Set for a rebound, set to scale up in retail July 06, 2017 R Sreesankar rsreesankar@plindia.com / +91 22 66322214 Pritesh Bumb priteshbumb@plindia.com / +91 22 66322232 Vidhi Shah vidhishah@plindia.com / +91 22 66322258 Rating BUY Price Rs28 Target Price Rs37 Implied Upside 32.1% Sensex 31,246 Nifty 9,638 (Prices as on July 05, 2017) Trading data Market Cap. (Rs bn) 50.0 Shares o/s (m) 1,802.8 3M Avg. Daily value (Rs m) 605.3 Major shareholders Promoters 0.00% Foreign 35.37% Domestic Inst. 13.05% Public & Other 51.58% Stock Performance (%) 1M 6M 12M Absolute (2.6) 49.5 41.6 Relative (2.4) 33.3 26.6 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 3.0 2.9 1.7 2019 3.9 3.6 7.2 Price Performance (RIC: SIBK.BO, BB: SIB IN) (Rs) 31 29 27 25 23 21 19 17 15 Jul 16 Sep 16 Source: Bloomberg Nov 16 Jan 17 Mar 17 May 17 Jul 17 Worst behind post strengthening balance sheet: SIB has got out of two of their worst problems, addressing their corporate NPAs and shoring up of capital. With both having done in 4QFY17, the sale to ARC of their NPA book was the start of this new phase in SIB as they have laid to rest some of the uncertainty leading to stressed assets. After the peaking of incremental NPAs at Rs16.9bn in FY17 (3.9% of gross incremental slippage), we expect the same to drop to Rs9.2bn (1.9%) in FY18 and further to Rs6.9bn (1.2%) in FY19 leading to lower provisions and improving PPOP. We are revise upwards our income, PPoP and earnings assumptions for FY18 & FY19 by 2 5%. Sale to ARCs, expected recovery higher than normal: SIB in Q4FY17 sold to ARC a bouquet of assets to the extent of Rs16.5bn with book value of Rs12bn and carried provisions of Rs4.5bn and additional hit of ~Rs1.0bn which will amortised over four quarters. The bouquet consisted of Iron and steel assets of 30%, EPC assets of 20%, Auto ancillary assets of 11.5%, Ship building assets of 5% and many smaller accounts contributing to 34% of assets sold. While we expect to see some provisioning shortfall for the assets in Steel, EPC, auto ancillary and ship building to the extent of 40 50% or so, the smaller accounts are well covered with adequate security. Hence in our view, the provisions on the SRs is likely to be low at 30 35% as it already carries a decent provision cover of Rs4.5bn. Problems addressed, incremental slippages to be lower: The bank had been grappling with addressing the issue of corporate slippages for the last three years. With the lessons learned and the focus returning to their strength i.e. the mid corporate/sme and retail, we expect the credit growth to be robust at 15% 16% in FY18 & 17% in FY19 and above industry growth rate. And with incremental slippages trending lower, with the provision requirements to start slowing down from later half of FY18. Contd...2 Key financials ( Y/e March) 2016 2017 2018E 2019E Net interest income 15,097 16,754 20,228 23,071 Growth (%) 10.5 11.0 20.7 14.1 Operating profit 8,793 12,146 14,474 16,357 PAT 3,333 3,925 5,355 7,036 EPS (Rs) 2.5 2.5 3.0 3.9 Growth (%) 8.2 0.9 19.3 31.4 Net DPS (Rs) 0.5 0.5 0.6 Profitability & Valuation 2016 2017 2018E 2019E NIM (%) 2.46 2.43 2.56 2.56 RoAE (%) 9.0 9.0 10.6 12.6 RoAA (%) 0.54 0.57 0.68 0.78 P / BV (x) 1.0 1.1 1.0 0.9 P / ABV (x) 1.5 1.3 1.1 1.0 PE (x) 11.2 11.1 9.3 7.1 Net dividend yield (%) 1.8 1.6 2.0 Source: Company Data; PL Research Company Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Stressed accounts down to Rs6.05bn: Apart from the NPAs, the total stressed accounts were to the extent of Rs6.05bn as at March 2017, of which Rs3.09bn were already under restructured accounts. We are comfortable in our estimate in slippages, and we believe the growth in retail