South Indian Bank : BUY

Strong Business; Asset Quality Comforting

South Indian Bank’s (SIB) Q4FY11 PAT grew 112% YoY to Rs 818 mn, above our estimates, led by higher NII and lower-thanestimated provision expenses. Core income rose 181% YoY, which appears optically large because of higher interest expenses booked in 4QFY10 (due to a system error wherein SIB had to absorb full year impact of cost of a special deposit scheme). Margins impressed with ~35 bps QoQ improvement backed by strong low-cost deposit franchise. Asset quality improved with 9% QoQ decline in gross NPAs and 19% QoQ decline in net NPAs. Coverage ratio has increased to 74% (from 71% in Dec-10).

Key highlights

• Loan growth (up 29% YoY) was led by SME and Agri advances which increased 41% and 44% resp. Overall lowcost deposits (incl. NRI deposits) recorded robust 45% YoY growth and now stand at 34% of overall deposits (vs. ~30% in Mar-10).
• Yield on advances rose by 21 bps QoQ to 10.9% while cost of funds increased by 17 bps QoQ to 6.6%.
• Staff cost rose 129% YoY to Rs 758 mn as it includes Rs 251 mn for pension (2nd option) towards retired staff and Rs 270 mn for 1/5th pension (2nd option) towards existing staff.

Maintain BUY with TP of Rs 30

SIB’s overall biz momentum was maintained with advances & deposits growing in tandem at ~29% YoY each, along with improvement in asset quality. As expected, margins were well supported by adequate CASA and low-cost NRI deposits. SIB plans to start gold loan NBFC and to raise capital of Rs ~10 bn to fund future growth. At CMP of Rs 22, the stock is trading at 1.2x FY12E ABV of Rs 18 and 1.1x FY13E ABV of Rs 21. We have a BUY rating on the stock with a TP of Rs 30 (10x FY12E EPS and 1.7x FY12E ABV) – upside of 30% from CMP.