Syndicate Bank (SYNBN) 130

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1 Result Update Rating matrix Rating : Hold Target : 141 Target Period : 12 months Potential Upside : 9% What s Changed? Target Changed from 145 to 141 EPS FY15E Changed from 27.7 to 25 EPS FY16E Unchanged Rating Unchanged Quarterly Performance Q2FY15 Q2FY14 YoY (%) Q1FY15 QoQ (%) NII 1,422 1, , Other income PPP , PAT Key Financials Crore FY2013 FY2014 FY2015E FY2016E NII 5,454 5,540 6,224 7,102 PPP 3,450 3,563 4,021 4,694 PAT 2,004 1,711 1,561 2,011 Valuation summary FY13 FY14 FY15E FY16E P/E Target P/E P/ABV Target P/ABV RoA RoE Stock data Market Capitalisation 7840 Crore GNPA (Q2FY15) 6049 Crore NNPA (Q2FY15) 3825 Crore NIM (Q2FY15) week H/L 180 /77 Equity Capital 602 Crore Face value 10 DII Holding (%) 11.3 FII Holding (%) 8.5 Price performance (%) 1M 3M 6M 12M Syndicate Bank Indian Bank Andhra Bank Corporation Bank Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Sheetal Ashar sheetal.ashar@icicisecurities.com November 12, 2014 Syndicate Bank (SYNBN) 130 Growth on track; asset quality to be watched Syndicate Bank s Q2FY15 performance was mixed. NII grew 5.3% QoQ (flat YoY) to 1422 crore (I-direct estimate: 1364 crore) as NIM improved to 2.96% from 2.47 %( Q1FY15). Credit growth slowed to 13.6% YoY to crore lower than our estimate while deposits grew at a healthy 25% YoY to crore faster than our estimate Other income surged 58% YoY to 437 crore supporting PAT led byincrease in recoveries of 86 crore and trading gains of 96 crore Higher provisions and higher tax rate (24%) led PAT to decline 32% YoY to 316 crore vs. our expectation of 411 crore Slippages were high at 1683 crore in Q2FY15 leading to an increase in NPA to 6045 crore from 5237 crore (Q1FY15). PCR came down to 65.4% from 67.5% leading to NNPA surge to 2.2% of credit Business growth to stay slightly ahead of industry Syndicate Bank is a mid-sized PSU bank with close 3500 branches. In the past eight years, it consistently grew its business above industry except in FY10-11 wherein it went into consolidation phase. Post FY11, business traction improved and was above industry at 17% CAGR in FY11-14 with loans at crore and deposits at crore by FY14. Currently, the book is diversified into corporate (36%), PSL (36%), retail (15%) and MSME (14%). We have built in business CAGR of 17% over FY14-16E with loans rising to crore & deposits at crore. Expect margins to stay stable against management guidance of pick-up Syndicate Bank s NIMs declined to 2.3% in FY10 from 3% levels in FY07 owing to its focus on higher growth and also due to higher deterioration in asset quality during FY10. However, in FY11-13, margins improved and have stayed at ~3% due to shedding of bulk deposits (down to 17% in FY13 from >25% in FY09), maintenance of CASA ratio at >30% levels and controlled asset quality. However, in FY14, margins slipped significantly to 2.52% mainly due to a sharp spurt in slippages to 3628 crore from 2142 crore in FY13 leading to a significant reversal of interest income. We have built in calculated margins of ~2.5% over FY14-16E. Asset quality slightly better than peers; H1FY15 bad in terms of NPA The bank s asset quality came under significant pressure in FY10 primarily due to service sector followed by corporate & personal loans. However, consolidation in asset growth brought in stability in asset quality with GNPA ratio dropping to 2% as on FY13, which is relatively better than peers. However, asset quality pressure has again emerged with GNPA surging to 3.4% (highest in the past seven years) to 6049 crore and RA increasing to crore or 6.2% of advances as on Q2FY15. PCR has also declined to 65.4% from >80% in Q2FY15. We revise our GNPA estimate upwards to 7378 crore FY16E (3.2% of credit, earlier 3%). Earnings traction to slide on NPA risks; maintain HOLD, reduce target Driven by MAT credit, FY12 and FY13 return ratios seemed higher with average RoA and RoE at ~0.8% and 17.5%, respectively. However, the same was unavailable in FY14 due to which RoE dropped to 15.2% apart from subdued operational performance (lower margins and enhanced credit cost). We have marginally revised our FY15E GNPA estimates upwards resulting in higher credit cost. Owing to asset quality pressure FY16E RoA, RoE may be contained at 0.6%, 14.8%, respectively, while the book value is expected to erode to 141 from 145 earlier. We have accordingly reduced our target price to 141 (1x FY16E ABV) and maintained our HOLD rating on the stock but with a negative bias. