-income decline of 843 bps YoY, 293 bps QoQ to 41% (Opex grew 10% YoY in-line with guidance). With clear indications of formidable balance sheet and asset quality concerns topping out, we reiterate BUY. Hopeful servings to turn out better than expected The advances at ` 489.5bn stood healthy growing 12.4% YoY largely driven by robust 19% YoY growth in SMEs. With the recent addition to the team in the retail domain, the bank should be channelizing their expertise to achieve the much-needed retail growth traction the key driver for stock re-rating. Ex- HDFC Bank Sanchay Sinha s appointment to head the retail credit and elevation of Mr. Varghese who boasts of 33 years association across credit vertical of SIB should prove a game changer enabling the bank to build retail asset capabilities. Moreover, Mr. V.G. Mathew s term extension as MD & CEO for another 3 years comes at the blissful time given his strategic decision to streamline consortium corporate loans and aligning business strategy towards the expansion of retail/sme. Loan CAGR of 18%+ for FY17-19E maintained Sharp recovery ahead Healthy operational metrics backed by improving retail architecture, ebbing asset quality pressures and focus on low ticket lending are indicative of solidification of the balance sheet. While we incorporate higher provision for FY18 due to higher valuation loss and therefore unexpected provisioning on 5 IBC accounts referred to ARCs, we cut our PAT estimates by 4% for FY18, but maintain FY19 estimates as revenue streams continue to hold strong for bank. While our earnings estimate CAGR at 40%+ for next two years stand maintained, RoEs at 15% and RoAs at 0.9% by FY19 is achievable. Maintain BUY. Q2FY18 Result (` Mn) Particulars Q2FY18 Q2FY17 Q1FY18 QoQ (%) YoY (%) Interest earned 15,362 14,502 14, Interest expended 10,330 10,050 10, Net interest income 5,032 4,452 4, Other income 2,805 1,459 2, Total Net Income 7,837 5,911 6, Operating expenses 3,234 2,937 3, Pre-provision profits 4,603 2,973 3, Provisions 4,537 1,283 2, Tax expense (95.8) (96.1) Reported Net Profit 43 1,105 1,015 (95.7) (96.1) CMP ` 30 Target / Upside ` 40/34% BSE Sensex 31,869 NSE Nifty 9,993 Scrip Details Equity / FV Market Cap ` 1,804mn/`1/- `54bn USD 800mn 52-week High/Low ` 32.3/16.8 Avg. Volume (no) 23,965,785 NSE Symbol Bloomberg Code SOUTHBANK Shareholding Pattern Mar 17(%) SIB IN Promoters - MF/Banks/FIs 12.2 FIIs 44.9 Public / Others 42.9 Valuation (x) FY17 FY18E FY19E P/E P/ABV ROAA ROAE Estimates (` mn) FY17 FY18E FY19E NII 16,754 19,953 23,493 OPPAT 12,146 15,113 17,557 PAT 3,925 5,196 8,107 Adj. BV Sr. Analyst: Shweta Daptardar Tel: shwetad@dolatcapital.com Associate: Pravin Mule Tel: pravinm@dolatcapital.com Advances (` mn) 489, , , NIM (%) CASA (%) (2.6) 7.9 Gross NPA (%) (0.8) (9.8) October 11, 2017

