RESULT UPDATE SOUTH INDIAN BANK...

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Edelweiss Securities Limited

South Indian Bank’s (SIB) Q3FY18 performance improved anchored by improved growth momentum and steady asset quality. Key highlights: 1) slippages normalised, as expected, to 2.1% versus ~4.0% in past 6 quarters; 2) loan growth momentum improved (up 16% YoY) with sustained buildup on granular portfolio with focus on SME/retail; and 3) opex growth was relatively higher (up 10% QoQ) following wage revision & DA impact (trend likely in other PSU banks as well). Key monitorable—softer traction in CASA (sub-3% growth) at <25%. As highlighted in our earlier note (Retail to drive growth), the strategic exercise—centralisation of processes, getting more granular—has put SIB on a firm footing and is expected to propel core operating profit CAGR of ~30% and generate RoA/RoE of ~0.8%/13.5% by FY20E. Trading at 1.0x FY20E ABV, the stock is attractively positioned from the risk-reward perspective. Maintain ‘BUY’.

Steady asset quality Slippages came in at INR2.6bn (2.1% versus past six quarters’ ~4.0% run rate). While

fresh slippages were restricted to INR980mn (in line with guidance), devolvement of

non-fund-based exposure (pharma sector) of INR1.52bn led to elevated slippages.

However, the impact on credit cost was restricted as SIB had already provided for >50%

earlier (now have 100% towards this account). SIB maintained its “ZERO” watchlist claim

in corporate exposure. Furthermore, lower stock of 5:25/SDR/S4A/restructured book

indicates lower incremental stress. We believe, rising provisions on NCLT (41% currently)

with lower NPL coverage ratio at 31% is likely to lead to elevated credit cost.

Growth momentum coming to fore NII gained traction at INR5bn (up 22% YoY) following improved loan growth (up 16%

YoY, driven by retail/SME segments). NIMs came in at 2.88% (down 7bps QoQ) on lower

lending yields (down 15bps QoQ, conversion to MCLR regime & move towards better

rated corporate forming 46% versus 30% a year ago) even as funding cost benefit lent

support. Henceforth, transition to MCLR regime and limited cushion on funding cost

(hardening interest rate with soft CASA growth) will likely put some pressure on NIMs.

Outlook and valuations: Risk-reward favourable; maintain ‘BUY’ SIB’s endeavour to derisk its balance sheet by shifting to the retail segment, stable asset

quality, valuations at 1.0x FY20E P/ABV for RoA/RoE of 0.8%/13.5% (post capital raising)

and healthy earnings CAGR of >30% (albeit on low base) over FY17-20E, lend comfort.

We roll over to FY20E earnings and peg our target price at INR44 (INR40 earlier).

RESULT UPDATE

SOUTH INDIAN BANK Core improving; asset quality holds ground

COMPANYNAME

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight

MARKET DATA (R: SIBK.BO, B: SIB IN)

CMP : INR 32

Target Price : INR 44

52-week range (INR) : 35 / 19

Share in issue (mn) : 1,805.8

M cap (INR bn/USD mn) : 58 / 919

Avg. Daily Vol.BSE/NSE(‘000) : 17,737.7

SHARE HOLDING PATTERN (%)

Current Q2FY18 Q1FY18

Promoters *

- - -

MF's, FI's & BK’s 15.2 12.3 13.1

FII's 34.6 37.9 38.0

Others 50.3 49.8 48.9

* Promoters pledged shares (% of share in issue)

: NIL

PRICE PERFORMANCE (%)

Stock Nifty EW Banks and

Financial Services Index

1 month (0.2) 3.6 1.1

3 months 7.7 6.1 5.7

12 months 71.0 28.3 37.7

Kunal Shah +91 22 4040 7579

[email protected]

Prakhar Agarwal +91 22 6620 3076

[email protected]

India Equity Research| Banking and Financial Services

January 10, 2018

Financials (INR mn)

Year to March Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) FY17 FY18E FY19E

