MOSL: SOUTH INDIAN BANK (Buy)-PPoP growth offset by elevated provisions-asset quality stable

​SOUTH INDIAN BANK: PPoP growth offset by elevated provisions; asset quality stable

(SIB IN, Mkt Cap USD0.6b, CMP INR31, TP INR36, 17% Upside, Buy)

• South Indian Bank (SIB) reported robust PPoP growth of 21%/55% QoQ/YoY on the back of strong other income (fee income growth of 1.2x, led by lumpy PSLC fees of INR590m). As % of total income, other income was the second highest in 13 quarters (36%), except 3QFY17. However, elevated provisions of INR4.5b (including INR2.5b toward SR depreciation) weighed down on PAT, which declined 96% YoY to INR43m.
  
• NII grew 9%/13% QoQ/YoY, led by 5%/12% QoQ/YoY advances growth and NIM expanding 15bp/20bp QoQ/YoY to 2.95% on the back of steady yields and favorable cost of funds (5.4%, -20bp QoQ). Opex growth was controlled at 8%/10% QoQ/YoY (flat employee expenses). CI ratio declined to 41.3%.
  
• Loan growth of 5%/12% QoQ/YoY was led by robust growth in retail (+2%/19% QoQ/YoY) and SME (+14.5%/+19.1% QoQ/YoY), while the corporate book grew 2%/4% QoQ/YoY as per the bank's retail-focused strategy.
  
• Asset quality stayed stable, as slippages declined across segments (except agri) from last quarter's high of 5.9% to 2.1% (INR2.5b). Absolute GNPA/NNPA increased 4%/6% QoQ/YoY to INR17.6b/INR12.6b and stood at 3.57%/2.57% (-4bp/+4bp QoQ). Elevated SR provisioning was on account of presence of NCLT referred cases in the SR book.
  
• Valuation and view: Management is focused on building a low-ticket loan book, with steady balance sheet clean-up, which will help improve asset quality substantially. We have cut our FY18 estimates by 35% to account for higher provisioning in 2QFY18. We maintain our Buy rating with a TP of INR36.1 (1.1x Sep 2019E BV, vs our earlier TP of INR34) in view of significantly improved visibility of asset quality/profitability.