2 Valuation and Recommendation The victim of elongated lumpy corporate loan cycle and therefore volatile asset quality and revenue stream, SIB s performance stood tepid over past few years. While the asset quality concerns have peaked out and granularity in loan mix improving aiding healthy growth, expect meaningful improvement in the book quality which forms a major trigger for the valuation re-rating of the bank. South Indian Bank has gained renewed focus on building up a robust liability franchise (current CASA: 25%) without compromising on margins, granularity on loan portfolio on the asset side paving the way on minimizing credit risks. With corporate loan book stress behind, SIB strategically has planned to spread its wings into the retail segment (through the home, auto, MSME, and LAP) capitalising upon the existing set of customer base and strengthening MSME relationships. Focus on retail products and dedicated verticals with the cluster-based approach is helping the bank to penetrate further into the existing set of customers and focus on certain geographies. As part of boosting retail growth strategy, SIB aims to lay greater thrust on low ticket loans through centralised processing and faster approvals. The bank aims to enhance branch profitability by focusing on both geographies outside Kerala and the home turf aided by the formation of branch clusters. Besides, the bank has identified 150 branches that will lay major thrust on retail and SME portfolios. Q2FY18 stood healthy on operational front for SIB as the PPoP stood highest in last 6 years indicative of strengthening balance sheet. Higher than anticipated provisioning hit on shortfalls of NAVs of SRs issued by ARCs on valuation by rating agencies and thereafter ARC certificates marred the bottomline. Going forward, given the provisions run-rate to be maintained at ` 2 bn each quarter, slippages at around similar levels and recoveries of ` 1.5 bn each quarter, our GNPA target at 3.2% for FY18 remains unchanged. While we tweak our provisioning estimate higher for FY18 thereby taking moderate hit on FY18 PAT, our return ratios stand intact as the bank continues to grow healthy revenue (NII + core other income) stream. With only 5 IBC accounts (fairly provided especially post Q2FY18 hit) and ` 2.5 bn restructured book as painpoint, worst is over for SIB both in terms of provisions and slippages. Moreover, SME traction stood strong at 19% YoY growth in-line with guidance coupled with fresh competitive team at retail verticals should ensure healthy laon trajectory ahead. Amid the industry-wide asset quality turmoil, the SIB s progress in recognizing and providing bad legacy assets upfront coupled with retail branch banking focus and improving operating leverage will aid best-in-class return ratios, reduce volatility in asset quality and fuel re-rating. The marked shift in business strategies adopted by the Bank in low-ticket lending and de-focusing on project risk and large syndicated loans to highly levered corporates has been positively contributing to the bank's better performance, despite significant stress in the economy. We reiterate BUY recommendation on the stock with a TP of ` 40, valuing the bank at 1.4x P/ABV FY19E. At CMP, the stock trades at attractive valuations of 1.0x P/ABV FY19E. October 11,

3 South Indian Bank Q2FY18 Results Key Takeaways from Management ARC sale includes 5 Accounts referred to IBC from Infra, Iron and Steel, EPC sectors. With the incremental provisioning made, provisioning coverage towards the asset pool sold to ARC crossed 50% which would increase the prospects of recovery. Additions in provisions mainly due to diminution in value of SRs issued by ARC. PAT stood down on account of this very exceptional provision (` 252 crores) on MTM valuation of SRs received on ARC asset sales. (ARC: Edelweiss) Provisions run rate to return to normalized Q1FY18 levels/lower in H2FY18. Pre-provision operating profit is up by a substantial amount (highest in past 6 years) driven by core balance sheet growth. Healthy other income came on the back of core fee income; notably treasury gains stood down QoQ indicating healthy loans and strong core other income driving PPoP. Growth in retail segment is in line with the management's expectations (SME grew 19% YoY despite a soft quarter). No new slippages in corporate book. Agri slippages includes 1 account from Kerala, 1 from TN. Slippage trend is higher in last few quarters due to cleanup and shift to daily NPA recognition. Slippage in Q2FY18 of ` 252 crores is a stark improvement; ` 200 crores slippage run rate next quarter. GNPA stood at same levels as Q1 as the bank shifted to daily system generation NPA. PCR stood same as Q1FY18 inclusive of prudential write-offs of ` 57 crores Normalized PAT excluding the exceptional provision stand at ` 169 crores. October 11,

4 600 Loan book grew by 12% YoY, mainly driven by Retail Advances Loan (` bn) Growth (%) Segment wise Break Up of Corporate Loan Book > ` 250mn Sectoral exposure - ` mn Q1FY18 Q2FY18 Financial Intermediaries 34,710 40,620 Infrastructure 34,510 30,960 Cements & Products 11,200 10,570 Professional Services 9,800 9,600 Basic Metal & Metal Products 9,280 9,110 Textiles 5,640 6,810 Trade 5,670 4,980 Chemicals and Chemical Products 3,680 5,020 Food Processing and Agri Allied Activities 4,640 4,880 Construction 6,470 3,920 All Engineering 2,590 3,380 All other Manufacturing Industries 38,900 36,900 All Other Service Sectors 7,970 11,970 Total Corporate Portfolio 175, , Deposits grew by 12% YoY, backed by a healthy CASA growth of 20% YoY Deposit (` bn) Growth (%) Source: DART, Company October 11,