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY15 Q2FY15E Q2FY14 YoY (%) Q1FY15 QoQ (%) Comments NII 1,422 1,364 1, , NIM (%) bps bps NIM has improved QoQ as high cost DRI bulk deposit portion has come down Other Income Net Total Income 1,859 1,762 1, , Staff cost Other Operating Expenses PPP , Provision PBT Tax Outgo , PAT Other operating expenses are up on account of one-time hit of higher depreciation as bank has reduced useful life of certain assets to three years from five years earlier Provision increased QoQ as in Q1FY15 there were exceptional items (bank had reversed 120 crore provisions on assets sold to ARC and there was write-back in depreciation on investments to tune of 52 crore) PAT was down YoY by 33% as NII was flat and provisions were higher. PAT dipped QoQ as Q1FY15 has exceptional income to the tune of 238 crore. Key Metrics GNPA 6, , , , (Q1FY15: 1500 crore). GNPA has surged to 3.4% of credit highest in past seven years NNPA 3, , , , PCR dropped to 65.38% from 70%. Hence, NNPA rose to 2.22% of credit Total Restructured assets 10,736.0 NA 9, , There were no major addittion in RA in the current quarter Change in estimates FY15E FY16E ( Crore) Old New % Change Old New % Change Comments Net Interest Income 6,224 6, ,102 7, Pre Provision Profit 4,021 4, ,694 4, NIM (%) bps bps PAT 1,688 1, ,011 2, We have adjusted FY15E NPA estimates, which led to a decline in PAT ABV ( ) Assumptions Current Earlier FY13 FY14 FY15E FY16E FY15E FY16E Credit growth (%) Deposit Growth (%) CASA ratio (%) NIM Calculated (%) Cost to income ratio (%) GNPA ( crore) 2, , , , , ,077.0 NNPA ( crore) 1, , , , , ,353.0 Slippage ratio (%) Credit cost (%) We have increased our slippage ratio to 2% from 1.9% earlier. Mangement has guided at improvement in upgradation and recoveries, which can contain GNPA and act as a positive trigger ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Business growth to moderate but stay slightly higher than industry Syndicate Bank s loan book stood at crore with domestic advances amounting to crore. In the past three years, domestic advances grew at a CAGR of 10% while foreign advances increased at 25% CAGR over FY12-14 partly supported by rupee depreciation. The bank s loan book is well diversified between corporate (36%), PSL (36%), retail (15%) and SME (14%). Deposits amount to crore with CASA deposits of crore constituting 29.8%. The domestic CASA ratio has been maintained above 30% for the past five years despite increased competition owing to a sustainable increase in branches, concentrated focus on CASA build up and a significant presence in the southern region, which accounts for the second highest CASA mobilisation in India after the western region. We have factored in business CAGR of 17% over FY14-16E with loans increasing to crore and deposits rising to crore If we consider the past eight years, the bank has consistently grown its business above industry except in FY10-11 wherein it went into a consolidation phase. During FY06-09, loan CAGR was 31%, which got reduced to 14% over FY10-11 owing to a sharp spurt in NPAs (absolute GNPA rose 26% YoY in FY10). This made the bank take a re-look at its strategy. Post FY11, the bank s business traction improved and was above industry at 17% CAGR over FY Going ahead, the management expect loans and deposit growth to pick up and be above the industry growth. We have factored in business CAGR of 17% over FY14-16E with loans increasing to crore and deposits rising to crore. Exhibit 1: Business traction to stay ahead of industry ( crore) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 FY15E FY16E (%) Advances Deposits Advances Growth (YoY) (RHS) Deposits Growth (YoY) (RHS) ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 2: Corporate & PSL segment remain major components SME 14% Retail 15% Corporate 35% Priority sector 36% We expect the bank s calculated NIMs to stay steady at ~2.5% over FY14-16E as against management guidance of bps improvement. Margins are expected to stay stable at ~2.5% Expect margins to stay stable against management guidance of pick-up We expect the bank s calculated NIMs to stay steady at ~2.5% over FY14-16E as against management guidance of a bps improvement. We believe the focus on retail loans, going ahead, and within that on home loans, which are available at