Buy Syndicate Bank; target Rs 128: Hedge Equities

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Buy Syndicate Bank; target Rs 128: Hedge Equities

Hedge Equities is bullish on Syndicate Bank (SBL) and has recommended buy rating on the stock with a target price of Rs 128 in its November 19, 2011 research report.

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Hedge Equities is bullish on Syndicate Bank (SBL) and has recommended buy rating on the stock with a target price of Rs 128 in its November 19, 2011 research report.

"Syndicate Bank Limited (SBL) is a Karnataka based public sector bank that was initially founded in 1925 under the name " Canara Industrial and Banking Syndicate". It was initially set up by three individuals for the purpose of catering to the financial needs of weavers in Udupi. It was only in 1963 that it's name was changed to 'Syndicate Bank'. The bank is noted for pioneering the concept of the 'Pigmy Deposit Scheme' which it still runs today. This scheme is considered to be the Brand Equity of Syndicate Bank and involves a process where bank agents go and collect small sums of money (as low as Rs.5 daily) as recurring deposits from the account holders' doorsteps. The bank has been able to generate a total pigmy deposit corpus of more than Rs.1800 crore. Currently SBL is involved in the conventional services of banking that mainly includes Personal Banking, Agricultural Banking, Corporate Banking and NRI Banking. SBL has a total branch network of 2494 branches with 80 branches in rural India, 589 branches in Semi-urban India, 551 branches in urban India and 550 branches in metros and port-towns. The bank also has an overseas branch in London. At the end of H1 FY12, SBL had a total business (advances plus deposits) corpus of more than Rs. 2,53,000 crores."

"With inflation expected to ease off due to the high base effect we are expecting the RBI to pause on its rate hike mechanism and this is likely to result in interest rates coming off. We also understand that potential to undertake further rate hikes are limited and thus are expecting the yield on loans to decline from 9.3% to 9%. At the same time cost of deposits are expected to be almost flat, or rising by 10 bps from 4.9% to 5%. We have not factored in a rise in savings deposit rates as yet and we believe the management of SBL will play a wait and watch game before taking any action on this front. Based on FY11 figures it is estimated that a 1% hike in savings deposits rates could bring down the PBT of SBL by 24%. We are expecting the NII of SBL to grow by 12% and 16% over the next two years with NIMs to compress by 10 bps from 3.3% to 3.2%."

"SBL does not have a very strong fee based franchise and other income as a % of total income stood at 17%. We are not expecting an improvement on this front and expect that number to hover around the 17% threshold. SBL's operating expenditure is forecasted to grow at 17% yoy over the next two years and the cost to income ratio is expected to go up to 49.7% from 48% in the previous year. We are expecting asset quality to decline by 10 bps from 2.4% to 2.5% and concomitantly provisions are expected to rise. Due to the high base effect, provisions are expected to grow by 9% in FY12 and 18% in the next. PAT growth is expected to come off in FY12 to 9% but is expected to grow by a greater margin of 17% in FY13. PAT growth in H1FY12 was quite healthy but we are expecting muted other income growth and rising provisions in H2 to bring down PAT growth for the fiscal. PAT margins are expected to be flat at 9%."

"SBL is a bank with tremendous heritage and experience having started operations in 1925. The bank has then go on to build a solid branch network across the country. To re-emphasize SBL's profile of branch network it must be noted that 708 of its total branches are located in under-banked districts and 670 branches are located in minority concentration districts. In the last fiscal, SBL opened 188 General branches out of which 154 branches are located in tier-6 centres ,76 branches in under-banked districts and 6 branches in Minority Concentration camps. What this has done is resulted in strong customer loyalty within the semi urban or rural areas where SBL's clients will be reluctant to shift to other banks. Also the fact that SBL has understood these markets well gives it a solid platform to build its business and source more low cost deposits rather than wholesale deposits to fund its growth."

"In this liquidity driven free-fall the SBL stock has corrected quite a bit and is now trading at below its 3 year Price to Book value mean of 0.9. Besides it has reached our 45% DCF margin of safety level of below Rs.97 levels. At a CMP of Rs.95 the stock is currently trading at 0.7 times its trailing book value. Our book value analysis, DCF analysis and PE analysis all suggest that the stock is undervalued and the market has not accorded it a suitable PE or PBv multiple due to a lack of clarity on the balance sheet or future operations. If the bank could improve on these fronts we believe we could see an expansion in the multiples. We believe now would be a good time to accumulate this stock but based on the degree of risk capacity, aggressive investors can consider entering the stock at lower levels (Rs.88 levels as this is a 45% margin of safety on our weighted average price of Rs.128) as the liquidity driven pressures could continue as Euro zone worries persist."

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