RESULT UPDATE

SOUTH INDIAN Core steady; asset quality still volatile

India Equity Research| Banking and

COMPANYNAME South (SIB) reported lower-than-expected Q3FY20 PAT of EDELWEISS 4D RATINGS

INR905mn. While revenue momentum surpassed expectation, elevated credit Absolute Rating BUY cost impacted PAT. Key highlights: a) Slippages remained elevated, essentially Rating Relative to Sector Performer due to delinquency in two earlier identified stressed accounts. Henceforth, Risk Rating Relative to Sector Medium >3% of corporate book—given it is below BBB—could be a source of volatility. Sector Relative to Market Overweight Besides, lower coverage (at sub-32%) will lead to higher credit cost; b)

Advances grew <10% YoY (below trend), but better NIM (still below peers) MARKET DATA (R: SIBK.BO, B: SIB IN) supported core profitability (16% YoY). c) CASA continued to be soft (up mere CMP : INR 11 13% YoY to ~25%) and is a key variable. Factoring higher credit cost, we prune Target Price : INR 15 FY20E EPS 20%. Though valuation at 0.5x FY21E P/ABV lends comfort, given 52-week range (INR) : 19 / 9 volatile asset quality and stretched recovery we prune multiple from 0.8x to Share in issue (mn) : 1,809.7 0.6x, leading to revised TP of INR15 (earlier INR20). Maintain ‘BUY’. M cap (INR bn/USD mn) : 20 / 282 Avg. Daily Vol.BSE/NSE(‘000) : 11,208.4 Asset quality: Concerns persist; low coverage to keep credit cost high

Asset quality volatility persisted with slippages being elevated at INR3.6bn (2.3%), largely SHARE HOLDING PATTERN (%) driven by corporate (two accounts—a fitness company (INR750mn) and HFC (INR1.14bn)). Current Q2FY20 Q1FY20 Though two accounts slipped from the below BBB list, exposure to the list remains high at Promoters * - - -

3%. Moreover, the restructured book rose further as bank utilised MSME dispensation MF's, FI's & BK’s 8.0 8.7 8.6 which further pushed up the stress book. Also, there were three fraud accounts (road, FII's 22.3 22.9 23.2 textile, FMCG) for which 25% is provided for (taken through the P&L) and 75% via reserves. Others 69.6 68.4 68.2 We believe these could render asset quality vulnerable (only positive was no meaningful * Promoters pledged shares : NIL (% of share in issue) divergence). Additionally, lower coverage (sub-32%) is likely to push up credit cost.

PRICE PERFORMANCE (%) Operational performance improves, but still a long way to go EW and Loan growth was soft at sub-10% YoY (below trend) following a run-down in the Stock Nifty Financial corporate segment, while the retail segment sustained >17% growth. Meanwhile, NIM Services Index improvement (benefitting from business mix change towards retail) led to improved core 1 month 6.3 7.0 11.0 profitability. While NIM should benefit from change in the business mix, a weak liability 3 months (5.6) 7.9 9.5 franchise (soft CASA growth) implies that funding cost will remain under pressure. We 12 months (27.4) 12.4 20.0 believe improvement in core profitability is crucial for any meaningful change in RoA.

Outlook and valuation: Sustained performance key; maintain ‘BUY’ SIB’s asset quality has been volatile, but is better managed than peers (~6% stress pool).

