Result Update February 13, 2015 Rating matrix Rating : Hold Syndicate Bank (SYNBN) | 118 Target : | 124 Target Period : 12 months Growth on track; asset quality to be watched Potential Upside : 5% • Profit was below estimate at | 305 crore, plunging 20% YoY, mainly What’s Changed? led by higher tax outgo of | 243 crore in Q3FY15 vs. an inflow of | 33 Target Changed from | 141 to | 124 crore in Q3FY14 EPS FY15E Changed from | 25 to | 23.9 EPS FY16E Changed from | 32.2 to | 29.3 • Asset quality deteriorated QoQ with absolute GNPA increasing to Rating Unchanged | 6724 crore (GNPA: 3.6% vs. 3.43% in Q2FY15) from | 6049 crore. Consequently, NNPA rose to | 4370 from | 3825 crore QoQ. Quarterly Performance Slippages came in lower on a sequential basis at | 1300 crore Q3FY15 Q3FY14 YoY (%) Q2FY15 QoQ (%) compared to | 1683 crore in Q2FY15 NII 1,318 1,358 -3.0 1,422 -7.4 • Credit growth came in better than expected increasing by 18.6% YoY Other income 428 292 46.4 437 -2.0 (vs. 13.6% in Q2) to | 186630 crore. Deposits grew at a faster pace PPP 838 806 4.0 954 -12.1 increasing by 28.9% YoY to | 251469 crore in Q3FY15; ahead of PAT 305 380 -19.7 316 -3.4 expectation Business growth to stay slightly ahead of industry Key Financials Syndicate Bank is a mid-sized PSU bank with close 3500 branches. In the | Crore FY2014 FY2015E FY2016E FY2017E past eight years, it consistently grew its business above industry except in NII 5,540 5,626 6,495 7,427 PPP 3,563 3,809 4,456 5,142 FY10-11 wherein it went into consolidation phase. Post FY11, business PAT 1,711 1,493 1,830 2,117 traction improved and was above industry at 17% CAGR in FY11-14 with loans at | 173912 crore and deposits at | 212343 crore by FY14. Currently, the book is diversified into corporate (36%), PSL (36%), retail (15%) and Valuation summary MSME (14%). We have built in business CAGR of 16% over FY14-17E FY14 FY15E FY16E FY16E with loans rising to | 270912 crore & deposits at | 360156 crore. P/E 4.3 4.9 4.0 3.5 Expect margins to stay stable against management guidance of pick-up Target P/E 4.5 5.2 4.2 3.7 Syndicate Bank’s NIMs declined to 2.3% in FY10 from 3% in FY07 owing P/ABV 0.9 1.1 1.0 1.0 to its focus on higher growth and also due to higher deterioration in asset Target P/ABV 0.9 1.2 1.1 1.0 quality during FY10. However, in FY11-13, margins improved and have RoA 0.7 0.5 0.6 0.6 stayed at ~3% due to shedding of bulk deposits (down to 17% in FY13 RoE 15.2 12.1 13.6 14.3 from >25% in FY09), maintenance of CASA ratio at >30% levels and controlled asset quality. However, in FY14, margins slipped significantly Stock data to 2.52% mainly due to a sharp spurt in slippages to | 3628 crore from Market Capitalisation |6832 Crore | 2142 crore in FY13 leading to a significant reversal of interest income. GNPA (Q3FY15) |6724 Crore We have built in calculated margins of ~2.3% over FY14-17E. NNPA (Q3FY15) | 4370 Crore NIM (Q3FY15) 2.3 Asset quality slightly better than peers; 9MFY15 bad in terms of NPA 52 week H/L 179 /78 The bank’s asset quality came under significant pressure in FY10 primarily Equity Capital | 602 Crore due to service sector followed by corporate & personal loans. However, Face value | 10 consolidation in asset growth brought in stability in asset quality with DII Holding (%) 11.2 GNPA ratio dropping to 2% as on FY13, which is relatively better than FII Holding (%) 8.9 peers. However, asset quality pressure has again emerged with GNPA surging to 3.4% (highest in the past seven years) to | 6724 crore. PCR has Price performance (%) also declined to 62.96% from >80% in Q3FY15. We revise our GNPA 1M 3M 6M 12M estimate upwards to | 9733 crore FY17E (3.6% of credit). Syndicate Bank -9.88 -11.68 -11.03 39.42 Dena Bank -8.86 -12.07 -10.71 3.87 Earnings traction to slide on NPA risks; maintain HOLD, reduce target J&K Bank -26.07 -21.54 -29.57 -19.15 Driven by MAT credit, FY12 and FY13 return ratios seemed higher with Syndicate Bank -9.88 -11.68 -11.03 39.42 average RoA and RoE at ~0.8% and 