Emkay Your success is our success

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1 Emkay Your success is our success January 16, 2013 Rating Previous Reco Accumulate Hold CMP Target Price Rs28 Rs32 EPS Chg FY13E/FY14E (%) NA Target Price change (%) 28 Nifty 6,002 Sensex 19,818 Price Performance (%) 1M 3M 6M 12M Absolute Rel. to Nifty Source: Bloomberg Relative price chart 40 Rs % South Indian Bank Results beat estimates; Asset quality healthy ICON CAPITAL SIB s Q3FY13 results beat forecast with NII at Rs3.5bn and adj PAT at Rs1.3bn. NII beats estimates by almost 8% despite slower loan growth of 3% qoq Sharper loan growth in sectors like SME helped margins. The NIMs expanded by about 10bps qoq led by QIP money driven 10bps qoq drop in cost of funds Asset quality witnesses turnaround as GNPA/ NNPA down by 4%qoq/19%qoq resp. One time settlement likely in NAFED A/c (Rs1.5bn) with 60% recovery rate. PCR increased to 59% Recent draft report 1 shows that RBI may favor banks in gold loans over NBFCs giving confidence in SIB. Valuations at 1.2x/1x FY14E/FY15E ABV are attractive Result Update Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Source: Bloomberg South Indian Bank (LHS) Rel to Nifty (RHS) Stock Details Sector Banking & Financial Services Bloomberg SIB IB Equity Capital (Rs mn) 1,336 Face Value(Rs) 1 No of shares o/s (mn) 1, Week H/L 31/ 20 Market Cap (Rs bn/usd mn) 37/ 681 Daily Avg Volume (No of sh) 5,775,280 Daily Avg Turnover (US$mn) 2.8 Shareholding Pattern (%) Sep12 Jun12 Mar12 Promoters N/A N/A N/A FII/NRI Institutions Private Corp Public Source: Bloomberg Kashyap Jhaveri kashyap.jhaveri@emkayglobal.com Pradeep Agrawal pradeep.agrawal@emkayglobal.com Aalok Shah aalok.shah@emkayglobal.com P&L and asset quality surprise positively SIB s NII grew by sharp 29% yoy (18.4% qoq) to Rs3.5bn, much ahead of our as well as consensus expectations. Even adjusted for interest income reversal in the previous quarter (Rs220mn), the growth could have been 10% qoq. The growth in NII was driven by 11bps qoq expansion in reported margins. Other income growth came in modest at 11% yoy and was largely driven by treasury. As SIB did provisions of Rs260mn on one large account (Rs1.5bn), the profits came in line with estimates at Rs1.3bn. The slower loan growth of 3% qoq was largely driven by retail gold loans (22% qoq) and SME loans (37% qoq). The deposits remained flat qoq with CASA expanding by 100bps YTD. The LDR expanded by 140bps qoq to 74.6% We were positively surprised with asset quality as GNPA/NNPA came down by 4%qoq/19%qoq to Rs4.7bn/2.0bn as slippages remained modest at 0.7% annualised. SIB has provided 38% YTD towards NAFED account and the rest to be provided over Q1FY13/ FY14. Though OTS is likely in the near future, the bank has been prudent in providing for the same. Financial Snapshot (Standalone) (Rsmn) Y/E Net Net EPS ABV RoA RoE PE P/ABV Mar Income Profit (Rs) (Rs) (%) (%) (x) (x) FY12A 12,688 4, FY13E 15,870 4, FY14E 19,290 6, FY15E 23,346 7, This report is distributed by Icon Capital Limited in association with Emkay Global Financial Services Limited. This report is classified as being a marketing communication for the purposes of the rules and guidance (FSA Rules) issued by the Financial Services Authority (FSA). This is principally because Icon Capital Limited cannot verify that this report has been prepared in accordance with UK legal requirements designed to promote the independence of investment research. This report has been prepared by the research division of Emkay Global Financial Services Limited and has been reviewed by Icon Capital Limited, but no material changes have been made as a result. Emkay Global Financial Services Limited is a member of the Bombay Stock Exchange and The National Stock Exchange of India and is registered with the Securities and Exchange Board of India. Icon Capital Limited is a member of the London Stock Exchange and is authorised and regulated by the FSA. Emkay Global Financial Services Ltd. 1

2 Exhibit 1: Yield Analysis % Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 YoY QoQ bps bps Yield on advances Yield on Investments Yield on funds Cost of Funds NIM NIMs # Exhibit 2: Key financials Quarterly Rs mn Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 YoY (%) QoQ (%) YTD' 13 YTD' 12 YoY (%) Net Interest Income 2,734 2,846 2,968 2,977 3, ,471 7, Other Income ,140 1, Fee Income Net Income 3,333 3,671 3,718 3,706 4, ,611 9, Total Operating Expenses 1,543 2,040 1,643 1,709 1, ,186 4, As % Of Net Income Employee Expenses 893 1,281 1,002 1,015 1, ,098 2, As % Of Net Income Other Expenses ,088 1, As % Of Net Income Operating Profit 1,790 1,630 2,075 1,996 2, ,425 4, As % Of Net Income Provisions Prov for NPA PBT 1,568 1,507 1,821 1,437 1, ,156 4, Total Tax ,672 1, Adjusted PAT 1,023 1,220 1,230 1,189 1, ,698 2, Extra Ordinary Items Reported PAT 1,023 1,220 1, , ,484 2, Reported EPS Key highlights: Loan growth driven by SME: SIB s Q3FY13 loan growth at 3% qoq was primarily driven by SME (+35% qoq). SME saw a huge jump as RBI enlarged the scope of the private sector SME from Rs2mn to Rs20mn. Agri loans declined 39%yoy, adjusted for which, the overall loan growth was much stronger at 22% yoy. Margin expansion led by loan book mix and QIP funds: The margins expansion during the quarter would have been largely led by better yields as SIB expanded SME and retail loan book. Also, SIB raised Rs4.4bn during Q2FY13 from QIP, which would have helped cost of funds. NII drives earnings growth: SIB s fee income during the quarter declined by 15% qoq even as the trading gains gave some support to other income. However, with strong NII growth, the operating profit grew by 31% yoy. In fact, core operating profit grew by sharper 34% yoy for Q3FY13 One large account drives provisions: During Q3FY13, SIB has provided Rs337.5mn for one large account of Rs1.5bn which has slipped into NPA in the last quarter. The bank will be providing another Rs337.5mn in Q4FY13, and the rest over FY14. Though the account is likely to be subjected to OTS with 60% recovery rate, as a prudent measure the bank will be completely providing for the account over the FY13/14, provided the settlement does not happen within these two years. Emkay Research January 16,