The bank’s endeavour to de-risk the balance sheet by shifting to retail could abate Kunal Shah +91 22 4040 7579 volatility. That said, sustained delivery is critical to restore investors’ confidence. The [email protected] stock is trading at 0.5x FY21E P/ABV, implying limited downside. We maintain ’BUY/SP’. Prakhar Agarwal

Financials (INR mn) +91 22 6620 3076 Year to March Q3FY20 Q3FY19 Growth (%) Q2FY20 GrowthFY18 (%) FY19 FY20E FY21E [email protected]

Net revenue 8,222 7,064 16.4 8,335 (1.4) 27,459 32,937 37,430 Anisha Khandelwal Net profit 905 838 8.0 845 7.2 2,475 3,902 6,980 +91 22 6623 3362 Dil. EPS (INR) 1.4 2.2 3.9 [email protected]

Adj. BV (INR) 19.8 21.0 24.3 Price/ Adj book (x) 0.6 0.5 0.5

Price/ Earnings (x) 8.0 5.1 2.9 January 17, 2020 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Banking and Financial Services

Table 1: Key takeaways from Q3FY20 earnings (INR mn) Q3FY20 Q3FY19 Growth (%) Q2FY20 Growth (%) Comments NII growth steady despite sub par loan growth due Net interest income 6,018 5,196 15.8 5,843 3.0 to NIMs improvement given business mix change. Other income 2,204 1,868 18.0 2,492 (11.6) Operating expenses 4,391 3,744 17.3 4,221 4.0 Staff expense 2,396 2,022 18.5 2,332 2.7 Other opex 1,995 1,722 15.9 1,889 5.6 Pre prov Op profit (PPP) 3,831 3,320 15.4 4,115 (6.9) Provisions inched up due to elevated slippages. That Provisions 2,609 2,031 28.5 3,063 (14.8) said, lower coverage suggest that credit cost will continue to be elevated. Profit before tax 1,222 1,289 (5.2) 1,051 16.3 Provision for tax 317 450 (29.7) 206 53.5 Profit after tax 905 838 8.0 845 7.2

Asset quality (INR mn)

High proportion of BBB and below accounts (at >3% Gross NPA (%) 5.0 4.9 4.9 levels) , MSME restructured book and restructured book from Kerela floods could spike NPLs..

Gross NPA 32,437 29,300 10.7 31,452 3.1 Net NPA (%) 3.4 3.5 3.5 Net NPA 22,119 20,997 5.3 21,932 0.9

Coverage ratio continues to be lower, we expect this Provision coverage (%) 31.8 28.3 30.3 will keep credit cost elevated.

Source: Company, Edelweiss research

Table 2: Loan growth grew sub 10% levels given run-down in corporate book with retail segment being key drivers Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Advances (INR mn) 545,629 561,640 574,130 600,640 636,360 636,520 629,934 653,340 Growth Q-o-Q 4.0 2.9 2.2 4.6 5.9 0.0 (1.0) 3.7 Growth Y-o-Y 17.6 21.6 17.3 14.5 16.6 13.3 9.7 8.8 Deposits (INR mn) 720,296 724,880 749,112 776,650 804,201 817,230 829,470 848,740 Growth Q-o-Q 5.8 0.6 3.3 3.7 3.5 1.6 1.5 2.3 Growth Y-o-Y 8.9 10.2 11.6 14.0 11.6 12.7 10.7 9.3 CD ratio (%) 75.8 77.5 76.6 77.3 79.1 77.9 75.9 77.0 CASA (%) 23.8 24.7 24.5 24.3 24.2 24.1 24.9 25.2 Source: Company

Table 3: Slippages elevated largely driven by higher corporate slippages; MSME segment could lend further volatility (INR mn) Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Gross NPA 19,803 25,522 26,462 29,300 31,317 31,542 31,452 32,437 Growth Q-o-Q 11.6 28.9 3.7 10.7 6.9 0.7 (0.3) 3.1 Gross NPA (%) 3.6 4.5 4.6 4.9 4.9 5.0 4.9 5.0 Net NPA 14,158 18,139 17,847 20,997 21,636 21,347 21,932 22,119 Growth Q-o-Q 16.9 28.1 (1.6) 17.6 3.0 (1.3) 2.7 0.9 Net NPA (%) 2.6 3.3 3.2 3.5 3.5 3.4 3.5 3.4 Provision coverage (%) 27.6 28.0 31.5 27.5 29.9 31.3 29.3 30.6 Source: Company

