Accumulate South Indian Bank; target Rs 28: P Lilladher

Prabhudas Lilladher is bullish on South Indian Bank (SIB) and has recommended accumulate rating on the stock with a target price of Rs 28 in its January 15, 2013 research report.

'SIB reported a strong Q3FY13 largely driven by better-than- expected rebound in margins. Gross NPA was down QoQ due to Rs0.4bn restructuring adjusted for which asset quality performance was satisfactory. Overall, Q3FY13 was a stable quarter. However, we maintain our cautious view as structural issues, both on liability (Low CASA) + priority sector compliance (~20% v/s 40% requirement), remain unsolved.

Margin surprise drives PPOP performance: Sequential margin improvement of ~30bps was better-than-expected as not only did yield improve sequentially (no interest reversal v/s Rs200m in Q2FY13) but cost of funds also moderated marginally. Large part of PPOP surprise was related to margins, excluding which fee income performance was muted.

Asset quality stable even adjusted for one-offs: Gross NPAs came off QoQ driven by restructuring of MFI account “Samruddhi Finance” (Rs400m) adjusted for which Gross NPA performance was robust. Provisions were higher-thananticipated due to Rs300m of provisioning related to NAFED. SIB has made ~35% provisions on their NAFED exposure which is the initial haircut which management had anticipated on NAFED. Overall, adjusted for these one-offs, asset quality performance was relatively stable.

Other structural issues: SIB continues to have structural issues that we have highlighted earlier on dwindling CASA ratio and more importantly, large drop in PSL compliance which has led to complete dependence on very low credit costs to maintain 1% ROA. We see no material improvement on CASA and PSL front and believe that long-term ROAs will remain under pressure and hence, maintain our cautious stance. Undemanding valuations (1.15x FY14 book) refrain from downgrading to Reduce. We maintain 'Accumulate' with a parice target of Rs 28/share," says Prabhudas Lilladher research report.

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