South Indian Bank. Institutional Equities. 4QFY18 Result Update. Asset Quality Pain To Ease Hereafter BUY. 15 May 2018

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1 4QFY18 Result Update Institutional Equities South Indian Bank 15 May 2018 Reuters: SIBK.BO; Bloomberg: SIB IN Asset Quality Pain To Ease Hereafter South Indian Bank (SBL) reported 4QFY18 results with the key strategic takeaways being: (1) SBL has taken cognisance of RBI s February circular overhauling stressed asset resolution and recognised two large corporate accounts as NPAs from outside the standard restructured book. The management is guiding for materially lower slippage ratio in FY19. (2) Core fee income performance has been encouraging. (3) SBL has also guided for a decline in opex run-rate. (Please see initiating coverage report here, see conference-call highlights below). Per se, on the results front, SIBL posted a NII growth of 12% YoY to Rs4,992mn, PPOP growth of 11% YoY to Rs3,109 and PAT growth of 51% YoY to Rs1,141mn. We have revised our estimates for FY19/FY20 and have retained Buy rating on SBL, revising our target price on it to Rs30 (from Rs28 earlier) and valuing the stock at 0.95x P/BV FY20E financials. SBL has taken cognisance of RBI s February Circular overhauling stressed asset resolution: SBL has taken cognizance of RBI s February Circular overhauling stressed asset resolution and recognized 2 large corporate accounts as NPA from outside standard restructured book. Total corporate slippages stood at Rs4820mn, and include slippage from road projects of Rs3530mn, of which 2 accounts were from the restructured standard book, while another 2 accounts were from outside the restructured standard book. The standard restructured book reduced by 77% QoQ and stands at Rs570mn as of FY18-end. SBL is guiding for materially lower slippage ratio in FY19. The management has guided for total slippage of Rs6,000mn in FY19. Management is confident that below investment grade book will not pose a problem. Shift in focus to non-corporate lending continues, while core fee income performance is encouraging: The retail, SME and agri loan book grew 19%, 18% and 19% YoY, respectively. The retail loan book stands at Rs347bn as of FY18-end. Within retail loans, housing loans grew 23% YoY and loans against deposits grew 31% YoY. The corporate loan book grew 14% YoY to Rs204bn. Other income grew 30% YoY to Rs1787mn, driven by strong core fee income growth. Operating expense ratio is expected to decline going forward: Cost-to-income ratio for the quarter rose 234bps YoY to 53.7% on the back of costs relating to centralisation of processes and opening up of an additional establishment in Kochi. The management has guided for 12%/11% growth in other operating costs and employee costs, respectively, for FY19. However, the management expects the cost-to -income ratio to improve going forward. Valuation and outlook: We have revised our NII estimates by -3.7%/-2.1% for FY19/FY20, our PPOP estimates by -2.2%/-2.2% and our PAT estimates by 1.7%/2.2%, respectively. We have retained Buy rating on SBL, revising our target price on it to Rs30 (from Rs28 earlier) and valuing the stock at 0.95x P/BV FY20E financials BUY Sector: Banking CMP: Rs26 Target Price: Rs30 Upside: 15% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com Shreesh Chandra Research Associate shreesh.chandra@nirmalbang.com Key Data Current Shares O/S (mn) 1,809.5 Mkt Cap (Rsbn/US$mn) 47.6/ Wk H / L (Rs) 35/22 Daily Vol. (3M NSE Avg.) 11,338,600 Price Performance (%) 1 M 6 M 1 Yr South Indian Bank 5.2 (12.5) 6.7 Nifty Index Source: Bloomberg Y/E March (Rsmn) 4QFY18 4QFY17 3QFY18 YoY (%) QoQ (%) Interest income 15,890 14,707 15, Interest expenses 10,968 10,316 10, Net interest income 4,922 4,391 5, (3.4) NIM (%) bps (22bps) Non-interest income 1,787 1,377 1, Operating income 6,709 5,768 6, Staff costs 1,933 1,662 1, Other operating expenses 1,667 1,298 1, Total operating expenses 3,600 2,960 3, Cost-to-income (%) bps 307bps Pre-provision profit 3,109 2,808 3, (5.8) Provisions 1,486 1,653 1,543 (10.1) (3.7) PBT 1,623 1,155 1, (7.7) Tax (20.9) -Effective tax rate (492bps) (493bps) PAT 1, , (0.8) EPS (Rs) (0.9) BV (Rs) Deposits 720, , , Advances 545, , ,

2 Conference-call highlights The management stated that total corporate slippage of Rs4820mn includes slippage from road projects of Rs3530mn, of which two accounts were from the restructured standard book while another two accounts were from outside the restructured standard book. Corporate slippage also includes a gold and jewellery account from Kerala. There is only one account in the 5/25 book of ~Rs3,000mn. The management reiterated its guidance of Rs6,000mn in fresh loan slippage for FY19 (Rs1,500mn per quarter). The management gave credit cost guidance of ~Rs6,000mn for FY19. Break-up of total deduction in the gross NPA book was as follows: Rs1,620mn write-off, Rs1,650mn sale to ARC, Rs290mn cash recovery, and Rs530mn upgrades. The bank had a non-funded exposure of Rs1,560mn where the RBI noted a divergence in provisioning. The bank has sold the account to ARC. Of the accounts sold to the ARC, Rs4,780mn was principal gross NPA against which Rs2,940mn was provided. The bank sold this to the ARC for Rs1,650mn, and recovered Rs825mn in cash. Outstanding gross security receipt book stood at Rs13,560mn, against which Rs2610mn has been provided. The management does not expect any slippage from the private sector power book. There are no accounts in restructuring in this book. The bank has exposure of ~Rs3,300mn to the accounts under NCLT, and an outstanding provision of 40% against the same as of 4QFY18-end. Of the 56 corporate accounts having ticket size >Rs1,000mn (forming ~Rs90bn), 96% is rated above investment grade. There are a few accounts rated below BBB against which the bank has a high collateral security (100% in some cases). The management does not have a negative view on the below investment grade rated book. The bank does not have any exposure to aviation and telecom sectors. The management stated that the bank will look to raise additional capital in FY19. The management is targeting a CASA ratio of 38% for FY20. The management expects a NIM of 2.85% to continue in FY19, with a target NIM of ~3% for FY20. There was a 10bps reduction in NIM during 4QFY18 because of interest reversal of Rs180mn. The bank is focusing on 20% growth in retail gold loans. The management gave guidance of 70% PCR (including technical write-offs) by September 2019 and expects recovery to the extent of 40%. The management gave RoA guidance of 1% for FY20, driven by lower credit costs The management expects employee costs to grow 10%-11% and other opex to grow 10%-12% in FY19. 2 South Indian Bank