2 Edelweiss Securities Limited

Table 4: Core fee steady, improvement key (INR mn) Q3FY20 Q3FY19 Growth (%) Q2FY20 Growth (%) Transaction related 570 620 (8.1) 570 0.0 Forex 110 100 10.0 100 10.0 Profit on sale of inv 320 270 18.5 830 (61.4) Others 1,204 878 37.2 992 21.4 Total 2,204 1,868 18.0 2,492 (11.6) Source: Company

Table 5: NIMs improve marginally due to change in loan book mix towards retail segment, sustenance key (%) Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 NIMs 2.7 2.6 2.6 2.7 2.5 2.5 2.7 2.7 Yield on Advances 9.6 9.5 9.5 9.6 9.5 9.7 9.8 9.8 Cost of Deposits 6.0 6.1 6.1 6.2 6.3 6.3 6.2 6.1 Source: Company

3 Edelweiss Securities Limited Banking and Financial Services

Financial snapshot (INR mn) Year to March Q3FY20 Q3FY19 % change Q2FY20 % change YTD20 FY20E FY21E Interest on advances 15,568 13,653 14.0 15,503 0.4 41,141 62,073 71,124 Interest on investments 3,503 3,185 10.0 3,531 (0.8) 10,434 12,951 14,757 Int. on other resources 151 116 30.1 92 64.6 330 3,348 3,744 Interest income 19,673 17,352 13.4 19,540 0.7 58,161 78,371 89,624 Interest exp 13,655 12,155 12.3 13,697 (0.3) 40,944 54,699 62,484 Net int. inc. (INR mn) 6,018 5,196 15.8 5,843 3.0 17,217 23,672 27,140 Other income 2,204 1,868 18.0 2,492 (11.6) 6,515 9,265 10,290 Net revenues 8,222 7,064 16.4 8,335 (1.4) 23,733 32,937 37,430 Operating expenses 4,391 3,744 17.3 4,221 4.0 12,611 17,194 19,106 Staff expense 2,396 2,022 18.5 2,332 2.7 6,963 9,542 10,495 Other opex 1,995 1,722 15.9 1,889 5.6 5,647 7,652 8,611 Pre prov op profit(ppop) 3,831 3,320 15.4 4,115 (6.9) 11,122 15,744 18,325 Provisions 2,609 2,031 28.5 3,063 (14.8) 7,723 10,541 9,019 Profit before tax 1,222 1,289 (5.2) 1,051 16.3 3,399 5,203 9,306 Provision for taxes 317 450 (29.7) 206 53.5 917 1,301 2,327 PAT 905 838 8.0 845 7.2 2,483 3,902 6,980 Diluted EPS (INR) 0.5 0.5 8.7 0.5 6.4 1.3 2.2 3.9

Ratios NII/GII (%) 30.6 29.9 29.9 29.6 30.2 30.3 Cost/income (%) 53.4 53.0 50.6 53.1 52.2 51.0 Provisions / PPOP 68.1 61.2 74.5 69.4 67.0 49.2 Tax rate (%) 25.9 34.9 19.6 27.0 25.0 25.0 Bal. sheet data Advances 653,340 600,640 8.8 629,934 3.7 653,340 695,901 807,245 Deposits 848,740 776,650 9.3 829,470 2.3 848,740 895,575 1,024,613

Asset quality Gross NPA 32,437 29,300 10.7 31,452 3.1 32,437 33,524 36,347 Gross NPA (%) 5.0 4.9 4.9 5.0 4.8 4.4 Net NPA 22,119 20,997 5.3 21,932 0.9 22,119 22,283 21,831 Net NPA (%) 3.4 3.5 3.5 3.4 3.2 2.7 B/V per share (INR) 29.6 32.8 Adj BV/share (INR) 21.0 24.3 Price/ Adj. book (x) 0.5 0.5 Price/ Earnings (x) 5.1 2.9