the base rate in order to be competitive, will keep margins upside under check. The management is banking on an improvement in overseas margins from 0.3% to ~ % for an improvement in overall NIMs, which we believe is difficult considering the global economic scenario. Further, fresh slippages will continue though going ahead, they will keep pressure on margins. Syndicate Bank s NIMs had declined to 2.3% in FY10 from 3% in FY07 owing to its focus on higher growth and also due to higher deterioration in asset quality during FY10. However, in FY11-13, margins improved and stayed at ~3% due to shedding of bulk deposits (down to 17% in FY13 from >25% in FY09), maintenance of CASA ratio >30% levels despite competition from private banks and controlled asset quality. However, during FY14, margins slipped significantly to 2.52% mainly due to a sharp spurt in slippages to 3628 crore from 2142 crore in FY13 leading to a significant reversal of interest income. Exhibit 3: Margins to stay steady (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E NIMs (Calculated) ICICI Securities Ltd Retail Equity Research Page 4

5 Asset quality to remain acceptable Syndicate Bank s asset quality has been relatively better than peers. The stressed asset ratio (GNPA + restructured assets) as on FY14 stood at 9%, lower compared to its peer s ratio of 10%+. This is due to its diversified book and consolidation phase adopted during FY10-11, which proved to be a blessing in disguise where its asset growth was moderate compared to aggressive growth clocked by peers. Further, its infra exposure at ~14% was lower compared to peers. The stressed asset ratio (GNPA + restructured assets) as on FY14 stood at 9%, which is lower compared to its peer s ratio of 10%+ During FY10, the bank s asset came under significant pressure wherein the GNPA ratio increased to 2.2% vs. 1.9% in FY09 primarily contributed by the service sector followed by corporate and personal loans. However, the consolidation phase adopted during FY10-11 brought in stability in the asset quality with GNPA ratio dropping to 2% as on FY13, which is relatively better than peers. However, FY14 saw the GNPA ratio rising to 2.65% (highest in the past six years) as the economy weakened further. Further, in the first half of FY15 so far, slippage continues to be high with 1500 crore slippage in Q1FY15 and 1683 crore in Q2FY15, which has led to GNPA rising to 3.46% (higher in seven years). RA as on Q2FY15 was crore or 6.2% of advances. PCR has also declined to 65.3% from >80% in FY13. As per the management, fresh slippage may moderate. Going forward, the bank has strengthened its recovery process, which will aid contain NPAs. However, we have factored in a slippage ratio of 2.1% in FY15E and 1.7% in FY16E leading to absolute GNPA increasing to 7378 crore in FY16E from 4611 crore as on FY14. Exhibit 4: Slippages to continue but pace may reduce 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-1, , ,599 1,031 3,183 1,185 2,979 1, ,611 2, ,215 3,649 7,378 4,504 FY09 FY10 FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 FY15E FY16E GNPA NNPA GNPA ratio (RHS) NNPA ratio (RHS) ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuation Driven by MAT credit, FY12 and FY13 return ratios seemed higher with average RoA and RoE at ~0.8% and 17.5%, respectively. However, the same was unavailable in FY14 due to which RoE dropped to 15.2% apart from a subdued operational performance (like lower margins & enhanced credit cost than FY13). We have tweaked our FY15E NPA estimates slightly higher resulting in higher credit cost. Thus, our earnings CAGR fell to 8.4% over FY14-16E. FY16E RoA and RoE, therefore, may moderate to 0.6% and 14.8%, respectively, while the FY16E book value may erode to 141 from 145 earlier. Accordingly, we have reduced our target price to 141 (1x FY16E ABV). We maintain our HOLD rating on the stock but with a negative bias. Exhibit 5: Trend in return ratios (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E RoE RoA Exhibit 6: Valuation NII Growth PAT Growth P/E ABV P/ABV RoA RoE ( cr) (%) ( cr) (%) (x) ( ) (x) (%) (%) FY13 5, , FY14 5, , FY15E 6, , FY16E 7, , ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot Target price: Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event FY00 Syndicate came out with an IPO aggregating 125 crore at the price of 10 FY07 Stock was in a bull run for years making a high of 115. The economy