South Indian Bank (SOUIN0) 24

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1 Result Update July 17, 215 Rating matrix Rating : Buy Target : 27 Target Period : 12 months Potential Upside : 13% What s Changed? Target Changed from 29 to 27 EPS FY16E Changed from 3.6 to 3. EPS FY17E Changed from 4.4 to 3.9 Rating Changed from Hold to Buy Quarterly Performance Crore Q1FY15 YoY Gr. Q4FY15 QoQ Gr. NII (.2) NIM bps 2.6-6bps PPP (18.1) PAT (48.4) Key Financials Crore FY14 FY15 FY16E FY17E NII PPP PAT ABV ( ) Valuation summary FY14 FY15 FY16E FY17E P/E Target P/E P/ABV Target P/ABV RoA RoE Stock data Particular Amount Market Capitalisation 3254 crore GNPA () 714 crore NNPA () 464 crore NIM () 2.54% 52 week H/L 34.5/22.5 Equity capital 135 crore Face value 1 DII Holding 12.9 FII Holding 28.2 Price performance Return % 1M 3M 6M 12M South Indian Federal Bank City union Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com South Indian Bank (SOUIN) 24 NPA concerns stay; business growth picking up South Indian Bank (SIB) reported PAT below our estimate at 65 crore (down 48% YoY) against our estimate of 81 crore mainly on account of lower-than-expected NII ( 34 crore vs. I-direct estimate of 37 crore) and higher provisioning expenses Margins were down 16 bps QoQ to 2.54%, which was the lowest in the last several quarters. Loan growth saw an improvement from the 3.2% YoY increase seen in Q4FY15. In, the traction was close to industry levels at 11.6% YoY to crore Asset quality pressure remained against expectation of an improvement in. Slippages were at 175 crore, at levels similar to that seen in the past two quarters Strategic location in South India benefits; business growth to improve SIB is an 84-year old bank based out of Thrissur, Kerala. It generates ~5% of its business from Kerala and Tamil Nadu. Due to its strategic location, SIB gets advantage of NRI deposits that forms ~23% (~ crore) of total deposit. Similarly, gold loan demand (~ 4268 crore, 11% of SIB s credit) is high in this region. In the past, SIB has grown at a strong 25% CAGR in credit to crore with 24% deposit CAGR to crore in FY8-13. Strong business growth supported NII CAGR of 27.8% to 128 crore in FY8-13. However, business growth significantly moderated in FY14 & FY15 due to the economic slowdown. Credit grew 3.2% YoY to crore while deposits grew 9.3% YoY to crore in FY15. Going ahead, we estimate credit, deposit CAGR of 13.6%, 13% to 4825 crore, crore, respectively, over FY15-17E. Loan book well diversified; NIM to improve to ~ % range ahead About 42% ( crore) of SIB s credit book comprises the corporate sector wherein yields are low. Hence, they earn relatively low NIM of % compared to peer s earning of %. Other than corporate, agri & SME credit comprise 34% ( crore) of credit while retail credit forms 24% ( 9369 crore) of credit. Going ahead, the management has guided at reducing its corporate book proportion. Major growth will be led by the retail & SME segment for FY16E, FY17E. With increased focus on high yielding retail & SME loans, NIM is expected to improve to ~ % by FY17E. Asset quality key factor to watch SIB has suffered a significant asset quality deterioration in Q1FY13- H2FY14 wherein its GNPA mounted from 267 crore to 614 crore as a few large corporate accounts had slipped to the NPA category. Similarly, its NNPA increased from 77 crore to 44 crore. In, GNPA surged to 714 crore while fresh slippages were to the tune of 175 crore. We factor in GNPA ratio of 1.8% and NNPA ratio of.9% in FY16E. Slippages and credit cost may be lower going ahead vs. FY15. Valuations reasonable considering modest return ratios; recommend BUY SIB s performance in terms of major parameters like business growth, margins, asset quality and profitability has been impaired in the past two or three quarters. NPA pressure would continue though slightly at a lower pace than in. We have revised our FY16E and FY17E PAT lower by 16% and 8% to 43 crore and 533 crore, respectively. RoA