Change in Estimates FY20E FY21E New Old % change New Old % change Comments NII 23,672 23,844 (0.7) 27,140 28,070 (3.3) PPOP 15,744 16,222 (2.9) 18,325 18,434 (0.6) Provisions 10,541 9,645 9.3 9,019 9,212 (2.1) Factoring in higher credit costs PAT 3,902 4,933 (20.9) 6,980 6,917 0.9 NIMs 2.6 2.6 2.6 2.7

4 Edelweiss Securities Limited South Indian Bank

Q3FY20 earnings conference call key takeaways: Guidances for FY21:

 Slippages of INR2-2.5bn per quarter

 Recoveries of INR5bn-6bn

 PCR of 60%

The bank is focusing on achieving its objectives of strengthening margins, reaching a favorable loan mix and recognizing stress in corporate loan book.

With respect to asset quality:

 Slippages for the quarter came at INR3.58bn with accounts from HFC and Fitness sectors, both of which were a part of the watchlist.

 The Real estate NBFC account which was a part of watchlist has been sold off and the Irrigation account is standard

 Going ahead, there should be a 30-35% decline in slippages

 The management expects 15-20% slippages in the restructured MSME book

 SMA-2 has improved to 2.71% vs 3.5% in the last quarter. SMA-2 book includes no account above INR1bn and only one account above INR500mn.

 The biggest fraud account recognized this quarter (there are three NPA accounts recognized as fraud this quarter) is a Road account belonging to a major group; the other two accounts are from the textile and FMCG sectors.

o This is an old account and the bank has not undertaken an EPC, Road and Telecom projects in last five years.

 Movement of NPA- Additions of INR3.61bn, Recoveries of INR450mn, Upgrades of INR 540mn, Write offs of INR 1.46bn.

o Sale to ARC amounted to INR170mn

 The corporate book does not have accounts in the EPC/ Aviation/ Entertainment/ Telecom sectors.

 NBFC portfolio amounts to 6.9% of the loan book.

 There is no divergence as per RBI’s risk assessment report.

With respect to growth:

 The bank will continue to focus on expanding Retail, Gold, Agri portfolio which now forms 70% of overall loan book.

 Loan book distribution matches the distribution of branches (ex of corporate book which is declining)

With respect to operational highlights:

 Broad breakup of Fee income - PSLC 160mn, Recoveries- INR30mn, IT Refunds- INR150mn

5 Edelweiss Securities Limited Banking and Financial Services

 Retail yields have come off from Q2FY20 and has impacted profitability on a sequential basis. This downward trend in yields may not continue.

Other highlights:

 The bank plans to issue Additional Tier-1 bonds of INR5bn with a greenshoe option and pricing is yet to be decided.

 The bank has tied up with Bajaj, Kotak and SBI Life and LIC for Life Insurance and Bajaj, New , Bharti AXA for General Insurance.

 Would be opening branches in Andhra Pradhesh, North Eastern geographies and certain Industrial clusters.

6 Edelweiss Securities Limited South Indian Bank

Q2FY20 earnings conference call key takeaways Guidances:  Expect Loan growth of 15% for FY20  Recovery of INR5-6bn in FY20 (INR2bn done so far) ;  NIMs- 2.7% for the full year  PCR- 52% by end of FY20 and 62% by end of FY21 (including technical write offs)  Slippages- INR2.5bn per quarter, steady state should be approx INR1.5bn post corporate book run down  Credit cost- INR2bn per quarter for next four quarters, steady state should be INR1bn per quarter

