Buy South Indian Bank; target of Rs 20: Motilal Oswal

Motilal Oswal 's research report on South Indian Bank

SIB reported 2QFY19 PAT of INR0.8b (1QFY19: INR0.2b), supported by controlled provisions of INR2.1b (-55% YoY), even as PPoP declined 32% YoY (muted treasury gains). Our full-year estimate suggests SIB should deliver PAT of INR1.7b in 2HFY19 (after INR0.9b in 1HFY19). NII stood flat even as advances increased 16% YoY. Margins also held flat at 2.6%. Loan growth of 16% YoY was led by robust growth in retail (+19% YoY) and MSME (+7.2% YoY) loans, while corporate book grew 13% YoY. Deposits grew by 12% YoY, while the CASA ratio stood at 24.6%. Inspite of opex growth of 10% YoY led by higher employee expenses (+17% YoY) ; CI ratio declined to 53.4% (57.9% in 1QFY19). Slippages declined sharply to INR2.1b (INR6.1b in 1QFY19), which included SME slippages of INR1.1b. Absolute GNPA increased 3.7% QoQ to INR26.5b (4.6%, +7bp QoQ). NNPA declined 1.6% QoQ to INR17.8b (3.16%, -11bp), with calculated PCR improving to 32.6% (+363bp QoQ). Total NSL were at INR20.4b (3.6% of total loans).

Outlook

Management is focused on building a low-ticket loan book, while the ongoing cleansing of balance sheet has led to elevated stress on the book. Management remains confident on the healthy trend in recoveries and suggested having healthy collateral cover on most of these assets. We cut our FY19/20 estimates by 14%/29% to account for higher provisions, muted other income and slow growth trajectory considering the impact of Kerala floods. Maintain Buy with a TP of INR20 (0.8x FY20E ABV).