South Indian Bank: Spreading Its Wings Wider

Indian banking sector has always been a sought after space for many players owing to the kind of growth it has been witnessing. It was no wonder that when the RBI invited applications for new banking licenses there was a rush to join the bandwagon. This was despite the fact that there were many riders applied by the central bank. The kind of rush we have witnessed for applying banking licenses clearly indicates interest of everyone in the space. While this factor made the banking space vibrant there was another set of guidelines provided by the RBI regarding the foreign banks being allowed to buy private banks in India. While the new banking license has already resulted in re-rating of the banking sector as a whole, the possibility of foreign banks being allowed to buy private made the smaller banks a good buyout target. 

South Indian Bank (SIB) is one such bank which we feel would be a target for any foreign bank to spread its wings. And recent events where the RBI allowed FIIs to invest more in the bank and a large investment being made by an individual investor (NRI Businessman - Yusufali MA) are few factors pointing towards the same. In the past Yusuali has invested in the other private banks like Federal Bank and Dhanalaxmi Bank, where the stocks witnessed a good upward movement on the bourses after that. So what is in the store for SIB? Investors would like to know whether it makes sense to invest in SIB, especially in a scenario of concerns of rising nonperforming assets (NPAs) in the sector. Further with higher exposure to the riskier asset class like gold loans only adds to the concerns. Going ahead in the story we would try to answer these queries.

Current Scenario and Its Impact 

Let’s first try to understand the overall scenario in the banking sector as a whole. The overall banking sector has been facing a number of issues. With the inflation remaining above the comfort levels the RBI kept the liquidity positing tightened, ultimately keeping the borrowing rates higher. This not only resulted in slower advances growth but also impacted the net interest margins of many banks. Apart from that there was increase in nonperforming assets (NPAs). The increase was such that even RBI raised alarms regarding the same and SIB was not an exception. Worries were higher for SIB considering its major exposure to the Gold loans and infrastructure sector.

SIB - Asset Quality Likely To Improve

However when everyone on the street was worried about the rising NPA levels, SIB pleasantly surprised with improvement in NPAs for the December 2013 quarter as there were lower slippages and higher recovery. Here VA Joseph (MD & CEO, SIB) stated that, “This time against the slippages of around Rs 103 crore the recovery and up-gradation was around Rs 163 crore, so that has been advantageous as far as the provisioning is concerned to a great extent”. Here we are of the opinion that, though there has been improvement, the gross and Net NPAs are still higher. However the management has plans to reduce it going ahead. In the next quarter SIB will aggressively going to focus on recovery. The management is planning to bring it below 1 per cent in next two quarters. The main focus during the next quarters will be on recovery front and bringing down our NPA substantially. 

Here we are of the opinion that the Bank will be able to reduce its NPA as major exposure has been to the Gold loans and infrastructure sector. With the gold prices stabilising the gold portfolio (which is considered to be risky) is likely to remain less volatile. On the infrastructure front, the delinquencies have been mainly on account of infra projects being stalled due to unviable finances.. But as the economy revives, we feel the NPA would tend to reduce from infra segment also. 
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Slower Advances Growth –Changing Strategy May Help

While there was some relief on the NPA level, the bank has been facing few issues on the growth in advance. Since the last three quarter the advances growth has remained under the 15 per cent level. Impact of the same was clearly seen on the net interest income (NII) for the December 2013 quarter. 

Here Joseph stated that “NII has come down slightly this quarter, because the advances growth has been slightly low compared to earlier period. The reason being a shift mainly from the corporate to the retail lending where the advances pick up has been little slow, but we will be able to sustain profitability with the shift from the corporate to retail during this year”.

Going ahead it is planning to bring 30 per cent business from wholesale banking, 30 per cent from SME and 40 per cent from retail by FY15. All in all it is planning for a credit growth of around 25 per cent by FY15 with sustained NIM of 3 per cent. The growth targets seem achievable with 50 branches being added to the network every year. In addition the bank’s tier-1 ratio currently stands at a healthy 10.7 per cent, which gives the bank enough headroom to grow at a healthy pace going ahead.

NIMs Likely To Sustain

If we take a look at the trend of yield on advances and cost of funds, we expect the bank to sustain the NIM above the 3 per cent levels. There are few other factors to be noticed. The management is planning to increase its low cost current account saving account (CASA) ratio by one per cent every year. Currently the CASA stands at 21.70 per cent and has improved for consecutive three quarters on sequential basis. Hence again the efforts seem to be paying off. Apart from this, it is also planning to reduce the cost to income by 1 per cent per annum. How much success it gets here needs to be seen. Overall the NIM is likely to sustain at higher levels. 

Financial Performance 

If we take a look at the financial performance of Q3FY14, though the net interest income has declined to Rs 350 crore from Rs 356 crore in Q2FY14 (Rs 353 crore in Q3FY13), the improvement in non-interest income and lower provisioning has helped the bank in putting a better performance on bottomline front. For December 2013 it posted a PAT of Rs 141 crore against Rs 127 crore in September 2013 and Rs 128 crore in December 2012. 

Final Call

Looking at current scenario there are many positive factors for the bank. While increased FII investment in the counter is an added advantage and may make it a prime target of private banks, the operational performance has also been improving. Healthy capital adequacy, improving asset quality and expected increase in credit growth indicates a better scenario for the bank. On the valuation front also the counter is placed well with the trailing four quarter EPS of Rs 4 discounting its CMP of Rs 21 by 5.25x. Even the price to Book of 0.95x seems to be in-line with peers. Considering all the above factors, we recommend the investors to buy the scrip with a target of Rs 27 in next 12-18 months period.