With respect to asset quality:  Of the total slippages of INR4.35bn, one account amounts to INR2.38bn which is from the textile sector  Watchlist breakup: o HFC- INR1.14bn (ICA signed) o Real estate NBFC- INR680mn (has a credit rating of D) o Fitness Company- INR750mn (included in SMA-2) o Irrigation company- INR500mn (ICA signed, included in SMA-2)  BB and below book includes three accounts: o HFC – INR1.14bn (in watchlist, rated D) o Hotel- INR1.01bn o Highway- INR1.29bn  SMA-2 : 3.5% of loan book  Write offs amounted to -INR3.51bn, Recoveries and upgrades - INR930mn  No sale made to ARCs in this quarter  Management maintains slippage guidance of INR10bn for FY20 (of which INR6.58bn has slipped in H1FY20)  Expecting a maximum slippage of 20% on restructured MSME accounts, only one account is under stress and this has been factored in slippages guidance  Management expects a maximum of INR2bn for SR provisioning  Total NBFC exposure amounts to INR51.47bn which includes 16 accounts, their external rating is - o 3 Accounts- rated AAA o 8 Accounts- rated AA o 1 Account – rated A o 3 Accounts – rated BBB (amount to INR4.17bn, all from Kerala) o 1 Account – rated D

7 Edelweiss Securities Limited Banking and Financial Services

With respect to growth:  Targeted loan mix- 30% retail, 30% corporate, 15% Agri and 25% MSME  Focus continues on Retail, (mortgages, auto, gold loan) MSME and Agri segments  As per management’s strategy, Corporate book is being run down and is down from 35% of overall advances in Q2FY19 to 31% in Q2FY20 (intend to bring it down to 30%)  The bank intends to reduce reliance on CDs  The rates on bulk deposits (average tenor is 1-2 years) are similar to retail FD rates

Other highlights:  Have tied up with various insurance companies for and expecting strong third party distribution  RWA stands at INR630bn  ATS for business loans is less than INR20mn  Have factored in 12% IBA wage negotiations

8 Edelweiss Securities Limited South Indian Bank

Company Description SIB, a private sector bank, was incorporated at Thrissur in Kerala, South India. The bank has a pan- India presence with a network of over 870 branches and approx 1,400 ATMs across India.

Over the past few years, the bank has achieved considerable progress in terms of bringing profitability focus among branches, re-energizing employees, improving asset quality, and creating greater brand awareness and technology coverage. The employee compensation has been linked to performance and union clout has diminished. The re-branding exercise of bank has created greater brand re-call and awareness among customers.

Investment Theme SIB’s asset quality has been volatile, but better managed than peers (~6% stress pool). The bank’s endeavour to de-risk the balance sheet by shifting to retail could abate volatility in our view. That said, sustained delivery is critical to restore investor confidence. The stock is trading at 0.5x FY21E P/BV, implying limited downside potential. We maintain ’BUY/SP’.

Key Risks System wide economic slowdown will lead to a sharp deterioration in asset quality and lower than anticipated recoveries.

Slowdown in business growth is a key systematic risk for the bank as 80% of total revenues are derived from net interest income. Being a mid-sized bank, it does not have huge diversification option.

Disruption by employee union and the management’s inability to sustain pace of reforms could cause concern.

Redemption in NRE deposit base will lead to rise in cost of funds thereby impacting margin