3 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Institutional Equities Sep-16 Feb-17 Jul-17 Dec-17 May-18 Exhibit 1: Financial summary Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Net interest income 15,097 16,754 19,655 25,479 33,328 Pre-provision profit 8,794 12,163 14,808 17,520 23,795 PAT 3,333 3,942 3,349 6,190 8,336 EPS (Rs) ABV (Rs) P/E (x) P/ABV (x) GNPAs (%) NNPAs (%) RoA (%) RoE (%) Exhibit 2: Actual performance versus our estimates (Rsmn) 4QFY18 4QFY17 3QFY18 YoY (%) QoQ (%) 4QFY18E Devi. (%) Net interest income 4,922 4,391 5, (3) 5,596 (12) Pre-provision profit 3,109 2,808 3, (6) 3,179 (2) PAT 1, , (1) 1,219 (6) Exhibit 3: Change in our estimates Revised estimate Earlier estimate % Revision FY19E FY20E FY19E FY20E FY19E FY20E Net interest income (Rsmn) 25,479 33,328 26,447 34,037 (3.7) (2.1) NIM (%) (8bps) (6bps) Operating profit (Rsmn) 17,520 23,795 17,915 24,319 (2.2) (2.2) Profit after tax (Rsmn) 6,190 8,336 6,089 8, Exhibit 4: One-year forward P/ABV (x) P/BVPS Mean +1 SD -1 SD +2 SD -2 SD 3 South Indian Bank

4 Financials Exhibit 5: Income statement Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Interest income 55,572 58,471 61,928 76,852 94,972 Interest expenses 40,475 41,716 42,273 51,373 61,643 Net interest income 15,097 16,754 19,655 25,479 33,328 Fee income ,750 1,020 1,454 Other Income 4,656 6,623 4,623 6,408 8,096 Net revenues 20,272 23,927 28,028 32,907 42,878 Operating expenses 11,478 11,764 13,220 15,387 19,083 -Employee expenses 6,923 6,765 7,132 8,185 9,635 -Other expenses 4,556 4,999 6,088 7,202 9,448 Pre-provision profit 8,794 12,163 14,808 17,520 23,795 Provisions 3,696 6,144 9,809 8,141 11,164 -Loan loss provision 3,911 6,201 8,188 7,196 10,096 -Provision for investment , ,068 -Other provisions (647) (478) (1,541) - - PBT 5,097 6,019 4,999 9,379 12,631 Tax 1,764 2,077 1,650 3,189 4,294 PAT 3,333 3,942 3,349 6,190 8,336 Exhibit 7: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Equity Capital 1,350 1,803 1,809 1,990 1,990 Reserves & Surplus 37,106 46,682 50,623 54,807 61,875 Shareholder's Funds 38,456 48,485 52,432 56,797 63,865 Deposits 557, , , ,247 1,024,102 -Current deposits 19,831 27,526 30,580 44,265 56,326 -Saving deposits 104, , , , ,302 -Term deposit 432, , , , ,474 Borrowings 26,150 19,578 40,434 80, ,561 Other liabilities 12,936 13,884 13,697 31,208 50,559 Total liabilities 634, , ,859 1,019,753 1,241,088 Cash/Equivalent 32,745 38,877 42,211 55,654 67,898 Advances 410, , , , ,801 Investments 147, , , , ,195 Fixed Assets 4,870 6,561 6,808 7,489 8,237 Other assets 38,837 39,492 48,581 58,297 69,956 Total assets 634, , ,859 1,019,753 1,241,088 Exhibit 6: Key ratios Y/E March FY16 FY17 FY18 FY19E FY20E Growth (%) NII growth Pre-provision profit growth (0.4) PAT growth (15.0) Business (%) Deposit growth Advance growth Business growth CD CASA Operating effeciency (%) Cost-to-income Cost-to-assets Productivity (Rs mn) Business per branch 1, , , , ,994.4 Business per employee Profit per branch Profit per employee Spreads (%) Yield on advances Yield on investments Cost of deposits Yield on assets Cost of funds NIMs Capital adequacy (%) Tier I Tier II Total CAR Asset Quality (%) Gross NPAs Net NPAs Provision coverage Slippage Credit cost Return (%) RoE RoA RoRWA Per share EPS BV ABV Valuation (x) P/E P/BV P/ABV South Indian Bank

5 Apr-17 Apr-17 May-17 Jun-17 Jun-17 Jul-17 Aug-17 Aug-17 Sep-17 Oct-17 Oct-17 Nov-17 Dec-17 Jan-18 Jan-18 Feb-18 Mar-18 Mar-18 Apr-18 May-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 26 March 2018 Buy May 2018 Buy Rating track graph Not Covered Covered 5 South Indian Bank

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