5 Average CASA (%) ratio maintained at 24% Zero branch addition aids fall in cost to income ratio Cost to Income Ratio Source: DART, Company No of Branch Addition Employee Addition Marketing professionals added No of Employees Addition Source: DART, Company Cost to Income Ratio Asset Quality (%) remains stable in Q2FY GNPA NNPA PCR October 11,

6 Gross NPA Movement Sequential ` Mn Opening 16,510 17,450 17,870 11,490 16,960 Additions 2,260 1,970 11,500 6,860 2,520 Deductions 1,320 1,550 17,880 1,400 1,820 Closing 17,450 17,870 11,490 16,960 17, Q2FY18 Return ratios (%) impacted, expect 0.9% ROA by FY Source: DART, Company Sharp decline in corporate slippages; QoQ slippages halve Fresh Slippages rate (%) 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Retail SME Agri Corporate (Reported) Total Sector Standard Restructure Q2FY18 Construction EPC 9% Others 15% Infra Roads 76% October 11,

7 Key Management Name Designation Qualification Experience Expertise Previous stint Stint with SIB V G Mathew MD & CEO Post-Graduation - Physics, CAIIB Sanchay Sinha Country - Head, Retail Banking Benoy Varghese Countgry Head- Wholesale Banking Source: DART, Company One at the Helms 37 Years Retail & Corporate Credit Technology Key Management - Addition PGCBM, XLRI 24 Years Retail Distribution Management Graduate, CUSAT State Bank of India Dy. General Manager (IT Networking Project) Risk Dy. General Manager & Branch Management Head (Overseas branch, Bangalore) Institutional Sales Key Management - Elevation 33 Years Corporate Banking General Manager (Corporate Accounts Group- Mumbai) Chief General Manager (Risk Management) Chief General Manager (Corporate Accounts Group) IndusInd Bank - Senior VP HDFC Bank Product Mahindra & Mahindra Management & Planning Modi Xerox Associated with SIB for 33 years Senior General Manager - Credit Regional Head - Ahemdabad, Chennnai, Mumbai Jan 14 Onwards; Received Extension for another 3 years 2 September, 2017 Elevation October 11,

8 Income Statement (` mn) Particulars Mar16 Mar17 Mar18E Mar19E Interest income 55,572 58,471 63,175 73,159 Interest expense (40,475) (41,716) (43,222) (49,665) Net interest income 15,097 16,754 19,953 23,493 growth (%) Non-interest income 5,174 7,156 8,391 9,142 Operating income 20,271 23,910 28,344 32,635 Operating expenses (11,478) (11,764) (13,231) (15,078) - Staff expenses (6,923) (6,765) (7,786) (8,158) Pre-provisions profit 8,793 12,146 15,113 17,557 growth (%) (0) Provisions & Contingencies (3,696) (6,144) (8,091) (5,104) Pre-tax profit (before nonrecurring items) 5,097 6,002 7,022 12,452 Pre-tax profit (after nonrecurring items) 5,097 6,002 7,022 12,452 Tax (current + deferred) (1,764) (2,077) (1,826) (4,346) Net profit 3,333 3,925 5,196 8,107 growth (%) Balance Sheet (` mn) Particulars Mar16 Mar17 Mar18E Mar19E Cash and balance with RBI/Banks 30,995 38,877 41,901 46,052 Investments 146, , , ,984 Advances 410, , , ,401 Interest earning assets 588, , , ,438 Fixed assets (Net block) 4,870 6,561 9,121 9,323 Other assets 38,837 39,492 64,596 66,425 Total assets 631, , ,695 1,001,186 Deposits 557, , , ,648 Other interest bearing liabilities 23,150 19,578 21,056 24,393 Total Interest bearing liabilities 580, , , ,041 Other liabilities and provisions 12,936 13,884 14,457 20,872 Share capital 1,350 1,803 1,803 1,803 Reserves & surplus 37,106 46,682 50,854 57,471 Less: Misc. expenditure Shareholders' funds 38,456 48,485 52,657 59,274 Minorities interests Total equity & liabilities 631, , ,695 1,001,186 E Estimates Important Ratios Particulars Mar16 Mar17 Mar18E Mar19E Valuation ratios Adjusted EPS (`) BVPS (`) Adjusted Book NAV/share (`) PER (x) Price/Book (x) Price/Adjusted book (x) DPS (`) Du-Pont ratios NII/Avg. Assets (%) Non-int. income/avg Assets Fee income / Avg Assets Trading gains / Avg Assets Cost / Avg Assets Non-tax Prov. / Avg Assets Tax Provisions / Avg Assets ROA (%) Leverage ROE (%) Balance Sheet ratios Loan growth (%) Deposit growth (%) Loans/Deposits (%) Investments/Deposits (%) CASA ratio (%) Profitability ratios NIMs (%) Interest spread (%) Yield on advances (%) Cost of deposits (%) Efficiency/other P/L ratios Non-interest income/net income (%) Trading income/net inc. (%) Cost/Income (%) Asset quality ratios Gross NPLs (%) Net NPLs (%) Net NPLs/Net worth (%) Loan provisions/avg loans (%) Provisions cover (%) Capitalisation ratios Tier I cap.adequacy (%) Total cap.adequacy (%) E Estimates October 11,