9 Edelweiss Securities Limited Banking and Financial Services

Financial Statements Key Assumptions Income statement (INR mn) Year to March FY19 FY20E FY21E FY22E Year to March FY19 FY20E FY21E FY22E Macro Interest income 68,765 78,371 89,624 104,038 GDP(Y-o-Y %) 6.8 5.0 5.8 6.5 Interest expended 48,568 54,699 62,484 72,741 Inflation (Avg) 3.4 4.3 4.8 5.0 Net interest income 20,197 23,672 27,140 31,297 Repo rate (exit rate) 6.3 5.2 4.5 5.0 Non interest income 7,262 9,265 10,290 10,843 USD/INR (Avg) 70.0 71.5 71.0 70.0 - Fee & forex income 1,058 1,219 1,407 1,627 Sector - Misc. income 4,994 5,646 6,383 7,216 Credit growth 14.0 11.0 13.0 15.0 - Investment profits 1,210 2,400 2,500 2,000 Deposit growth 13.0 12.0 14.0 15.0 Net revenue 27,459 32,937 37,430 42,140 CRR 4.0 4.0 4.0 4.0 Operating expense 15,069 17,194 19,106 21,425 SLR 19.5 18.5 18.0 18.0 - Employee exp 8,214 9,542 10,495 11,733 G-sec yield 7.0 7.1 7.1 7.1 - Other opex 6,855 7,652 8,611 9,692 Company Preprovision profit 12,390 15,744 18,325 20,715 Op. metric assump. (%) Provisions 8,585 10,541 9,019 9,993 Yield on advances 9.2 9.4 9.5 9.5 Loan loss provisions 7,149 10,391 8,919 9,893 Yield on investments 6.8 6.9 7.0 7.0 Investment depreciation 1,403 100 100 100 Yield on asset 8.4 8.6 8.7 8.7 Other provisions 33 50 - - Cost of funds 5.9 6.0 6.1 6.2 Profit Before Tax 3,805 5,203 9,306 10,722 Net interest margins 2.5 2.6 2.6 2.6 Less: Provision for Tax 1,330 1,301 2,327 2,681 Cost of deposits 5.9 6.0 6.1 6.2 Profit After Tax 2,475 3,902 6,980 8,042 Cost of borrowings 7.9 7.6 7.6 7.6 Reported Profit 2,475 3,902 6,980 8,042 Spread 2.5 2.6 2.6 2.5 Adj. Diluted EPS (INR) 1.4 2.2 3.9 4.4 Tax rate (%) 34.9 25.0 25.0 25.0 Dividend per share (DPS) 0.3 0.6 0.6 0.6 Balance sheet assumption (%) Dividend Payout Ratio(%) 21.2 32.3 18.1 15.7 Credit growth 14.8 11.0 15.9 16.9

Deposit growth 11.6 11.4 14.4 16.9 Growth ratios (%) SLR ratio 21.0 20.0 19.3 19.3 Year to March FY19 FY20E FY21E FY22E Low-cost deposits 24.2 24.8 25.1 25.4 NII growth 2.8 17.2 14.6 15.3 Gross NPA ratio 5.0 4.8 4.4 4.1 Fees growth 17.4 15.3 15.4 15.6 Net NPA ratio 3.5 3.2 2.7 2.3 Opex growth 14.0 14.1 11.1 12.1 Net NPA / Equity 42.5 41.6 36.8 32.9 PPOP growth (14.0) 19.4 18.6 18.3 Capital adequacy 12.6 11.9 11.4 10.9 PPP growth (16.3) 27.1 16.4 13.0 Incremental slippage 2.9 2.4 2.4 2.4 Provisions growth (12.5) 22.8 (14.4) 10.8 Provision coverage 30.9 33.5 39.9 45.1 Adjusted Profit (26.1) 57.6 78.9 15.2

Operating ratios Year to March FY19 FY20E FY21E FY22E Yield on advances 9.2 9.4 9.5 9.5 Yield on investments 6.8 6.9 7.0 7.0 Yield on assets 8.4 8.6 8.7 8.7 Cost of funds 5.9 6.0 6.1 6.2 Net interest margins 2.5 2.6 2.6 2.6 Cost of deposits 5.9 6.0 6.1 6.2 Cost of borrowings 7.9 7.6 7.6 7.6 Spread 2.5 2.6 2.6 2.5 Cost-income 54.9 52.2 51.0 50.8 Tax rate 34.9 25.0 25.0 25.0

