Buy South Indian Bank; target Rs 35: AnandRathi
Brokerage house AnandRathi is bullish on South Indian Bank (SIB) and has recommended buy rating on the stock with a target price of Rs 35 in its research report dated July 16, 2013.
AnandRathi's report on South Indian Bank (SIB)
"South Indian Bank's advances grew 15.7 percent yoy, slower than deposits at 17.3 percent yoy, decreasing credit-deposit 99bps yoy to 71.6 percent. Led by a 52-bp yoy fall in share of CASA to 20.6 percent and a 48-bp yoy decline in the yield on earning assets, NIM declined 24bps yoy (10bps qoq) to 3 percent. Yet the average CASA per branch has steadily improved from Rs 91.5m in Mar'11 to Rs 115.1m in Mar'13, rising 6.2 percent yoy. Ahead, we expect the bank's business to register a 23 percent CAGR over FY13-15, with NIM estimated at 2.9 percent in FY14 and 3.1 percent in FY15."
"Despite modest fee income (13.3 percent yoy), non-interest income was led by robust Treasury profits of Rs 518m (156 percent yoy, 277 percent qoq). The bank's core-cost income rose 251bps yoy to 49.2 percent, with cost-to-assets down 2bps yoy to 1.7 percent. With no large expansion plans, branches are likely to see better operating leverage. We estimate cost-to-assets at 1.7 percent over FY14-15."
"The bank prudently made one-time provisions of Rs 600m for NAFED. This ate into profit growth. Gross NPAs rose 13.5 percent qoq, led by fresh slippages of Rs 2.2bn, of which Rs 1.75bn was accounted for by four large corporate accounts. Hence, NPA coverage (excl. technical write-offs) fell to 29.3 percent. In its conference call, management stated that it would sharpen its focus on recoveries of stressed/ default accounts, and strive to improve asset quality ahead. The restructured book stood at Rs 15.4bn (4.9 percent of loans)."
Our take: "We retain our Buy rating (with a target price of Rs 35), as we expect the bank's consistent profitability to be led by steady NIM, low operating expenses and stable credit costs. At our Mar'14 target, the stock would trade at P/BV of 1.3x FY14e and 1.1x FY15e. Our target is based on the two-stage DDM (CoE: 15.6 percent; beta: 0.8; Rf: 8 percent). Risk: Sharp increase in loan defaults," says AnandRathi research report.
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