17.5%, respectively. However, the same was unavailable in FY14 due to which RoE dropped to 15.2% apart Analyst from subdued operational performance (lower margins and enhanced credit cost). We have revised our FY15E and F16E GNPA estimates Kajal Gandhi [email protected] upwards resulting in higher credit cost. Owing to asset quality pressure, Vasant Lohiya we anticipate FY17E RoA, RoE will be contained at 0.6%, 14.3%, [email protected] respectively, while the book value is expected to erode to | 124. We Vishal Narnolia rolled over valuation to | 124 (1x FY17E ABV) led by uncertainty over [email protected] asset quality and thereby return ratios. ICICI Securities Ltd | Retail Equity Research Variance analysis Q3FY15 Q3FY15E Q3FY14 YoY (%) Q2FY15 QoQ (%) Comments NII 1,318 1,449 1,358 -3.0 1,422 -7.4 NIM (%) 2.3 2.3 2.8 -51 bps 2.6 -32 bps NIM came down QoQ on the back of lower CASA and higher deposit growth Other Income 428 396 292 46.4 437 -2.0 Treasury gains led to higher other income Net Total Income 1,746 1,845 1,651 5.8 1,859 -6.1 Staff cost 571 606 577 -1.1 552 3.4 Other Operating Expenses 337 295 268 25.5 354 -4.8 PPP 838 944 806 4.0 954 -12.1 Provision 290 505 459 -36.7 538 -46.0 PBT 548 440 347 58.0 416 31.7 Tax Outgo 242.8 88.0 -33.1 -834.4 100.5 141.6 Jump in tax outgo on account of DTL arising during the quarter PAT 305.0 351.8 379.7 -19.7 315.6 -3.4 PAT was down YoY by 20% as tax outgo rose to the tune of | 786 crore. Key Metrics Slippages accretion has toned down in Q3FY15 at | 1300 crore (Q2FY15: | 1638 crore). GNPA 6,724.0 6,649.0 4,400.9 52.8 6,049.0 11.2 GNPA surged to 3.6% of credit highest in past seven years NNPA 4,370.1 4,175.3 2,566.7 70.3 3,825.3 14.2 PCR dropped to 62.96% from 65.38%. Hence, NNPA rose to 2.38% of credit Total Restructured assets 10,736.0 10,503.0 10,151.0 5.8 10,736.0 0.0 Source: Company, ICICIdirect.com Research Change in estimates FY15E FY16E (| Crore) Old New % Change Old New % Change Comments Net Interest Income 6,224 5,626 -9.6 7,102 6,495 -8.5 margin pressure led to downward revision in NII Pre Provision Profit 4,021 3,809 -5.3 4,694 4,456 -5.1 NIM (%) 2.5 2.3 -24 bps 2.5 2.3 -21 bps PAT 1,688 1,493 -11.6 2,011 1,830 -9.0 PAT revised to owing to uncertainty on asset quality Higher provisions impact our book value estimate ABV (|) 136.9 104.7 -23.5 145.5 117.3 -19.4 Source: Company, ICICIdirect.com Research Assumptions Current Earlier FY13 FY14 FY15E FY16E FY15E FY16E Credit growth (%) 19.4 17.9 15.3 16.0 15.3 16.0 Deposit Growth (%) 17.4 14.6 21.6 17.7 17.3 18.9 CASA ratio (%) 28.0 26.4 25.3 25.3 26.2 26.0 NIM Calculated (%) 2.9 2.6 2.3 2.3 2.5 2.5 Cost to income ratio (%) 48.0 48.1 48.2 46.9 48.0 46.8 GNPA (| crore) 2,978.5 4,611.1 7,719.2 8,649.6 5,914.0 7,077.0 GNPA revised owing to higher slippages NNPA (| crore) 1,124.8 2,720.6 5,313.3 5,737.8 3,498.0 4,353.0 Slippage ratio (%) 1.7 2.5 3.3 1.7 1.9 1.7 Credit cost (%) 1.0 0.6 0.8 0.8 0.9 0.7 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Business growth to moderate but stay slightly higher than industry Syndicate Bank’s loan book stood at | 186630 crore with domestic advances amounting to | 148825 crore. In the past three years, domestic advances grew at a CAGR of 10% while foreign advances increased at 25% CAGR over FY12-14 partly supported by rupee depreciation. The bank’s loan book is well diversified between corporate (36%), PSL (36%), retail (15%) and SME (14%). Deposits amount to | 251469 crore with CASA deposits of | 62445 crore constituting 27.9%. The domestic CASA ratio has been maintained above 30% for the past five years despite increased competition owing to a sustainable increase in branches, concentrated focus on CASA build up and a significant presence in the southern region, which accounts for the second highest CASA mobilisation in India after the western region. If we consider the past eight years, the bank has consistently grown its business above industry except in FY10-11 wherein it went into a consolidation phase.