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MOSL: SOUTH INDIAN BANK (Buy)-In-line operating performance-Asset quality broadly stable

South Indian Bank: In-line operating performance; Asset quality broadly stable

(SIB IN, Mkt Cap USD0.3b, CMP INR13, TP INR18, 39% Upside, Buy)

 

• 1QFY20 PAT at INR733m was up 4% QoQ (v/s INR230m in 1QFY19), led by higher other income (+25% YoY) and a decline in provisions. NII grew 8% YoY to INR5.4b, aided by NIM expansion that increased 7bp QoQ to 2.53%.
• Opex grew 8% YoY, led by 11% YoY increase in other expenses. C/I ratio increased 30bp QoQ to 55.7%. Total income growth of ~12% YoY resulted in overall PPoP growth of 18% YoY to INR3.2b.
• Advances grew 13% YoY/flat QoQ, led by 26% YoY growth in retail loans while corporate loans grew at a tepid 3% YoY. Agri/SME book grew ~14% YoY each. Within retail, gold/housing loans grew 53%/28% YoY. Retail advances now comprise ~30% of total advances (RAM comprising ~68%).
• Fresh slippages moderated to INR2.4b (1.7% annualized, FY19 avg. INR4.6b), led by controlled slippages in corporate/agri portfolio. Absolute GNPLs increased 0.7% QoQ to INR31.5b, while NNPLs declined 1.3% QoQ to INR21.3b. GNPA ratio increased 4bp QoQ to ~4.96%, while NNPA ratio declined 4bp QoQ to 3.41%. Calculated PCR improved 140bp QoQ to 32.3% (45.1% including TWO); the bank aspires to take the PCR to 60%.
• Other highlights: (a) SMA-2 has increased to 2.65% v/s 1.7% in FY19, (b) SIB has suggested slippage rate of INR2.5b/quarter and has guided for a credit cost of ~100-110bp for FY20E, (c) Retail loan growth should sustain at 25-30%.
• Valuation and view: SIB is focused on improving the granularity in its loan book along with strengthening its fee income profile. Margins have been under pressure; however, increasing retail mix coupled with an improvement in CASA/opex ratio is likely to aid earnings. Fresh slippages are likely to subside, but lower PCR remains an overhang and should keep credit costs elevated. We cut our FY20/FY21 PAT estimate by 9%/16%, factoring in lower other income and higher opex, and expect SIB to deliver a ROA/ROE of 0.4% /8.1% by FY21. We maintain our TP at INR18 (0.7x FY21E ABV). Maintain Buy.