Net revenue 6,682 6,760 (1.2) 7,837 (14.7) 23,910 29,497 33,399

Net profit 1,150 1,114 3.3 43 NA 3,925 3,863 7,162

Dil. EPS (INR) 0.6 0.8 (21.0) 0.0 NA 2.2 1.9 3.6

Adj. BV (INR) 22.9 23.8 26.4

Price/ Adj book (x) 1.4 1.4 1.2

Price/ Earnings (x) 14.9 16.8 9.0

https://www.edelresearch.com/showreportpdf-37288/SOUTH_INDIAN_BANK_-_VISIT_NOTE-JUL-17-EDEL

https://www.edelresearch.com/showreportpdf-37288/SOUTH_INDIAN_BANK_-_VISIT_NOTE-JUL-17-EDEL

Banking and Financial Services

2 Edelweiss Securities Limited

Table 1: Key takeaways from Q3FY18 earnings

Source: Company, Edelweiss research

Table 2: Loan growth gaining traction with retail/SME segment being key drivers

Source: Company

(INR mn) Q3FY18 Q3FY17 Growth (%) Q2FY18 Growth (%) Comments

Net interest income 5,094 4,175 22.0 5,032 1.2

Gained traction following improving loan growth

(up 16% YoY, driven by retail/SME segment).While

NIMs saw some pressure on lending yields, funding

cost improvement lent support.

Other income 1,588 2,585 (38.6) 2,805 (43.4)

Other income softer due to lower treasury gains.

Core fee income continued momentum supported by

better cross sell opportunities.

Operating expenses 3,381 2,991 13.0 3,234 4.5

Operating profitability supported by controlled cost.

We expect cost to rise in interim given investments

on retail franchise

Staff expense 1,849 1,752 5.6 1,681 10.0

Growth was higher even following reduction in

number of employees following a) provision of wage

revision and b) rise in DA

Other opex 1,532 1,239 23.6 1,554 (1.4)

Pre prov Op profit (PPP) 3,302 3,770 (12.4) 4,603 (28.3)

Provisions 1,543 2,066 (25.3) 4,537 (66.0)

Credit cost continues to be elevated (albeit lower)

follwing rise in coverage. Bank was adequaltely

provided for NFB devlovement in Q3FY18 to an

extent of >50%

Profit before tax 1,759 1,703 3.2 66 NA

Provision for tax 609 590 3.2 23 NA

Profit after tax 1,150 1,114 3.3 43 NA

EPS (INR) 0.6 0.8 (21.0) 0.0 NA

Balance sheet data (INR mn) 0.1 0.1 0.1 0.1 0.1

Advances 5,24,490 4,52,340 16.0 4,89,543 7.1Loan book growth targetted at 18% plus levels,

retail/SME to be key drivers.

Deposits 6,81,090 6,35,950 7.1 6,71,421 1.4

Asset quality (INR mn) 0.1 0.1 0.1 0.1 0.1

Gross NPA (%) 3.4 4.0 3.6

Incremental slippages taper off on expected lines .

With lower incremental stress and focus on

recoveries, bank expects headline asset quality

numbers to taper off.

Gross NPA 17,746 17,870 (0.7) 17,663 0.5

Net NPA (%) 2.4 2.5 2.6

Net NPA 12,108 11,157 8.5 12,558 (3.6)

Provision coverage (%) 30.9 36.7 28.0Coverage ratio continues to be lower, we expect this

will keep credit cost at elevated levels.

Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18

Advances (INR mn) 3,99,240 4,10,858 4,12,370 4,35,478 4,52,340 4,63,895 4,61,854 4,89,543 5,24,490

Growth Q-o-Q 0.9 2.9 0.4 5.6 3.9 2.6 (0.4) 6.0 7.1

Growth Y-o-Y 9.7 9.9 7.8 10.1 13.3 12.9 12.0 12.4 16.0

Deposits (INR mn) 5,34,410 5,57,207 5,78,890 6,01,918 6,35,950 6,61,175 6,57,910 6,71,421 6,81,090

Growth Q-o-Q 0.8 4.3 3.9 4.0 5.7 4.0 (0.5) 2.1 1.4

Growth Y-o-Y 10.3 7.3 10.6 13.5 19.0 18.7 13.7 11.5 7.1

CD ratio (%) 74.7 73.7 71.2 72.3 71.1 70.2 70.2 72.9 77.0

CASA (%) 23.0 22.4 23.2 22.8 25.9 23.8 25.2 24.6 24.9

South Indian Bank


Table 3: Fresh slippages curtailed (on expected lines) but NFB devolvement kept slippages higher

