Buy South Indian Bank - Motilal Oswal Q2 2010-11 Update

SOUTH INDIAN BANK 2QFY11: Above estimates; Strong business growth continues; Margins improve sharply QoQ; Buy

• South Indian Bank's (SIB IN, Mkt Cap US$700m, CMP Rs28, Buy) 2QFY11 reported net profit increased 6% YoY (32% QoQ) to Rs770m (27% higher than estimates), and up 35% YoY on an adjusted basis.
• Earnings were better than expected led by higher net interest income and lower provisions due to strong asset quality.
• Bank has made an additional provision of Rs175m on account of 2nd pension option and other provisions of Rs50m; else profit growth would have been much higher.

• Strong loan growth and sharp improvement in margins led to 19% YoY growth in NII to Rs1.97b (14% higher than est). However, adjusting for the proportionate understatement of interest expenses in 9MFY10, NII growth would have been higher at 39% YoY.
• Loan growth remained strong at 35% YoY and 7% QoQ to Rs180b. Deposits grew 7% QoQ and 27% YoY. CD ratio remained largely stable QoQ at 72%.
• For 1HFY11, NIMs improved to 3% v/s 2.64% (adjusted) in 1HFY10 and 2.83% for 1QFY11. In our view, 2QFY11 NIM stood at 3.17% (Up 34bp QoQ)
• On back of strong profitability the bank made additional provision of Rs176m for 2nd pension option and ad hoc provisions of Rs50m.
• Gross NPAs increased just 2% sequentially in absolute terms. In % terms it improved 6bp QoQ. Net NPAs increased 4% QoQ while provision coverage remained steady at 71%. SIB continues to have excess capitalization with CAR at 16% and Tier I CAR of ~13%.

• Loans grew 7% QoQ and 35% YoY to Rs180b while deposits grew 7% QoQ and 27% YoY to Rs250b. CD ratio remained largely stable at ~72%.
• CASA growth is strong at 25% YoY (2% QoQ) and savings deposits growth stood at 29% YoY (3.4% QoQ). CASA ratio stood at ~24% vs ~25% a quarter ago. Including NRE deposits, low cost deposits stood at ~30%.

• NII growth on a reported basis grew 19% YoY. However if we adjust for the system error on account of which bank could not account the accrued interest on certain deposits on a quarterly basis (for the period of 9 month – from April 2009 to December 2009), the NII growth would have been higher at 39% YoY.
• NIMs for 1HFY11 were 3% compared to 2.64% (adjusted) for 1HFY10 and 2.77% for FY10. In our view 2QFY11, NIM are at 3.17% (up 34bp QoQ).
• Yield on loans moderated further to 10.61% in 1HFY11 vs 10.77% for 1QFY11 (down 32bp QoQ in 2Q). Yield on investment improved from 6.1% in 1QFY11 to 6.29% in 1HFY11 (up 38bp QoQ in 2Q). Cost of deposits declined from 6.43% in 1QFY11 to 6.34% in 1HFY11 (down 18bp QoQ in 2Q).
• Higher yield on investment and fall in cost of deposits led to sharp improvement in margins. Management has guided for at least 3% margins in FY11.

• Treasury gains for the quarter were Rs62m as against Rs92m a quarter ago and Rs366m a year ago. Fee income was up 43% YoY and 20% QoQ to Rs340m.
• Opex increased 12% QoQ (21% YoY) led by 15% QoQ (22% YoY) growth in employee cost. During the quarter, bank provided Rs176m towards 2nd pension option. The bank has ascertained total liability of Rs1.5b for the same which it will provide in 3 years (subjected to regulatory approvals).

• Gross NPAs increased just 2% sequentially in absolute terms. In % terms it improved 6bp QoQ. Slippages during the quarter stood at Rs260m (annualized slippage ratio of 65bp in 2Q and 1H). Recoveries were also equally strong at ~Rs210m
• Net NPAs increased 4% QoQ while provision coverage remained steady at 71%.

• We have upgraded our earnings estimates by ~12% for FY11/12 to factor in better than expected margins and lower credit cost. We expect SIB to report FY11 EPS of Rs2.6 and BV of Rs15.1 and FY12 EPS of Rs3.2 and BV of Rs17.5.
• SIB has shown consistent improvement in its operating performance. We expect its ROAs to sustain at ~1% whereas increased leverage would help drive ROEs to ~18% by FY12. SIB is planning to add 60 new branches every year and to increase number of branches to 750 by FY13.
• Strong loan growth and improving core operating performance will continue re-rating, in our view. We maintain Buy with a target price of Rs31.6 (1.8x FY12E BV).

Source : Equity Bulls

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