[T.S.R:16748] South Indian Bank-Growth Is Choking

South Indian Bank's 3QFY11 net profit growth was led by healthy net interest income growth (19.2% yoy) and better productivity. We maintain Buy on the stock as the bank's prudent loan growth, strong deposit franchise and healthy asset quality make it an attractive pick among small-cap banks.

n       Healthy business growth, improving margin. Advances and deposits grew 27.4% yoy and 30.8% yoy respectively. NIM marginally improved 3bps qoq to 3.03%. However, share of CASA slightly declined yoy, from 24.2% to 22.4%. Low-cost (current and savings accounts) and non-residential external (NRE) deposits constitute 36.1% of the Bank's deposits base, enabling it to keep deposit costs low, thereby protecting margin.

n       Modest fees, flat treasury gains. Healthy business growth led to a modest 15.3% yoy growth in fees. Treasury gains were flat yoy and comprised 19.5% of non-interest income. Productivity improved, with core cost-income rising 153bps yoy to 45.6%.

n       Asset quality slips, adequately capitalized. Gross NPAs rose 11.4% qoq, but a sharp rise in NPA provisions saw NPA coverage maintained at 71%. Net NPAs are only 0.39% of loans, one of the best among peers. Capital adequacy stands at 14.9% (tier-I capital: 12.3%), sufficient to support the bank's business growth targets.

n       Valuation and risks. At our price target, the stock would trade at PABV of 1.7x FY12e and 1.4x FY13e.

 

Risks: Slow economic growth leading to credit growth being lower than estimated and higher NPAs.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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