Source: Company

Table 4: Improvement in core fee income, sustainability key

Source: Company

Table 5: NIMs benefitting from lower funding cost, even while lending yields are under pressure

Source: Company

(INR mn) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18

Gross NPA 11,080 15,624 16,516 17,453 17,870 11,490 16,957 17,663 17,746

Growth Q-o-Q 24.2 41.0 5.7 5.7 2.4 (35.7) 47.6 4.2 0.5

Gross NPA (%) 2.8 3.8 4.0 4.0 4.0 2.5 3.6 3.6 3.4

Net NPA 7,160 11,853 11,918 12,064 11,157 6,746 11,825 12,558 12,108

Growth Q-o-Q 30.3 65.5 0.6 1.2 (7.5) (39.5) 75.3 6.2 (3.6)

Net NPA (%) 1.8 2.9 2.9 2.8 2.5 1.5 2.5 2.6 2.4

Provision coverage (%) 34.5 23.3 27.0 30.1 36.7 40.8 29.6 28.0 30.9

(INR mn) Q3FY18 Q2FY17 Growth (%) Q2FY18 Growth (%)

Transaction related 670 450 48.9 640 4.7

Forex 70 80 (12.5) 90 (22.2)

Profit on sale of inv 110 1,270 (91.3) 680 (83.8)

Others 738 785 (6.0) 1,395 (47.1)

Total 1,588 2,585 (38.6) 2,805 (43.4)

(%) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18

NIMs 2.9 2.6 2.7 2.8 2.7 2.7 2.8 3.0 2.9

Yield on Advances 11.2 10.6 10.9 10.6 10.3 10.0 10.1 10.0 9.9

Cost of Deposits 7.4 7.2 7.0 6.8 6.5 6.3 6.2 6.1 6.0



Financial snapshot (INR mn) Year to March Q3FY18 Q3FY17 % change Q2FY18 % change YTD18 FY18E FY19E

Interest on advances 12,273 11,285 8.8 11,830 3.7 23,174 50,671 59,527 Interest on investments 3,111 3,091 0.7 3,169 (1.8) 6,365 12,219 13,154

Int. on other resources 39 59 (33.0) 44 (9.9) 104 2,836 3,266

Interest income 15,770 14,790 6.6 15,362 2.7 46,038 65,725 75,947

Interest exp 10,676 10,614 0.6 10,330 3.3 31,305 45,022 51,940

Net int. inc. (INR mn) 5,094 4,175 22.0 5,032 1.2 14,733 20,703 24,007

Other income 1,588 2,585 (38.6) 2,805 (43.4) 6,586 8,794 9,391

Net revenues 6,682 6,760 (1.2) 7,837 (14.7) 21,319 29,497 33,399

Operating expenses 3,381 2,991 13.0 3,234 4.5 9,620 13,281 15,046

Staff expense 1,849 1,752 5.6 1,681 10.0 5,199 7,282 8,197

Other opex 1,532 1,239 23.6 1,554 (1.4) 4,421 5,999 6,848

Pre prov op profit (PPOP) 3,302 3,770 (12.4) 4,603 (28.3) 11,699 16,216 18,353

Provisions 1,543 2,066 (25.3) 4,537 (66.0) 8,323 10,362 7,500

Profit before tax 1,759 1,703 3.2 66 NA 3,376 5,853 10,852

Provision for taxes 609 590 3.2 23 NA 1,169 1,990 3,690

PAT 1,150 1,114 3.3 43 NA 2,208 3,863 7,162

Diluted EPS (INR) 0.6 0.8 (21.0) 0.0 NA 1.2 1.9 3.6

Ratios

NII/GII (%) 32.3 28.2 32.8 32.0 31.5 31.6

Cost/income (%) 50.6 44.2 41.3 45.1 45.0 45.0

Provisions / PPOP 46.7 54.8 98.6 71.1 63.9 40.9

Tax rate (%) 34.6 34.6 34.4 34.6 34.0 34.0

Bal. sheet data (INRbn)