is expected to improve but at.8% by FY17E is still below peers. SIB trades at a discount to peers as its RoA is low and has a restructured book of 5.7% of credit. We maintain target multiple of 1x FY17E ABV but reduce TP to 27 from 29 earlier. We have a BUY rating on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis E Q1FY15 YoY Q4FY15 QoQ Comments NII Interest reversal of 25 crore results in NII coming in below estimate NIM bps bps Adjusted for interest reversal, the margins would have been at 2.6% Other Income Other income came in slightly higher than our estimate at 14 crore vs. 96 crore estimated. Trading income was low at 14 crore while fee income was at 52 crore, up 35% YoY due to the low base last year Net Total Income Staff cost Other Operating Expenses Cost to income ratio stayed high at 59.3% PPP Provision Provisions stayed higher than estimated owing to asset quality pressure PBT Tax Outgo PAT Key Metrics GNPA NNPA Total Restructured assets 2,17. 1,9. 1, , Slippages stood at 175 crore vs. 164 crore in Q4FY15. The bulk of the slippages were from a single account in the steel sector ( 6 crore). As per the management, slippages may reduce to 5-6 crore per quarter, going ahead NNPA ratio stood at 1.2% of credit vs.96% in Q4FY15. PCR dipped to 56% from 6% levels earlier Fresh RA during the quarter was at 17 crore.the total restructured assets stood at 217 crore (5.7% of credit) Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Net Interest Income 1,6.6 1, ,9. 1, NII estimates have been lowered as we factor in a decline in margins and credit traction Pre Provision Profit ,2. 1, NIM calculated bps bps PAT PAT has been revised downwards adjusting for a decline in NII and higher NPA provisions ABV ( ) Assumptions Current Earlier Comments FY14 FY15 FY16E FY17E FY16E FY17E Credit growth We have lowered the credit growth assumption given the slower pace of loan growth so far Deposit Growth CASA ratio CASA ratio is estimated to improve NIM Calculated Cost to income ratio GNPA ( crore) NNPA ( crore) Slippage ratio Credit cost ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Asset quality pressure stays in The bank has witnessed sharp jerks in terms of asset quality during Q1FY13 to H2FY14 as discussed earlier. However, SIB managed to recover a significant part of its slippages. Its GNPA and NNPA ratios stood at 1.5% and.9%, respectively, in Q1FY15. The management guided that asset quality will stay stable. However, the last three quarters again saw a surge in slippages that were at ~ crore vs. below 1 crore range earlier. Accordingly, the GNPA ratio jumped to 1.9% by. Going ahead, the management has indicated that fresh slippages will reduce from current levels. We factor in a GNPA ratio of 1.8% over FY16E improving to 1.7% by FY17E as the proportion of relatively safer retail loan goes up. Exhibit 1: Slippages remain on higher side during 3 Although it complied with RBI s guidelines, SIB s PCR is on the lower side at 56% as on FY1 FY11 Q1FY12 Q2FY12 Q3FY12 FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 FY16E FY17E GNPA NNPA Source: Company quarterly press release, ICICIdirect.com Research As per the management, two accounts of ~ 23 crore are under watch. A single account of 6 crore, which slipped this quarter, is expected to be upgraded in the next quarter. SIB has completed providing 75 crore as funded interest term loan (FITL) provision as per the mandate from the RBI that had permitted it to be spread across quarters through FY15. Restructured assets Fresh RA stayed above 1 crore at 17 crore vs. 153 crore seen in Q4FY15. The total outstanding restructured asset of SIB is slightly on the higher side at 217 crore (5.7% of total credit). Of these, ~6% pertains to three discoms including Uttar Pradesh, Rajasthan and Tamil Nadu. ICICI Securities Ltd Retail Equity Research Page 3