10 Edelweiss Securities Limited South Indian Bank

Balance sheet (INR mn) RoE decomposition (%) As on 31st March FY19 FY20E FY21E FY22E Year to March FY19 FY20E FY21E FY22E Share capital 1,810 1,810 1,810 1,810 Net int. income/assets 2.5 2.6 2.6 2.6 Reserves & Surplus 49,158 51,798 57,516 64,296 Fees/Assets 0.7 0.8 0.8 0.7 Net worth 50,968 53,608 59,325 66,105 Invst. profits/Assets 0.1 0.3 0.2 0.2 Sub bonds/pref cap 5,000 5,000 5,000 5,000 Net revenues/assets 3.4 3.6 3.6 3.5 Deposits 804,201 895,575 1,024,613 1,197,281 Operating expense/assets (1.8) (1.9) (1.9) (1.8) Total Borrowings 44,032 44,032 44,032 44,032 Provisions/assets (1.0) (1.2) (0.9) (0.8) Other liabilities 16,188 13,659 14,134 14,992 Taxes/assets (0.2) (0.1) (0.2) (0.2) Total liabilities 920,389 1,011,874 1,147,104 1,327,411 Total costs/assets (3.1) (3.2) (3.0) (2.9) Loans 626,937 695,901 807,245 944,476 ROA 0.3 0.4 0.7 0.7 Cash and Equivalents 48,228 50,213 57,351 66,902 Equity/assets 6.2 5.7 5.5 5.3 Gilts 166,389 187,921 205,714 238,953 ROAE (%) 4.9 7.5 12.4 12.8 Others 24,424 26,610 29,015 31,660

Fixed assets 4,683 4,312 3,864 3,331 Valuation parameters Other Assets 49,727 46,917 43,916 42,089 Year to March FY19 FY20E FY21E FY22E Total assets 920,389 1,011,874 1,147,104 1,327,411 Adj. Diluted EPS (INR) 1.4 2.2 3.9 4.4 Credit growth 14.8 11.0 15.9 16.9 Y-o-Y growth (%) (26.1) 57.6 78.9 15.2 Deposit growth 11.6 11.4 14.4 16.9 BV per share (INR) 28.2 29.6 32.8 36.5 EA growth 12.3 10.9 14.4 16.6 Adj. BV per share (INR) 19.8 21.0 24.3 28.1 SLR ratio 21.0 20.0 19.3 19.3 Diluted P/E (x) 8.1 5.1 2.9 2.5 C-D ratio 79.1 78.9 79.9 79.9 Price/ BV (x) 0.4 0.4 0.3 0.3 Low-cost deposits 24.2 24.8 25.1 25.4 Price/ Adj. BV (x) 0.6 0.5 0.5 0.4 Provision coverage 30.9 33.5 39.9 45.1 Dividend Yield (%) 2.3 5.5 5.5 5.5

Gross NPA ratio 5.0 4.8 4.4 4.1 Net NPA ratio 3.5 3.2 2.7 2.3 Incremental slippage 2.9 2.4 2.4 2.4 Net NPA / Equity 42.5 41.6 36.8 32.9 Capital adequacy 12.6 11.6 11.4 10.9 - Tier 1 10.0 9.5 9.0 8.5

Peer comparison valuation Market cap Diluted P/E (X) Price/ Adj. BV (X) ROAE (%) Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E South Indian Bank 282 5.1 2.9 0.5 0.5 7.5 12.4 29,275 25.7 14.1 2.6 2.2 10.4 15.5 DCB Bank 884 15.3 11.6 2.0 1.8 13.4 15.5 2,608 10.4 8.4 1.4 1.2 12.6 14.0 HDFC Bank 99,310 26.3 20.3 4.2 3.6 16.6 18.7 ICICI Bank 48,933 19.7 16.7 2.9 2.5 12.2 16.8 IndusInd Bank 13,536 16.1 12.1 2.7 2.2 17.7 19.6 45,807 26.3 30.2 3.8 3.3 15.0 15.7 1,435 (4.1) (15.1) 0.6 0.7 (12.4) (3.1) Median - 16.1 12.1 2.6 2.2 12.6 15.5 AVERAGE - 17.5 11.2 2.6 2.2 10.3 13.9 Source: Edelweiss research