Advances 524,490 452,340 16.0 489,543 7.1 524,490 547,396 656,875

Deposits 681,090 635,950 7.1 671,421 1.4 681,090 735,265 864,444

Asset quality

Gross NPA 17,746 17,870 (0.7) 17,663 0.5 17,746 18,224 22,089

Gross NPA (%) 3.4 4.0 3.6 3.4 3.3 3.3

Net NPA 12,108 11,157 8.5 12,558 (3.6) 12,108 10,261 10,307

Net NPA (%) 2.4 2.5 2.6 2.4 1.9 1.6

B/V per share (INR) 27.3 30.0

Adj book value / share 23.8 26.4

Price/ Adj. book (x) 1.4 1.2

Price/ Earnings 16.8 9.0

South Indian Bank


Key highlights: Q3FY18 earnings conference call

With respect to asset quality

Fresh slippages during the quarter was INR980mn, but devolvement of Non-Fund

based exposure (Pharma sector) of INR1.52bn led to higher slippages. The bank was

already carrying > 50% provisions on this and made additional provisions to have

100% coverage on this account (bank has no such NFB exposure left). The slippages

should normalise henceforth (INR1-1.2bn per quarter) , except the 2 accounts that are

in restructured book.

GNPAs movement (INR bn) – Opening: 17.6, Slippages: 2.6, Cash Recovery: 0.2,

Upgrades: 0.77, Write-offs: 1.52, Closing: 17.7

Restructured book at INR2.48bn, contains 2 annuity based road projects (not much risk

to slipping into NPLs), the bak holds provisions of 10-15% on the restructured book

The bank has exposure of INR6.6bn towards NCLT list for which they have been

provided to the extent of 41% ( balance 9% will be provided in Q4FY17). Stepping into

FY18, management expect to curtail credit cost at < 1% levels.

o NCLT list has one EPC account of INR2bn wherein bank anticipates to make 100%

provisions but large part of that have already been made.

The bank maintained its ZERO watchlist claims in the corporate exposure. Further they

highlighted that 74% of corporate book has been above investment grade. The portion

of below BBB rated accounts has been coming down, the trend of this will continue.

Moreover, the corporate book with exposure of > INR250mn now stands at INR185.6bn

largely contributed by Financial Intermediaries (23%) primarily NBFCs, Infra – 15% ,

metal 6% among others.

SRs: INR12.74bn, further bank already has 49% is the blended provision on SRs portfolio.

SDR (standard): NIL, 5:25 refinance– INR3.05bn (2 accounts) .

With respect to growth and other operating metrics

Loan growth during the quarter was 16%, largely driven by SME , mortgage, agri and

retail loans. Management aims to achieve loan growth at 18% levels in FY18, driven

by MSME and retail business. And henceforth aims to achieve 20% plus growth

Other income growth ( ex-treasury) aims to grow at > 25%. Other income in last

quarter had some one-offs ( PSLCs etc)

NIMs during the quarter was 2.88%. Management has maintained its NIMs guidance

in the range of 2.85-2.90%

o There was some pressure on yields given focus on higher collateral, has led to

competitive pricing

o Funding cost benefitted during the quarter due to run-down in higher cost deposits.

CASA grew <3% YoY (partially a impact of higher deposit base), and now stands 24.9%.

Management have highlighted CASA target growth of 25% (also focus on NRI part of

CASA), and overall deposit growth to be in line with advance growth

The opex was higher during the quarter due to a) wage revision (12%, for 2 months

starting November), impact of INR100mn and b) DA.



Other highlights

During the quarter bank has raised tier-2 bonds for INR4.9bn. Further the board has

approved the issuance of 200m share through QIB, price, time and others details will be

intimidated in. This capital will provide enough capital for growth needs

Treasury income was lower at INR110mn.

The bank plans to add 50 branches and extension counter (more tilt towards extension

counters) per year.

The cost/income ratio target of 47%, further improving to 45% ( in FY19).