and SME should more than offset for the reversal in corporate advances. Focussed management, CEO continuity for another three years: The MD&CEO Mr VG Mathews had been in the helm for the last three years. However, better part of the last three years has been spent mostly on addressing the NPA/stressed assets issue. This had led to consolidation in the business growth of SIB, underperforming the peers during this period. With a firm solution to the NPAs/stressed assets, we expect the bank to return to the growth segments in SME/retail though the corporate loan growth is likely to be anaemic as the focus has shifted. Return ratios to improve after hitting a trough in FY17: The ROAs which were at 1.12 1.13% in FY12/13 had dropped to below 0.58 0.61% in FY16/17. We expect to see a steady improvement going forward to reach 0.72% in FY18 and 0.83% in FY19. We also believe this leaves ample scope for further improvements going forward as they see the provisioning reduce and slippages reduce. Cheapest banking stock, Rerating warranted. TP raised upwards to Rs37: With the incremental slippages to be lower, lesser amount of provisions going forward from 2HFY18, better growth in lending and with comfortable CAR, improving ROAs and profits, we expect to see SIB move out of the low valuation range the bank has been trading at. We expect SIB to trade at 1.3x FY19 (from our earlier target multiple of 1.0x FY19 ABV) with a revised Target Price of Rs37 (earlier TP Rs28) and maintain our BUY stance. The stock remains one of the cheapest in the sector with attractive risk reward. Exhibit 1: Loan growth should see upward trend post consolidation helping NII 25% Loan Growth YoY (%) Deposit Growth YoY (%) Exhibit 2: despite margins being steady as pricing pressures remain on competition 3.02% NIM (%) 20% 15% 10% 5% 2.84% 2.62% 2.76% 2.72% 2.84% 2.82% 0% July 06, 2017 2
Exhibit 3: C/I should improve further as income picks up C / I Ratio (%) Exhibit 4: Bank is in much better capital position post rights issue Tier 1 (%) 56.6% 12.05% 10.79% 10.43% 9.83% 10.88% 10.44% 10.09% 47.5% 50.0% 52.7% 49.2% 46.9% 46.5% Exhibit 5: Asset quality to remain stable Exhibit 6: but PCR should improve towards 70% 1.4% 1.2% 0.8% 0.8% NNPA (%) GNPA (%) 3.8% 2.9% 2.5% 2.7% 1.7% 1.5% 1.0% 1.1% 0.8% 2.4% 37.9% 30.0% 40.0% PCR (%) 22.6% 41.3% 58.1% 66.0% Exhibit 7: Slippages seemed to have peaked in FY17 and should retreat to normal levels Exhibit 8: and so has credit cost which should improve bank s return ratios Slippage (Rs Bn) Slippage Rate (%) Credit Cost (%) 20 15 10 5 5.0% 4.0% 3.0% 2.0% 1.0% 0.51% 0.43% 0.93% 1.03% 1.42% 1.20% 0.90% 0.0% July 06, 2017 3
Exhibit 9: Return Ratios to improve gradually... Exhibit 10:... with pickup in growth and reduction in credit costs 20.5% RoAE (%) 1.14% RoAA (%) 16.6% 9.2% 9.3% 9.4% 11.1% 13.2% 0.99% 0.56% 0.58% 0.61% 0.72% 0.83% Exhibit 11: SIB is comparatively cheaper than its regional banking peers 1.8 CUB 1.6 RoA (%) FY19E 1.4 KVB 1.2 LVB 1.0 0.8 JKBK SIB FB DCBB 0.6 0.4 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 P/BV FY19E (x) Source: Company Data, Bloomberg, PL Research Exhibit 12: Estimates change table We change our estimates to factor in increase in NII due to lower slippages and slightly lower credit costs (Rs mn) Old Revised % Change FY18E FY19E FY18E FY19E FY18E FY19E Net interest income 19,668 22,442 20,228 23,071 2.8 2.8 Operating profit 13,882 15,652 14,474 16,357 4.3 4.5 Net profit 5,332 6,741 5,355 7,037 0.4 4.4 EPS (Rs) 3.0 3.7 3.0 3.9 0.4 5.5 ABVPS (Rs) 24.3 27.8 24.6 28.4 1.0 2.2 Price target (Rs) 28 37 30.6 Recommendation BUY BUY July 06, 2017 4
