Cholamandalam Securities 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 January 10, 2018.
Cholamandalam Securities' research report on South Indian Bank
SIB’s loan book showed a steady growth of 16% YoY in 9MFY18 (5.5% QoQ), in line with the targeted growth of ~18% for FY18E, as guided by management in 2QFY18. The growth was predominantly led by Retail (28.3% YoY, 7.2% QoQ) and SME & Agriculture (23.6%YoY, 6.2% QoQ) segments. Management has guided that their focus will continue to be on these segments and the loan book would grow over 20% in FY19. Within the Retail portfolio, growth was largely driven by Manufacturing (40.1% YoY, 11.6% QoQ) and Service & Traders (40.1% YoY, 11.5% QoQ) segments. Loan against Deposits saw a de-growth sequentially of 3.7% QoQ. Gold loans which showed de-growth in the last quarter, revived slightly, recording a muted growth of 2.9% YoY (0.6% QoQ). Deposits grew by 7.1% YoY (1.4% QoQ) to INR 681bn, with Current account deposits growing at 6.2%YoY (5.7% QoQ). Overall CASA grew by 2.7% YoY and the share of CASA in total deposits increased marginally to 24.9% from 24.6% in 2QFY18. NRI Deposits constituting 27% of total deposits grew by 12.6% YoY (2.9% QoQ). Management has guided to achieve ~25% overall growth in deposits by FY19E. Net Interest Income increased by a robust 22% YoY (1.2% QoQ), driven by strong growth in advances. Cost of funds declined by 57bps YoY( -2bps QoQ) to 5.4%.Consequently, NIMs grew by 22bps YoY (-7bps QoQ) to 2.88%. The sequential decline in NIMs is due to dip in yield on advances (-44bps YoY, -15 bps QoQ). Going forward, the management expects the NIM to remain in the range of 2.85 to 2.90% till FY19E.
The bank continues to shift its focus from corporate loans towards Retail & SME loans which would help them contain the credit costs and maintain the margins at current levels. The Stock currently trades at 1.0x PBV of FY20E. We maintain our BUY rating on the stock and revise the target price to INR 40, implying a 1.2X P/B FY20E. Risk: Tougher ramp up of retail loan book; higher credit costs due to ECL model.
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