Reduction in employee count is on account of retirement (retirement happens in

November) and not because on right sizing. The bank plans to add on to the work force

overtime.

Avg Ticket Size – 25lakh for home loans

AFS duration is around 3 years.

Expect to achieve RoA of 1% plus by FY20.

South Indian Bank


Key highlights: Q2FY18 earnings conference call

With respect to asset quality

Q2FY18 saw exceptional provisions to the tune of INR2.5bn on MTM valuation of

Security Receipts received on the sale of assets to ARC

o The bank had sold INR17.8bn to ARCs at an upfront discount of 33%; on top of this,

the bank has made another 25% provisioning on the same

Consequently, given >50% coverage on these, the bank does not expect any

further provisioning hit on the same

Outstanding SRs stood at INR12.7bn (book value), with the aforementioned

provisions of INR2.5bn

o Of the accounts sold to ARCs, INR7.6bn (4 accounts) are meant for the NCLT

resolution process under the IBC process

Management expects provisions to be elevated for the next 2 quarters at ~INR2bn

levels mainly due to incremental provisioning on:

o IBC accounts: Bank has exposure to 5 accounts amounting to INR8.9bn, with

existing provisions in the range of 25-50%

Management expects to achieve 50% provisioning on these accounts by

March-2018

Breakup of these accounts – Steel: 16%, Infra & EPC: 59%, Auto-ancillary: 25%

Management expects the steel account to turnaround and not require more than 50%

provisioning

At the same time, significant proposals are running in the case of Infra & EPC accounts

o Residual corporate accounts recognized as NPAs

GNPAs movement (INR bn) – Opening: 16.9, Slippages: 2.5, Cash Recovery: 0.4,

Upgrades: 0.9, Write-offs: 0.6, Closing: 17.7

o Slippages break-up - Food processing: INR1.0bn, Trade: INR0.6bn, Textile

manufactures: INR0.2bn, Others: INR0.7bn

Slippages of food processing a/cs is a one-off, as money may have been

diverted into real estate

Outstanding accounts – 5:25: INR3.0bn (2 accounts), Standard restructured: INR2.5bn,

Standard SDR & S4A: Nil

With respect to guidance

Management aims to achieve loan growth at 18% levels, driven by MSME and retail

business

o Except for the gold portfolio, all other segments are seeing good traction

While gold portfolio is muted, the bank is trying hard to push traction in the

same

o Entire home loan, LAP and auto loans business is coming from the hub



191 new employees were added during the quarter to support the retail drive

Management has maintained its NIMs guidance in the range of 2.85-2.90%

o While yield on advances is coming down, reducing cost of deposits is fundamental

to improving NIMs

o During Q2FY18, NIMs came in at 2.95%, with cumulative NIMs settling at 2.87%

Managements expects other income to be sustainable at a run-rate of INR2bn going

ahead

o During Q2FY18, other income of INR2.8bn includes INR260mn of interest received

on tax-refund (one-off) and INR590mn on sale of PSLC certificates

Given that the bank has fully recognized watch list accounts previously, slippages are

expected to normalize to INR1-1.5bn levels

o Management’s aim is to achieve provision coverage ratio of >60% by FY19E

Other highlights

While acknowledging that the bank has lagged behind, management stated that it is

working hard to drive better traction on the CASA front

Percentage of advances linked to MCLR-rates stood at 52%

CET-1 ratio stood at 10.39%, with risk weighted assets (RWA) at INR451.7bn

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 851 branches and over 1370s ATMs across

India.

Current management’s efforts at improving the bank’s operating performance are visible

with improvement in return on assets (RoA) to 1.1% in FY13 from 0.1% in FY05. 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. We believe the

present management is innovative and dynamic. Investment Theme

As highlighted in our note (Retail to drive growth), the strategic exercise—centralisation of

processes, getting more granular—has put SIB on a firm footing—propelling ability to

expand profit by > 30% CAGR and generate RoA/RoE of ~0.8%/13.5% by FY20E. At 1.0x

FY20E ABV, the stock is attractively positioned from the risk-reward perspective

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 70% 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.