was in a boom period with yields falling, asset quality improving and strong PAT growth FY09 Stock corrected as recession set in but corporates had a limited impact. Since SBL has high corporate exposure - PAT and asset quality remained healthy FY10 SBL went into consoloidation phase with credit growth of 10.9%, 18.1% and 15.8% for FY10, FY11 and FY12, respectively, with change of management FY11 Stock made all-time highs as the market and economy recovered from recession. Also, Syndicate is delivering a healthy financial performance Jan-12 The stock has fallen in line with other PSU banks as risk of corporate NPA rises. However, SBL did not face much of an NPA issue as the bank was in consolidation May-13 G-sec yields spiked post the Fed announcement on May 22 of its intention to taper QE and tighten liquidity measures by RBI. MTM risk and CoF rose. Also, asset quality of Syndicate came under pressure for the first time as the market was factoring it. A few large chunky accounts had slipped in H2FY14 Sep-13 Stock recovered as the new Governor announced measures to tackle rupee volatility and ease liquidity. Risk of a further rise in CoF subsides but MTM risk stayed Aug-14 Stock under pressure after the news that CBI has taken the CMD of the bank in custody over allegedly extending credit facilities to private companies in lieu of bribe Top 10 shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Government of India 30-Sep Life Insurance Corporation of India 30-Sep HDFC Standard Life Insurance Company Limited 30-Sep Dimensional Fund Advisors, L.P. 30-Sep Jupiter Asset Management Ltd. 30-Sep Mellon Capital Management Corporation 30-Sep JM Financial Asset Management Pvt. Ltd. 30-Sep Robeco Institutional Asset Management B.V. 31-Aug Norges Bank Investment Management (NBIM) 31-Dec The Vanguard Group, Inc. 30-Sep Source: Reuters, ICICIdirect.com Research Recent Activity Buys Shareholding Pattern (in %) Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Promoter FII DII Others Sells Investor name Value Shares Investor name Value Shares Jupiter Asset Management Ltd. 5.92m 3.36m HDFC Standard Life Insurance Company Limited -8.45m -4.80m Mellon Capital Management Corporation 3.45m 1.96m Life Insurance Corporation of India -3.93m -2.23m JM Financial Asset Management Pvt. Ltd. 2.78m 1.58m Russell Investments Limited -2.29m -1.30m Robeco Institutional Asset Management B.V. 2.78m 1.41m Wellington Management Company, LLP -1.70m -1.11m Norges Bank Investment Management (NBIM) 1.94m 1.27m Birla Sun Life Asset Management Company Ltd m -0.57m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY13 FY14 FY15E FY16E Interest Earned 17, , , ,536.2 Interest Expended Net Interest Income 5, , , ,101.8 growth (%) Non Interest Income Fees and advisory Treasury Income Other income Net Income Staff cost Other Operating expense Operating profit Provisions PBT Taxes Net Profit 2, , , ,011.3 growth (%) EPS ( ) Key ratios (Year-end March) FY13 FY14 FY15E FY16E Valuation No. of Equity Shares (Crore) 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) FY13 FY14 FY15E FY16E Sources of Funds Capital Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total 215, , , ,631 Applications of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total 215, , , ,631 Growth ratios (% growth) (Year-end March) FY13 FY14 FY15E FY16E Total assets Advances Deposit Total Income Net interest income Operating expenses Operating profit Net profit Net worth EPS 52.6 (17.7) 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) FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E Bank of India (BANIND) Buy 17, Bank of Baroda (BANBAR) 1,017 1,250 Buy 42, Dena Bank (DENBAN) Hold 3, Punjab National Bank (PUNBAN) 954 1,060 Buy 33, State Bank of India (STABAN) 2,764 3,234 Buy 189, Syndicate Bank (SYNBN) Hold 7, Axis Bank (UTIBAN) Buy 111, City Union Bank (CITUNI) Hold 4, Development Credit Bank (DCB) Buy 2, Federal Bank (FEDBAN) Buy 12, HDFC Bank (HDFBAN) Hold 218, Indusind Bank (INDBA) Buy 38, Jammu & Kashmir Bank(JAMKAS) Hold 6, Kotak Mahindra Bank (KOTMAH) 1,127 1,117 Hold 86, South Indian Bank (SOUIN0) Hold 3, Yes Bank (YESBAN) Buy 28, 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%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ANALYST CERTIFICATION We /I, Kajal Gandhi CA Vasant Lohiya CA Sheetal Ashar CA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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