Hold South Indian Bank target of Rs 12: ICICI Direct

ICICI Direct's research report on South Indian Bank

South Indian Bank (SIB) reported a stable set of Q3FY20 numbers with healthy growth in net interest income at Rs 602 crore; up 16% YoY, led by ~60 bps YoY improvement in margin on the back of change in asset mix. The bank reported steady business traction with credit & deposit growth stable at 9% & 11% to Rs 65334 crore & Rs 80451 crore, respectively. The bank’s strategy of gaining higher share in retail & MSME advances coupled with retailisation of liability has been working well with credit growth within retail & MSME being higher than overall credit growth at 18% YoY & 17% YoY to Rs 19834 crore & Rs 25787 crore, respectively. In contrast, the corporate book has see de-growth of 7% YoY to Rs 19713 crore. Retail deposit & CASA growth has been improving at 13% YoY. Accordingly, the CASA ratio increased 90 bps YoY to 25.2%.

Outlook

Focus on improving coverage ratio is seen keeping earnings muted in the near term. As the bank’s retailisation increases pace, earnings are poised to improve ahead. Going ahead, with anticipated slower pace of improvement in return ratios, we downgrade our target price to Rs 12/share, valuing the bank at 0.3x FY21E ABV. Accordingly, we downgrade the stock from BUY to HOLD. The bank is expected to raise capital to shore up capital adequacy, which remains an upside risk to our target price.