9 Aug-17 Sep-17 Oct-17 DART RATING MATRIX Total Return Expectation (12 Months) Buy > 20% Accumulate 10 to 20% Reduce 0 to 10% Sell < 0% Rating and Target Price History 50 SIB Target Month Rating TP (`) CMP (`) Sept-17 Buy DART Team Purvag Shah Managing Director purvag@dolatcapital.com Amit Khurana, CFA Head of Equities amit@dolatcapital.com CONTACT DETAILS Equity Sales Designation Direct Lines Kishor Bagri, CFA VP - Equity Sales kishorb@dolatcapital.com Kartik Sadagopan VP - Equity Sales kartiks@dolatcapital.com Kapil Yadav VP - Equity Sales kapil@dolatcapital.com Yomika Agarwal VP - FII Sales yomika@dolatcapital.com Derivatives Strategist Designation Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com Equity Trading Designation P. Sridhar VP and Head of Sales Trading sridhar@dolatcapital.com Chandrakant Ware AVP - Equity Sales Trading chandrakant@dolatcapital.com Derivatives Trading Designation Shirish Thakkar AVP - Derivatives shirisht@dolatcapital.com Hardik Mehta Sales Trader hardikm@dolatcapital.com Dolat Capital Market Private Limited. 20, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai

10 Analyst(s) Certification The research analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. I. Analyst(s) and Associate (S) holding in the Stock(s): (Nil) II. Disclaimer: This research report has been prepared by Dolat Capital Market Private Limited. to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies) solely for the purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of Dolat Capital Market Private Limited. This report has been prepared independent of the companies covered herein. Dolat Capital Market Private Limited. and its affiliated companies are part of a multi-service, integrated investment banking, brokerage and financing group. Dolat Capital Market Private Limited. and/or its affiliated company(ies) might have provided or may provide services in respect of managing offerings of securities, corporate finance, investment banking, mergers & acquisitions, financing or any other advisory services to the company(ies) covered herein. Dolat Capital Market Private Limited. and/or its affiliated company(ies) might have received or may receive compensation from the company(ies) mentioned in this report for rendering any of the above services. Research analysts and sales persons of Dolat Capital Market Private Limited. may provide important inputs to its affiliated company(ies) associated with it. While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and Dolat Capital Market Private Limited. does not warrant its accuracy or completeness. Dolat Capital Market Private Limited. may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and Dolat Capital Market Private Limited. reserves the right to make modifications and alterations to this statement as they may deem fit from time to time. Dolat Capital Market Private Limited. and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction. This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Dolat Capital Market Private Limited. and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions. For U.S. Entity/ persons only: This research report is a product of Dolat Capital Market Private Limited., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Dolat Capital Market Private Limited. only to "Major Institutional Investors" as defined by Rule 15a- 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person or entity. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Dolat Capital Market Private Limited. has entered into an agreement with a U.S. registered broker-dealer Ltd Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer/entity as informed by Dolat Capital Market Private Limited. from time to time. Dolat Capital Market Private Limited. Corporate Identity Number: U65990MH1993PTC Member: BSE Limited and National Stock Exchange of India Limited. SEBI Registration No: BSE - INB & INF , NSE - INB & INF , Research: INH Registered office: Office No. 141, Centre Point, Somnath, Daman , Daman & Diu Board: Fax: research@dolatcapital.com Our Research reports are also available on Reuters, Thomson Publishers, DowJones and Bloomberg (DCML <GO>)