Initiating Coverage March 24, 2010 Rating Matrix Rating : Strong Buy South Indian Bank (SOUIN0) Target : Rs 200 Target Period : 12-15 months Rs 156 Potential Upside : 28 % YoY Growth (%) Good thing in small package… FY09 FY10E FY11E FY12E South Indian Bank (SIB) is shedding its regional tag and growing its NII 39.0 24.5 22.3 21.6 pan-India reach. The total business of the bank grew at 22% CAGR over PBT 30.1 31.5 19.8 27.0 FY05-09 to Rs 30237 crore. We expect 22% CAGR over FY09-12E to Rs PAT 28.5 27.2 30.3 27.0 54,845 crore. The deposits and advances grew at 22% CAGR over FY07- 09. We expect a growth of 21% and 24% CAGR, respectively, over FY09- Stock Data 12E. The C/D ratio of the bank improved from 51% in FY04 to 72% for Bloomberg Code SIB.IN Q3FY10. We expect it to stabilise around 70% by FY12E. Reuters Code SIBK.BO Low cost deposits, improving C/D ratio to help maintain NIM Face value (Rs) 10 Above 35% of the total bank’s deposit consists of low cost deposits, Market Cap (Rs Crore) 1763 52 week H/L 171 / 48 (~24% CASA and 11% NRI deposits). The interest rates on these deposits Sensex 17451 are comparatively on the lower side at around 3-3.5%. This helps in Average volumes 69000 controlling the cost of deposits. We expect NIMs at 3% until FY12E. \ Substantial improvement in asset quality: A boon Comparative return matrix (%) SIB has now brought down its net NPA to 0.4% from a high of 6.7% and Company 1m 3m 6m 12m SIB 10 8 32 220 GNPA to 1.5% from over 10% in FY02. The total stressed assets (GNPA City Union bk -9 13 16 178 and restructured) at about 2.6% of total loans, with provision coverage of Karnataka bank 3 -5 -16 86 73% looks in good shape for SIB. We expect GNPA at 1.6% and NNPA at Indus ind bank 13 26 61 474 0.8% by FY12E after factoring in slippages from restructured loans. Price movement (Stock vs. Nifty) Higher HTM proportion to cushion investment book from MTM SIB’s bond portfolio is well cushioned in a rising interest rate scenario 200 6000 since 77% of the total investment is in the HTM category, on the one 150 5000 hand, while the remaining AFS portfolio of 23% carries a short duration of 4000 0.6 years. The total investment book duration stands at 4.5 years. We do 100 3000 not expect a major MTM hit on the AFS book. Hence, there will be no 50 2000 material effect on its profitability. 0 1000 Valuations At the CMP of Rs 156, the bank is trading at 0.9x FY12E ABV, which looks Jul-09 Oct-09 Apr-09 Feb-10 Jan-10 Jun-09 Sep-09 Dec-09 Nov-09 Mar-10 Aug-09 attractive. The bank, with a healthy low cost deposit base of around 35%, May-09 NIM of 3%, strong asset quality (2.5% of stressed assets) and CAR of 17% South Indian bank Nifty (RHS) is poised for above industry growth in the coming period. However, it continues to be regional with 55% of the total business contributed by the southern region. This is a point of concern to us. Assuming sustainable Analyst’s name RoE of 18%, terminal growth of 3% and CoE of 14.5%, we value the bank Kajal Gandhi at 1.2x FY12E ABV of Rs 167 and assign it a fair value of Rs 200. [email protected] Chirag Shah Exhibit 1: Key Financials [email protected] FY09 FY10E FY11E FY12E Viraj Gandhi Net Profit (Rs crore) 194.7 247.6 322.6 409.8 [email protected] EPS (Rs) 17.2 21.9 28.5 36.3 Growth (%) 2.8 27.2 30.3 27.0 P/E (x) 9.0 7.1 5.4 4.3 Price / Book (x) 1.4 1.2 1.0 0.8 Price / Adj Book (x) 1.5 1.3 1.1 0.9 GNPA (%) 2.2 1.7 1.7 1.6 NNPA (%) 1.1 0.9 0.8 0.8 RoNA (%) 1.0 1.1 1.2 1.3 RoE (%) 16.0 18.0 20.2 21.6 Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research South Indian Bank (SOUIN0) Company Background Shareholding pattern (Q3FY10) Shareholder Holding (%) South Indian Bank (SIB) is one of the oldest banks in south India, based Promoters - out of Thrissur, Kerala. The bank has a business mix of Rs 35,511 crore. Institutional investors 51.3 SIB has a dominant presence in Kerala and Tamil Nadu, with ~74% of General public 48.7 total branches and 55% of the business from there. The bank has a pan- India presence with a network of over 573 branches and over 230 ATMs across 23 states and two union territories. FII & DII holding trend (%) Exhibit 2: Branch distribution (region wise) Exhibit 3: Shareholding pattern 50 Rural Metro Others 38 40 18% 16% 19% 40 37 36 Public Mutual 30 35% (%) fund 20 8% 14 14 13 12 Urban 10 23% Q3FY10 Q2FY10 Q1FY10 Q4FY09 Semi FII Urban FII DII 38% 43% Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research Exhibit 4: Branch concentration High concentration Source: Company, ICICIdirect.com Research Key management profile VA Joseph, who took charge of SIB as MD and CEO from June 5, 2005, was instrumental in bringing development and revolution at SIB. He has overall 38 years of experience in the banking industry. The business and quality parameters of SIB like C/D ratio, asset quality, NIM, RoA, RoE all improved considerably. We can attribute this to the new management in place. ICICIdirect.com | Equity Research Page 2 South Indian Bank (SOUIN0) Investment Rationale SIB is shifting its focus from a regional bank to a bank with a pan-India presence. The branch concentration in the south zone provided the bank ~35% of low cost deposits. This helped to control the interest cost and maintain NIM of 3%. The total business of the bank grew at 22% CAGR over FY05-09 to Rs 30,237 crore. We expect it to grow at 22% CAGR over SIB is aiming for a pan-India presence FY09-12E to Rs 54,845 crore. The C/D ratio of the bank improved from 51% in FY04 to 72% for Q3FY10. We expect it to stabilise around 70% by FY12E. The GNPA improved from 6.6% in FY05 to 1.5% in Q3FY10. We expect a GNPA of 1.6% and NNPA of 0.8% in FY12E. Total business to grow at 18% CAGR over FY09-12E SIB’s total business grew at 22% CAGR over FY05-09 to Rs 30,237 crore. Total business growth of 18% CAGR will support Going forward, we expect 24% and 21% CAGR in advances and deposits 21% growth in the balance sheet size over FY09-12E to Rs 22578 crore and Rs 32267 crore, respectively. This will result in a 22% CAGR in business mix over the same period. The credit growth in the industry was dismal at around 9.9% during October 2009. It has started to pick up from early January. However, the pace of deposit growth was steady at around 20%. According to latest RBI data, bank credit grew at 15.8% showing early signs of a strong pick- up in industry credit. We expect industry loan growth of 21% and 20%, for FY11E and FY12E, respectively, while we expect deposit growth of 20% and 18%, respectively. We feel that SIB should grow ahead of the industry because of the small base and strategic expansion plans laid by the bank along with comfortable capital adequacy ratio (CAR) of 17.4% (Tier I CAR- 14%) for Q3FY10. We expect above industry business growth for SIB Exhibit 5: Industry loan growth Exhibit 6: Industry deposit growth 50000 40 70000 40 60000 40000 30 50000 30 30000 40000 20 20 20000 30000 20000 10000 10 10 10000 0 0 0 0 FY 07 FY 08 FY 09 FY FY 07 FY 08 FY 09 FY FY10E FY11E FY12E FY10E FY11E FY12E YTDFY10 YTDFY10 Amount (Rs. billion) YOY (%) (RHS) Amount (Rs. billion) YOY (%) (RHS) Source: RBI, ICICIdirect.com Research Source: RBI, ICICIdirect.com Research Exhibit 7: Total business growth for SIB 60000 54845 50000 45021 40000 37103 35511 30237 30000 25910 20542 (Rs Crore) 20000 16324 13857 10000 0 FY05 FY06 FY07 FY08 FY09 9MFY10 FY10E FY11E FY12E Source: Company, ICICIdirect.com Research ICICIdirect.com | Equity Research Page 3 South Indian Bank (SOUIN0) Exhibit 8: Market share of SIB likely to improve marginally 0.51 0.51 0.48 0.48 (%) (%) 0.45 0.45 0.42 0.42 FY 06 FY 07 FY 08 FY 09 FY10E FY11E FY12E YTDFY10 Advances Deposits (RHS) Source: Company, RBI, ICICIdirect.com Research …low cost deposits facilitate in controlling cost We expect credit growth of 21% and 20% in FY11E Above 35% of the total bank’s deposit consists of low cost deposits, and FY12E, respectively, for the industry (~24% CASA and 11% NRI deposits). The interest rates on these deposits are comparatively on the lower side of around 3-3.5%. This helps in controlling the cost of deposits and maintaining NIM of ~3%. We expect SIB to report 21% CAGR in deposits over FY09-FY12E to Rs 32,267 crore and CASA of 25%.