11 Edelweiss Securities Limited Banking and Financial Services

Additional Data Directors Data Salim Gangadharan Chairman V.G Mathew Managing Director & CEO John Joseph Alapatt Director Francis Alapatt Director Ranjana S. Salgaoca Director Parayil George John Tharakan Director Achal Kumar Gupta Director V. J. Kurian Director M. George Korah Director Pradeep Godbole Director

Auditors - Varma and Varma *as per last annual report

Holding - Top 10 Perc. Holding Perc. Holding Yusuffal Musaliam Veetil 4.98 Lavender Investments Ltd 4.91 International Value Advisers 4.05 Pear Tree Advisors Inc 4.01 Life Insurance Corp Of India 3.22 Icici Prudential Asset Management 2.97 Dimensional Fund Advisors Lp 2.31 Acacia Banyan Partners 1.72 Dhawan Ashish 1.55 Vanguard Group 1.53 *as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

12 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk HOLD SP M Aditya Birla Capital BUY SO H Axis Bank BUY SO M Bajaj Finserv REDUCE SU L REDUCE SU M DCB Bank HOLD SP M HDFC BUY SO L Federal Bank BUY SO L ICICI Bank BUY SO L HDFC Bank BUY SO L Indiabulls Housing Finance HOLD SU M IDFC FIRST BANK BUY SP L Kotak Mahindra Bank BUY SP M IndusInd Bank BUY SO L LIC Housing Finance BUY SO M L&T Finance Holdings HOLD SP M Mahindra & Mahindra Financial Services BUY SP M Magma Fincorp BUY SP M Max Financial Services BUY SO L Manappuram Finance HOLD SU H Muthoot Finance BUY SO M of India HOLD SP M REDUCE SU M Power Finance Corp BUY SP M Repco Home Finance BUY SP M REC HOLD SP M Shriram Transport Finance BUY SO M Shriram City Union Finance BUY SP M State BUY SO L South Indian Bank BUY SP M Yes Bank BUY SP M HOLD SU M

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

13 Edelweiss Securities Limited Banking and Financial Services

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services Aavas Financiers, Aditya Birla Capital, AU Ltd, Axis Bank, Bajaj Finserv, Bank of Baroda, DCB Bank, Equitas Holdings, Federal Bank, HDFC, HDFC Bank, HDFC Life Insurance Company Ltd, ICICI Bank, ICICI Lombard General Insurance Company Ltd, IDFC FIRST BANK, Indiabulls Housing Finance, IndusInd Bank, ICICI Prudential Life Insurance Company Ltd, Kotak Mahindra Bank, LIC Housing Finance, L&T Finance Holdings, Max Financial Services, Multi Commodity Exchange of India, Manappuram Finance, Magma Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Punjab National Bank, Power Finance Corp, REC, Repco Home Finance, SBI Life Insurance Company Ltd, , Shriram City Union Finance, Shriram Transport Finance, South Indian Bank, Union Bank Of India, Yes Bank Recent Research

Date Company Title Price (INR) Recos

14 -Jan-20 Indusind Core steady; pockets of 1,482 Buy Bank concern in asset quality; Result Update

08-Jan-20 BFSI Core momentum soft; resolution trend kicking in; Q3FY20 result preview 26-Dec-19 BFSI 2019 scorecard: Banks improving; NBFCs still challenged; Sector Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594

One year price chart 446 20

(INR) 297 17 149 14

(INR)

- 11

14

14 14

14 14

14

14

14

14

14

14

14

-

- -

-

-

-

-

- -

- - -

8

Jul

Jan

Jun

Oct

Apr

Sep Feb

Dec

Aug Nov

Mar May

5

19

19 19

19

19 19

19 20

19 19

19 19

19

-

-

-

-

-

-

- - - -

- -

-

Jul

Jan Jan

Jun

Oct

Apr

Feb Sep

Dec

Aug

Nov Mar May South Indian Bank

14 Edelweiss Securities Limited

South Indian Bank

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Banking and Financial Services

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