4 Business growth sees improvement in Exhibit 2: Business growth at 12% YoY in vs. 7% YoY in Q4FY ( Crore) FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 FY16E FY17E Total Business YoY business growth (RHS) Source: Company quarterly press release, ICICIdirect.com Research Historically, deposits have grown at a strong pace of 24% CAGR to crore in FY8-13. However, total deposit growth was lacklustre in at.8% QoQ to crore (incremental deposit of 41 crore in ). Outstanding NRI deposits were at ~ crore. SIB has location advantage, which helps it to maintain robust NRI deposit growth. The CASA ratio improved 17 bps QoQ to 22.3% but has largely remained in the range of 2-22% over the years. Exhibit 3: CASA ratio improves during, owing to lower traction in term deposits ( Crore) FY11 FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 FY16E FY17E Term Deposits CASA CASA Ratio Source: Company quarterly press release, ICICIdirect.com Research Historically, credit has grown at a strong pace of 25% CAGR to crore in FY8-13. However, credit growth has been modest in the past couple of years at 8.4% CAGR to crore over FY Owing to the change in rules pertaining to gold loans, SIB s gold loan book has run down from over 7 crore as on Q1FY14 (22% of total credit) to ~ 4268 crore (11% of credit). However, owing to stability in gold prices, the management has indicated that the gold loan portfolio should see healthy traction, going ahead. We factor in credit growth at 13.6% CAGR (FY15-17E) with growth primarily in retail and SME credit, which includes home loans, auto loans, gold loans etc. ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 4: Advances growth improves to 11.6% YoY in post bottoming out at 3.2% in Q4FY The bank has not grown its gold loan book in the past couple of years. The gold loan book stood at over 7 crore (22 of total credit) as on FY12 while it was at ~ 4268 crore (11% of total credit) as on. However, this proportion is now expected to increase ( Crore) FY12 Q1FY13 Q2FY13 Q3FY13 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 FY16E FY17E Advances YoY Growth (RHS) Source: Company quarterly press release,icicidirect.com Research Exhibit 5: Loan book break-up ( crore) The management has guided that the proportion of non corporate portion i.e. retail and SME credit shall increase, going ahead retail, 9369, 24% corporate, 16317, 42% SME and agri, 13135, 34% NIM comes under pressure at ~2.54% levels in Exhibit 6: Reported NIM shrinks to one of the lowest levels in FY12 Q1FY13 H1FY13 9MFY13 FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 H1FY15 Q3FY15 Q4FY15 YoA CoD NIM (RHS) Source: Company quarterly conference call, ICICIdirect.com Research The bank aims to manage NIM at ~ % by curtailing its cost of funds. Focus on CASA and retail deposits (low cost) shall aid in maintaining its cost of fund. Increased focus on the high yielding retail book is expected to improve yield on advances. We have been conservative and factored in NIMs at ~ % over FY16-17E. ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuation At the CMP, SIB is trading at a reasonable valuation at.9x its FY17E ABV. Historically, the profitability of the bank has grown at a healthy pace of 21.1% CAGR from 195 crore in FY9 to 58 crore in FY14. However, SIB s performance in terms of major parameters such as business growth, margins, asset quality and profitability has been impaired in the past two or three quarters. NPA pressure may continue though slightly at a lower pace than in. We have revised our FY16E and FY17E PAT lower by 16% and 8% to 43 crore and 533 crore, respectively. RoA is expected to improve but at.8% by FY17E is still below peers. SIB is trading at a discount to peers as its RoA is low and has a restructured book of 5.7% of credit. We maintain the target multiple of 1x FY17E ABV but reduce the target price to 27 from 29 earlier. We have a BUY recommendation on the stock. Exhibit 7: Valuation NII Growth PAT Growth PE ABV P/ABV RoA RoE ( cr) ( cr) (x) ( ) (x) FY14 1, FY15 1,366 (2.3) 37.5 (39.4) FY16E 1, FY17E 1, ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot 4 35 Target Price: Oct-4 Feb-5 Jun-5 Oct-5 Feb-6 Jun-6 Oct-6 Feb-7 Jun-7 Oct-7 Feb-8 Jun-8 Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event FY2 South Indian Bank comes out with IPO of 51.2 crore at the price of 32 ( 1.5 per share on adjusted basis) Mar-6 SIB raises 15 crore of capital via FPO route at 6.6/share on adjusted basis Jan-8 The stock was in a bull run as it was delivering strong credit, PAT growth in line with strong growth in economy and banking sector Mar-9 The stock loses 75% of its value in five quarters during recession. The NPA levels of SIB in FY9 had risen but the PAT growth was steady Sep-1 Stock split in the ratio of 1:1 Nov-1 The stock rallies as markets come out of recession and fear of further NPA rise wanes. SIB is back on track to deliver healthy all-round performance Aug-12 Three persons arrested in connection with an alleged extortion racket offering officer's post in SIB Aug-12 A fraud of 34.2 crore was perpatrated by two employees, which involved forging documents and granting loan without collateral Sep-12 SIB raised crore via QIP issue at the price of Earlier, it planned to raise 1 crore at 28-3, which was unsuccessful Dec-13 Stock remains largely rangebound and struggles to move up in the last three years as the bank has been marred by few one-offs time and again Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 The Carlyle Group 3-Jun ICICI Prudential Asset Management Co. Ltd. 31-May Pabrai Investment Funds 3-Jun Life Insurance Corporation of India 3-Jun Kader (Yusuffali Musaliam Veettil Abdul) 3-Jun Ruane, Cunniff & Goldfarb, Inc. 3-Jun George Kaiser Family Foundation 3-Jun CX Securities, Ltd. 3-Jun International Value Advisers, LLC 3-Jun Kotak Mahindra Asset Management Company Ltd. 3-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Promoter..... FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Polaris Capital Management, LLC 3.65m 9.83m Tata Asset Management Limited -3.35m -7.44m Reyl & Cie S.A..13m.3m IFCI Ltd -1.14m -3.7m TIAA-CREF.12m.28m CX Securities, Ltd. -.65m -1.74m HSBC Global Asset Management (India) Private Limited -.59m -1.32m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement crore (Year-end March) FY14 FY15 FY16E FY17E Interest Earned Interest Expended Net Interest Income 1, , , ,851.9 growth Non Interest Income Net Income Staff cost Other Operating expense Operating profit Provisions Taxes Net Profit growth EPS ( ) Key ratios (Year-end March) FY14 FY15 FY16E FY17E Valuation No. of Equity Shares EPS (Rs.) BV (Rs.) ABV (Rs.) P/E P/BV P/ABV Yields & Margins Net Interest Margins Yield on assets Avg. cost on funds Yield on average advances Avg. Cost of Deposits Quality and Efficiency Cost to income ratio Credit/Deposit ratio GNPA NNPA ROE ROA Balance sheet crore (Year-end March) FY14 FY15 FY16E FY17E Sources of Funds Capital Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total 54, , , ,39.3 Applications of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total 54, , , ,39.3 Growth (Year-end March) FY14 FY15 FY16E FY17E Total assets Advances Deposit Total Income Net interest income Operating expenses Operating profit Net profit Net worth EPS ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Banking) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA RoE Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Bank of India (BANIND) Sell 1, Bank of Baroda (BANBAR) Buy 32, Punjab National Bank (PUNBAN) Buy 26, Syndicate Bank (SYNBN) Buy 6, Indian Bank (INDIBA) Buy 5, Axis Bank (UTIBAN) Buy 143, City Union Bank (CITUNI) Buy 4, DCB Bank (DCB) Buy 3, Federal Bank (FEDBAN) Buy 6, HDFC Bank (HDFBAN) 1,115 1,225 Buy 278, IndusInd Bank (INDBA) 932 1,5 Buy 54, Jammu & Kashmir Bk(JAMKAS) Buy 5, Kotak Mahindra Bank (KOTMAH) Hold 56, South Indian Bank (SOUIN) Buy 3, Yes Bank (YESBAN) Buy 34, ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 1

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ICICI Securities Ltd Retail Equity Research Page 11