Financial Statements

Income statement (INR mn)

Year to March FY17 FY18E FY19E FY20E

Interest income 58,471 65,725 75,947 89,639

Interest expended 41,716 45,022 51,940 61,471

Net interest income 16,755 20,703 24,007 28,168

Non interest income 7,156 8,794 9,391 10,412

- Fee & forex income 1,004 1,242 1,428 1,644

- Misc. income 3,635 5,452 6,163 6,968

- Investment profits 2,517 2,100 1,800 1,800

Net revenue 23,910 29,497 33,399 38,580

Operating expense 11,764 13,281 15,046 16,746

- Employee exp 6,765 7,282 8,197 8,924

- Other opex 4,999 5,999 6,848 7,822

Preprovision profit 12,146 16,216 18,353 21,835

Provisions 6,144 10,362 7,500 8,834

Loan loss provisions 6,580 6,511 6,800 8,134

Investment depreciation 60 3,281 300 300

Other provisions (496) 570 400 400

Profit Before Tax 6,002 5,853 10,852 13,001

Less: Provision for Tax 2,077 1,990 3,690 4,420

Profit After Tax 3,925 3,863 7,162 8,580

Reported Profit 3,925 3,863 7,162 8,580

Adj. Diluted EPS (INR) 2.2 1.9 3.6 4.3

Dividend per share (DPS) 0.4 0.8 0.8 0.8

Dividend Payout Ratio(%) - 45.2 24.4 20.3

Growth ratios (%)


NII growth 11.0 23.6 16.0 17.3

Fees growth 3.4 23.6 15.0 15.2

Opex growth 2.5 12.9 13.3 11.3

PPOP growth 29.6 46.6 17.3 21.0

PPP growth 38.1 33.5 13.2 19.0

Provisions growth 66.2 68.7 (27.6) 17.8

Adjusted Profit 17.8 (1.6) 85.4 19.8

Operating ratios


Yield on advances 10.2 10.0 9.9 9.8

Yield on investments 6.4 6.4 6.7 6.9

Yield on assets 9.1 8.8 8.8 8.8

Cost of funds 6.5 6.1 6.2 6.2

Net interest margins 2.6 2.8 2.8 2.8

Cost of deposits 6.5 6.2 6.2 6.3

Cost of borrowings 7.5 7.4 7.4 7.4

Spread 2.6 2.7 2.6 2.6

Cost-income 49.2 45.0 45.0 43.4

Tax rate 34.6 34.0 34.0 34.0

Key Assumptions


Macro

GDP(Y-o-Y %) 6.6 6.5 7.1 7.6

Inflation (Avg) 4.5 3.8 4.5 5.0

Repo rate (exit rate) 6.3 6.0 6.0 6.5

USD/INR (Avg) 67.1 64.5 65.0 66.0

Sector

Credit growth 9.0 12.0 14.0 17.0

Deposit growth 14.0 12.0 13.0 14.0

CRR 4.0 4.0 4.0 4.0

SLR 20.0 20.0 19.5 19.0

G-sec yield 6.5 6.5 7.0 7.1

Company

Op. metric assump. (%)

Yield on advances 10.2 10.0 9.9 9.8

Yield on investments 6.4 6.4 6.7 6.9

Yield on asset 9.1 8.8 8.8 8.8

Cost of funds 6.5 6.1 6.2 6.2

Net interest margins 2.6 2.8 2.8 2.8

Cost of deposits 6.5 6.2 6.2 6.3

Cost of borrowings 7.5 7.4 7.4 7.4

Spread 2.6 2.7 2.6 2.6

Tax rate (%) 34.6 34.0 34.0 34.0

Balance sheet assumption (%)

Credit growth 13.9 17.9 19.8 17.9

Deposit growth 18.7 11.2 17.6 17.2

SLR ratio 23.0 23.0 22.5 22.5

Low-cost deposits 23.8 25.3 25.6 25.9

Gross NPA ratio 2.5 3.3 3.3 3.0

Net NPA ratio 1.5 1.9 1.6 0.9

Net NPA / Equity 14.6 18.7 17.1 10.6

Capital adequacy 12.4 11.9 11.4 10.9

Incremental slippage 3.6 3.2 2.5 2.0

Provision coverage 41.3 43.7 53.3 69.7


South Indian Bank

Peer comparison valuation

Market cap Diluted P/E (X) Price/ Adj. BV (X) ROAE (%)

Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E

South Indian Bank 919 16.8 9.0 1.4 1.2 7.7 12.5

Axis Bank 22,691 32.1 16.3 2.3 2.1 7.3 12.2

DCB Bank 968 22.9 18.6 2.5 2.2 11.8 11.9

Federal Bank 3,497 19.5 15.6 1.9 1.7 10.6 10.9

HDFC Bank 75,923 26.2 21.6 4.7 4.0 18.9 19.5

ICICI Bank 31,507 18.5 13.4 2.7 2.4 10.8 13.9

IDFC Bank 3,384 15.8 13.5 1.4 1.3 9.0 9.7

IndusInd Bank 16,353 28.3 22.5 4.5 3.8 16.5 17.9

Karnataka Bank 955 8.9 7.4 0.9 0.8 9.6 10.8

Kotak Mahindra Bank 30,017 32.6 26.2 4.2 3.7 14.5 14.8

Yes Bank 12,282 18.5 13.8 3.2 2.7 17.6 20.2

Median - 19.5 15.6 2.5 2.2 10.8 12.5

AVERAGE - 21.8 16.2 2.7 2.4 12.2 14.0

Source: Edelweiss research

RoE decomposition (%)


Net int. income/assets 2.6 2.8 2.8 2.8

Fees/Assets 0.7 0.9 0.9 0.8

Invst. profits/Assets 0.4 0.3 0.2 0.2

Net revenues/assets 3.7 4.0 3.9 3.8

Operating expense/assets (1.8) (1.8) (1.7) (1.7)

Provisions/assets (1.0) (1.4) (0.9) (0.9)

Taxes/assets (0.3) (0.3) (0.4) (0.4)

Total costs/assets (3.1) (3.4) (3.0) (3.0)

ROA 0.6 0.5 0.8 0.8

Equity/assets 6.5 6.8 6.7 6.3

ROAE (%) 9.4 7.7 12.5 13.5

Valuation parameters


Adj. Diluted EPS (INR) 2.2 1.9 3.6 4.3

Y-o-Y growth (%) (11.8) (11.4) 85.4 19.8

BV per share (INR) 25.5 27.3 30.0 33.5

Adj. BV per share (INR) 22.9 23.8 26.4 31.0

Diluted P/E (x) 14.9 16.8 9.0 7.6

Price/ Adj. BV (x) 1.4 1.4 1.2 1.0

Dividend Yield (%) 1.2 2.3 2.3 2.3

Balance sheet (INR mn)

