Edelweiss is bullish on South Indian Bank has recommended buy rating on the stock with a target price of Rs 40 in its research report dated October 10, 2017.
Edelweiss' research report on South Indian Bank
South Indian Bank’s (SIB) Q2FY18 earnings were marred by one-off provisions (provision on MTM valuation of security receipts (SR) of INR2.5bn) in an otherwise operationally improving quarter. Key highlights: 1) Slippages normalised, as expected, to 2.2% levels versus 4.5% in past 8 quarters, but credit cost was higher as SIB provided MTM on SRs; 2) Continued to build more granular portfolio with focus on SME/retail along with CASA improvement (up 20% YoY to 24.6%); and 3) Focus on cross-sell (benefits of centralised processing, tie ups with Kotak Life and SBI Life) supported core operating profit (surged >50% YoY). As highlighted in our earlier note (Retail to drive growth), the strategic exercise — centralisation of processes, getting more granular—has put SIB on firm footing, and is expected to propel core operating profit by >30% CAGR and generate RoA/RoE of ~0.9%/14% by FY19E. Trading at 1.1x FY19E ABV, the stock is attractively positioned from the risk-reward perspective. Maintain ‘BUY’.
Factoring in the one-off provision and impact of second list by RBI (up-fronted in FY18), we raise our credit cost estimates leading to earnings cut of ~21% for FY18. Despite this, SIB is set to deliver RoA/RoE of 0.9%/14.5% and healthy earnings CAGR of >30% (albeit on low base) over FY17-19E. Trading at 1.1x P/ABV, risk-reward is favourable. We maintain ‘BUY/SP’ with target price of INR40.
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