3 Tier I ratio remains robust but running down fast: The tier I ratio as on Q3FY13 end stood healthy at 11.8% (excluding M9FY12 profits). However with sharp growth in SME advances SIB s tier I CAR still has declined by 50bps qoq. Valuation and view Recent draft report has not only allayed the fears regarding any clamping down by RBI over high concentration of Gold loan in the banks books, but also has helped in building confidence in the banks gold loan business, as the report favored banks in gold loans business over NBFCs. With almost Rs65bn of Gold loan portfolio, which is 60% of second largest Gold loan NBFC, the banks is a proxy play for gold loan NBFC s, which offers tremendous growth opportunity while maintaining asset quality and margins at the same time. We believe SIB is a better placed than other peers in the industry as 1) 22% of its portfolio is gold loan which has negligible delinquencies 2) it makes 6% NIM s on Gold loan business which provide cushion to overall NIM s. 3) also helps in improving the tier I capital. Given above factors the valuations look attractive at 1.2x/ 1x FY14E/FY15E ABV, however low RoA as compared to other comparable peers like Federal bank, KVB, CUB to also work as a cap on the valuation. We have introduced FY15E numbers for SIB with EPS of Rs5.9 and ABV of Rs29 and value SIB at 1.1X FY15 ABV with 12 month price target of Rs32. Exhibit 3: Peer comparision P/ABV ROA ROE FY14 FY15 FY14 FY15 FY14 FY15 SOUTH INDIAN BANK LIMITED KARUR VYSYA BANK LTD ING VYSYA BANK LIMITED CITY UNION BANK LTD FEDERAL BANK LTD MANAPPURAM GEN FIN & LEASING MUTHOOT FINANCE LTD , Bloomberg Exhibit 4: Advance break up Rs bn Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 YoY (%) QoQ (%) Large corporate/others SME Agriculture Retail and others Total advances Exhibit 5: Deposit profile Rs bn Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 YoY (%) QoQ (%) CASA CASA (%) Other Deposit Total deposits Exhibit 6: Other income Rs mn Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 YoY (%) QoQ (%) YTD' 13 YTD' 12 YoY (%) Fee/Commission income Trading gains/(losses) Forex gains/(losses) Other non int income , Total ,140 1, Fee/Forex/others ,700 1, Emkay Research January 16,

4 Exhibit 7: Asset quality Rs mn Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 YoY (%) QoQ (%) Gross NPLs 2,342 2,672 2,947 4,958 4, Net NPLs ,419 1, Gross NPLs (%) Net NPLs (%) Provision cover (%) Net NPLs/Net worth (%) Emkay Research January 16,

5 Key Financials Income Statement Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E Net interest income 10,217 13,017 15,940 19,823 Other income 2,471 2,852 3,350 3,523 Net income 12,688 15,870 19,290 23,346 Operating expenses 6,173 7,426 8,798 10,357 Pre provision profit 6,515 8,443 10,492 12,989 PPP excl treasury Provisions 792 1,099 1,051 1,166 Profit before tax 5,723 7,344 9,441 11,823 Tax 1,707 2,424 3,115 3,902 Tax rate Profit after tax 4,017 4,921 6,325 7,922 Balance Sheet Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E Liabilities Equity 1,134 1,334 1,334 1,334 Reserves 20,541 28,599 33,520 40,038 Net worth 21,675 29,933 34,854 41,371 Deposits 365, , , ,151 Borrowing & Others 16,991 20,925 25,404 30,471 Total liabilities 403, , , ,994 Assets Cash and bank 26,405 38,527 45,807 54,493 Investments 93, , , ,480 Customer assets 272, , , ,053 Others 10,489 11,926 12,441 12,967 Total assets 403, , , ,994 Key Ratio (%) Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E NIM Non-II/avg assets Fee income/avg assets Opex/avg assets Provisions/avg assets PBT/avg assets Tax/avg assets RoA RoAE GNPA (%) NNPA (%) Valuation Table Y/E Mar FY11A FY12A FY13E FY14E Net profit (Rs mn) 4,017 4,921 6,325 7,922 Shares in issue (mn) 1,134 1,334 1,334 1,334 EPS (Rs) PER (x) FDEPS(Rs) FDPER (x) Book value (Rs) P/BV (x) Adj book value (Rs) P/ABV (x) P/PPP (x) Dividend yield (%) Emkay Research January 16,

6 Emkay Rating Distribution BUY ACCUMULATE HOLD REDUCE SELL Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next months. Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next months. Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next months. Expected total return (%) (stock price depreciation) of upto (-)10% within the next months. The stock is believed to under perform the broad market indices or its related universe within the next months. Emkay Global Financial Services Ltd. 7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai India Tel: Fax: Web: DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates are participants in virtually all securities trading markets in India. 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