South Indian Bank – the end of the pain in sight?
The asset quality looks incrementally stable, and the pain though not completely over, may be nearing an end. FY19 should turn out to be much better as the bank trims the ticket size of loans and sees fewer slippages and provisions.
Madhuchanda DeyMoneycontrol Research
The proactive clean-up of its corporate book in the June quarter provided a glimmer of hope for South Indian Bank (SIB) shareholders. So they were a bit taken aback when the bank took an exceptional provision in the September quarter due to diminution in the value of security receipts (assets sold to asset reconstruction companies).
The asset quality looks incrementally stable, and the pain though not completely over, may be nearing an end. FY19 should turn out to be much better as the bank trims the ticket size of loans and sees fewer slippages and provisions. The valuation at 1.1 times FY19P adjusted book looks interesting in the context of an expected improvement in return-on-equity (ROE) to 13 percent.
Results at a glance
Other income boosted pre-provision profit and net interest income (the difference between interest income and expense) grew a respectable 13 percent on 12.4 percent growth in loans and an improvement in net interest margin. The latter was aided by a steeper fall in the cost of deposits compared to yield on loans.
The other income component had certain one-offs like an income tax refund of Rs 26 crore and robust income from the sale of the priority sector lending portfolio. However, the significant increase in provisioning hurt profitability.
Exceptional charge in the quarter
The provisioning line was impacted as the bank created a provision of Rs 252 crore on account of diminution in the value of security receipts against loans that were sold to asset reconstruction companies (ARC) earlier.
The bank so far has sold assets worth Rs 1776 crore to ARCs taking an initial haircut of 33 percent on sale. However, four sold cases amounting to Rs 760 crore have been a part of the NCLT resolution process and warranted 25 percent incremental provision as the ARC feels that only around 50 percent of the asset value could be recovered. The cumulative coverage for the assets sold stands at close to 58 percent.
Incremental pain in asset quality?
While slippages are lower sequentially, they still remain elevated and the bank expects slippages and provisioning to be high in the second half of this fiscal.
However, the bank has fully recognised its watch list and the five cases (amounting to Rs 886 crore) that are part of the second likely list of NCLT, are also part of its non-performing assets (NPA). This list has 16 percent exposure to steel, 59 percent to infrastructure and 25 percent to auto ancillary and the bank is hopeful of a resolution especially for the steel assets. In addition, it has Rs 252 crore restructured standard advance. We have factored the elevated provision for the remaining part of FY18, in our estimates.
Loan book showing traction & getting granular
Loans showed a healthy growth and the bank has maintained close to 1.1% share in system’s incremental advances despite the onus of putting its house in order. However, the drivers of growth are retail and small businesses as the bank consciously builds a diversified book.
Deposit growth stood at 11.5 percent although the low-cost component (CASA) grew by 20 percent to reach 24.6 percent, a sequential decline and short of the bank’s own target of 27 percent. The bank has maintained its 0.7 percent share in system’s incremental deposits. The share of NRI deposits, in fact, has risen to 26.6 percent (from 25.7 percent in the year-ago quarter).
FY19 – the year to look forward to
One branch of the bank had unearthed a fraud of Rs 28 crore, but that will not have any material impact on performance, going forward. The bank has set an ambitious target of 1 percent return on assets (RoA), but doesn’t expect a turnaround in FY18. The management feels that a large part of the asset quality related issues would be addressed by FY18 and FY19 should begin on a better note. The reduction in provision should provide a key trigger for earnings growth in FY19.
The undemanding valuation at 1.1X FY19P adjusted book makes it a candidate to accumulate with an eye on FY19.For more research articles, visit our Moneycontrol Research Page.