Buy South Indian Bank; target of Rs 34: Motilal Oswal

Motilal Oswal's research report on South Indian Bank

SIB's reported PAT was flattish QoQ (-1%), but grew 51% YoY off a relatively low base. PPoP declined 6% QoQ, led by a 6% QoQ increase in opex with sequentially flat total income. Provisions of INR1.49b (1.1% annualized credit cost) came in below our estimate, leading to an 815bp QoQ decline in PCR to 41.2%. The bank utilized RBI's dispensation to spread MTM losses and provided INR129.6m, leaving INR344m to be provided over the next three quarters. NII declined 3% QoQ (+12% YoY), even as advances rose 5.7% QoQ (+17.6% YoY), as the NIM contracted 15bp QoQ to 2.73% due to a 14bp sequential decline in reported spreads. Opex grew 6% QoQ (+22% YoY; the bank utilized RBI's dispensation to spread out gratuity provisions, leaving INR204.5m to be further provided). CI ratio increased to 53.7% from 50.6% in 3QFY18. Loan growth of 5.7%/17.6% QoQ/YoY was led by robust growth in retail and agri (+19% YoY each), while corporate book grew 14% YoY, in line with the bank's retail-focused strategy. Corporate book has decreased to 37% of advances from 38% a year ago. Slippages were elevated at INR6.14b (INR2.58b in 3QFY18), of which INR1.9b were from restructured book (roads). Slippages declined in retail (0.18% v/s 0.38% in 3Q), but increased in agri (0.71% v/s 0.18% in 3Q) and SME (0.3% v/s 0.18% in 3Q). Recoveries, upgrades and write-offs came in at INR4.08b. Absolute GNPA increased 11.6% QoQ to INR19.8b (3.59%, +19bp QoQ), while NNPA rose 16.9% QoQ to INR14.2b (2.6%, +25bp), with calculated PCR down 326bp QoQ to 28.5%. Total net stressed loans at INR14.7b rose marginally QoQ (INR14.6b in 3Q), but declined to 2.7% of loans in percentage terms (2.8% in 3Q). The bank reported FY17 GNPA divergence of INR84m, excluding INR154m of non-funded exposure, which it had provided for and sold to an ARC.

Outlook

Management is focused on building a low-ticket loan book, with steady balance sheet clean-up, which has helped improve asset quality substantially. We believe the asset quality stress is largely behind us. We cut our FY19/20 estimates by 12%/7% to account for higher provisions and maintain our Buy rating with a TP of INR34 (1.1x FY20E ABV).