As on 31st March FY17 FY18E FY19E FY20E

Share capital 1,803 2,003 2,003 2,003

Reserves & Surplus 44,244 52,761 58,178 65,013

Net worth 46,047 54,764 60,181 67,015

Sub bonds/pref cap - 5,000 10,000 15,000

Deposits 661,175 735,265 864,444 1,013,142

Total Borrowings 19,578 19,578 19,578 19,578

Other liabilities 14,419 13,352 12,882 13,682

Total liabilities 741,218 827,959 967,084 1,128,416

Loans 463,895 547,396 656,875 775,112

Cash and Equivalents 38,877 42,458 48,469 56,754

Gilts 170,439 173,614 198,905 232,362

Others 23,858 26,455 28,873 31,534

Fixed assets 4,123 3,803 3,412 2,942

Other Assets 40,026 34,233 30,549 29,712

Total assets 741,218 827,959 967,084 1,128,416

Credit growth 13.9 17.9 19.8 17.9

Deposit growth 18.7 11.2 17.6 17.2

EA growth 18.5 13.3 18.1 17.4

SLR ratio 23.0 23.0 22.5 22.5

C-D ratio 71.5 75.8 77.3 77.7

Low-cost deposits 23.8 25.3 25.6 25.9

Provision coverage 41.3 43.7 53.3 69.7

Gross NPA ratio 2.5 3.3 3.3 3.0

Net NPA ratio 1.5 1.9 1.6 0.9

Incremental slippage 3.6 3.2 2.5 2.0

Net NPA / Equity 14.6 18.7 17.1 10.6

Capital adequacy 12.4 11.9 11.4 10.9

- Tier 1 10.9 10.4 9.9 9.4



Holding - Top 10

Perc. Holding Perc. Holding

Yusuffal Musaliam Veetil 4.94 Lavender Investments 4.92

First Carlyle Ventures Mauritius 4.91 Life Insurance Corporation of India 4.70

ICICI Prudential Asset Management 2.73 CX Securities 2.61

Iva International Fund 2.55 International Value Advisers 2.17

Deutsche Sec Mauritius 1.75 GKFF Ventures 1.73

*as per last available data

Insider Trades

Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

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

15 May 2017 Db International Asia Ltd Sell 11000000 25.55

24 Jan 2017 Kotak Mahindra (International) Ltd Sell 28500000 21.20

24 Jan 2017 Lavender Investments Ltd Buy 28500000 21.20

*in last one year

Additional Data

Directors Data Salim Gangadharan Part time Chairman V G Mathew Managing Director & CEO

Francis Alapatt Director Ranjana Salgaocar Director

Sri. Parayil George John Tharakan Director K Thomas Jacob Director

Mohan E. Alapatt Director Dr. John Joseph Director

Achal Kumar Gupta Director

Auditors - Deloitte Haskins & Sells

*as per last annual report


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Allahabad Bank HOLD SU M Axis Bank HOLD SP M

Bajaj Finserv HOLD SP L Bank of Baroda BUY SP M

Bharat Financial Inclusion BUY SO M Capital First BUY SO M

DCB Bank HOLD SP M Dewan Housing Finance BUY SO M

Equitas Holdings Ltd. BUY SO M Federal Bank BUY SP L

HDFC HOLD SP L HDFC Bank BUY SO L

ICICI Bank BUY SO L IDFC Bank HOLD SP L

Indiabulls Housing Finance BUY SP M IndusInd Bank BUY SP L

Karnataka Bank BUY SP M Kotak Mahindra Bank HOLD SP M

L&T FINANCE HOLDINGS LTD BUY SO M LIC Housing Finance BUY SP M

Magma Fincorp BUY SP M Mahindra & Mahindra Financial Services HOLD SP M

Manappuram General Finance BUY SO H Max Financial Services BUY SO L

Multi Commodity Exchange of India BUY SP M Muthoot Finance BUY SO M

Oriental Bank Of Commerce HOLD SP L Power Finance Corp BUY SO M

Punjab National Bank BUY SP M Reliance Capital BUY SP M

Repco Home Finance BUY SO M Rural Electrification Corporation BUY SO M

Shriram City Union Finance BUY SO M Shriram Transport Finance BUY SO L

South Indian Bank BUY SP M State Bank of India BUY SP L

Union Bank Of India HOLD SP M Yes Bank BUY SO M

RATING & INTERPRETATION

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



Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 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

Allahabad Bank, Axis Bank, Bharat Financial Inclusion, Bajaj Finserv, Bank of Baroda, Capital First, DCB Bank, Dewan Housing Finance, Equitas Holdings Ltd., Federal Bank, HDFC, HDFC Bank, ICICI Bank, IDFC Bank, Indiabulls Housing Finance, IndusInd Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, L&T FINANCE HOLDINGS LTD, Max Financial Services, Multi Commodity Exchange of India, Manappuram General Finance, Magma Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, Repco Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian Bank, Union Bank Of India, Yes Bank

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 161 67 11 240 * 1stocks under review

Market Cap (INR) 156 62 11

Date Company Title Price (INR) Recos

Recent Research

28-Dec-17 BFSI Turning interest rates table: Impact analysis; Sector Update

26-Dec-17 KMB Building blocks in place for profitable scale; Visit Note

1010 Buy

22-Dec-17 Banking (RESOLUTION TRACKER #4)

Expert speak: Bankruptcy Code progressively evolving; Sector Update

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

-

149

297

446

594

743

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

(IN

R)

One year price chart

10

15

20

25

30

35

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

De

c-1

7

Jan

-18

(IN

R)

South Indian Bank


South Indian Bank

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South Indian Bank

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