Stock Market Result Update on South Indian Bank for 2QFY2012

Stock Market Result Update on South Indian Bank for 2QFY2012 with an Accumulate recommendation.

For 2QFY2012, South Indian Bank (SIB) reported healthy net profit growth of 24.4% yoy (15.1% qoq) to `95cr, better than our (`83cr) and street estimates (`88cr). NIM expansion coupled with lower slippages was the key highlight of the results. We maintain our Accumulate recommendation on the share.

Healthy NIM expansion with improving asset quality: During 2QFY2012, the bank’s business growth moderated in-line with overall industry trends; however, it remained comfortably ahead of the industry. Advances grew by 3.9% qoq vis-à-vis marginal 0.2% growth for the industry (up to September 23, 2011). Deposits showed traction, rising by 4.5% qoq as compared to 0.8% growth for the industry. CASA deposits grew by relatively lower 3.5% qoq, leading to a marginal 20bp qoq compression in CASA ratio to 21.3% (down from 23.9% in 2QFY2011). With the pass-through of higher interest rates and a larger share of higher-yielding gold loans, the bank was able to improve its yield on advances further by 36bp qoq and 150bp yoy to 12.1% (for 1HFY2012). With wholesale funding costs remaining largely stable, the bank’s cost of deposits went up only marginally (6bp qoq), leading to a healthy ~50bp qoq expansion in calculated NIM for 2QFY2012. Asset quality was also largely stable during 2QFY2012, with absolute gross and net NPAs declining by 2.5% and 8.2% qoq, respectively, and provision coverage ratio excluding technical write-offs improving to 74.7%. Slippages surprised positively, coming in at just 0.5% (annualized) vis-à-vis 0.8% in 1QFY2012 in spite of deterioration in the economic growth outlook.

Outlook and valuation: SIB plans to raise ~`1,000cr in FY2012, which will enable it to maintain its strong growth, especially in its gold loan business. Currently, the stock is trading at moderate valuations of 1.1x FY2013E ABV. In light of capital raising and strong expansion plans, we value the bank at 1.2x FY2013E ABV and maintain our Accumulate view on the stock with a target price of `24.