Exhibit 13: We have increased our TP to Rs37 (from Rs28) on Mar 19 ABV and we maintain BUY rating PT calculation and upside Fair price P/ABV 37 Target P/ABV 1.3 Target P/E 9.4 Current price, Rs 28 Upside (%) 32% Dividend yield (%) 2% Total return (%) 34% Exhibit 14: One year Forward P/ABV SIB trades at below historical averages 1.8 1.6 P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD 1.4 1.2 1.0 0.8 0.6 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 July 06, 2017 5
Income Statement (Rs m) Int. Earned from Adv. 43,636 44,474 50,327 57,660 Int. Earned from Invt. 10,078 12,335 14,534 15,797 Others 1,858 1,662 1,802 1,844 Total Interest Income 55,572 58,471 66,662 75,301 Interest expense 40,475 41,716 46,435 52,229 NII 15,097 16,754 20,228 23,071 Growth (%) 10.5 11.0 20.7 14.1 Treasury Income 1,361 2,525 1,500 1,300 NTNII 3,813 4,630 5,513 6,203 Non Interest Income 5,174 7,156 7,013 7,503 Total Income 60,746 65,626 73,675 82,804 Growth (%) 5.0 8.0 12.3 12.4 Operating Expense 11,478 11,764 12,766 14,217 Operating Profit 8,793 12,146 14,474 16,357 Growth (%) (0.3) 38.1 19.2 13.0 NPA Provisions 4,053 6,218 5,998 5,232 Investment Provisions 127 362 Total Provisions 3,696 6,144 6,286 5,596 PBT 5,097 6,002 8,189 10,761 Tax Provisions 1,764 2,077 2,834 3,725 Effective Tax Rate (%) 34.6 34.6 34.6 34.6 PAT 3,333 3,925 5,355 7,036 Growth (%) 8.5 17.8 36.4 31.4 Balance Sheet (Rs m) Par Value 1 1 1 1 No. of equity shares 1,350 1,803 1,803 1,803 Equity 1,350 1,803 1,803 1,803 Networth 38,419 48,455 52,833 58,677 Adj. Networth 26,567 41,709 46,786 53,607 Deposits 557,207 661,175 750,434 866,751 Growth (%) 7.3 18.7 13.5 15.5 Low Cost deposits 124,590 157,463 186,858 216,688 % of total deposits 22.4 23.8 24.9 25.0 Total Liabilities 634,712 743,091 838,793 963,176 Net Advances 410,857 463,895 535,798 626,884 Growth (%) 9.9 12.9 15.5 17.0 Investments 147,439 194,297 214,185 239,246 Total Assets 634,749 743,122 838,793 963,176. Quarterly Financials (Rs m) Y/e March Q1FY17 Q2FY17 Q3FY17 Q4FY17 Interest Income 14,472 14,502 14,790 14,707 Interest Expense 10,736 10,050 10,614 10,316 Net Interest Income 3,736 4,452 4,175 4,391 Non Interest Income 1,734 1,459 2,585 1,377 CEB 780 530 530 680 Treasury 570 510 1,270 180 Net Total Income 5,471 5,911 6,760 5,768 Operating Expenses 2,876 2,937 2,991 2,960 Employee Expenses 1,676 1,676 1,752 1,662 Other Expenses 1,200 1,262 1,239 1,298 Operating Profit 2,595 2,973 3,770 2,808 Core Operating Profit 2,025 2,463 2,500 2,628 Provisions 1,141 1,283 2,066 1,653 Loan loss provisions 1,153 1,616 1,689 2,105 Investment Depreciation (54) (248) 128 233 Profit before tax 1,454 1,690 1,703 1,155 Tax 503 585 590 400 PAT before EO 951 1,105 1,114 755 Extraordinary item PAT 951 1,105 1,114 755 Key Ratios CMP (Rs) 28 28 28 28 Equity Shrs. Os. (m) 1,350 1,803 1,803 1,803 Market Cap (Rs m) 37,471 50,029 50,029 50,029 M/Cap to AUM (%) 5.9 6.7 6.0 5.2 EPS (Rs) 2.5 2.5 3.0 3.9 Book Value (Rs) 27 26 28 31 Adj. BV (100%) (Rs) 19 22 25 28 P/E (x) 11.2 11.1 9.3 7.1 P/BV (x) 1.0 1.1 1.0 0.9 P/ABV (x) 1.5 1.3 1.1 1.0 DPS (Rs) 0.5 0.5 0.6 Dividend Yield (%) 1.8 1.6 2.0 Profitability (%) NIM 2.5 2.4 2.6 2.6 RoAA 0.5 0.6 0.7 0.8 RoAE 9.0 9.0 10.6 12.6 Efficiency Cost Income Ratio (%) 56.6 49.2 46.9 46.5 C D Ratio (%) 73.7 70.2 71.4 72.3 Business per Emp. (Rs m) 108 109 108 109 Profit per Emp. (Rs lacs) 3.7 3.8 4.5 5.1 Business per Branch (Rs m) 942 876 801 744 Profit per Branch (Rs m) 3 3 3 4 Asset Quality Gross NPAs (Rs m) 15,624 11,490 14,418 14,906 Net NPAs (Rs m) 11,853 6,746 6,047 5,070 Gr. NPAs to Gross Adv. (%) 3.8 2.5 2.7 2.4 Net NPAs to Net Adv. (%) 2.9 1.5 1.1 0.8 NPA Coverage (%) 24.1 41.3 58.1 66.0. July 06, 2017 6
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