1QFY11 profits decline 2.8%. Despite net interest income (NII) growth of 9.8% yoy, South Indian Bank's 1QFY11 net profit fell 2.8% yoy, led by lower non-interest income (down 25.6% yoy) and increased cost-to-income. We maintain Buy on South Indian Bank as its conservative loan growth, strong deposit franchise and healthy asset quality make it an attractive pick among small-cap banks. Steady business growth, improving margins. Advances and deposits grew 33.6% yoy and 25.1% yoy respectively. NIM improved 7bp yoy to 2.83%, leading to modest NII growth (9.8% yoy). Share of CASA improved yoy, from 24.5% to 25.2%. We expect loans to witness 26.5% CAGR over FY10-12. Lower fees and treasury gains. Despite good business growth, fees grew a mere 2.8% yoy. Treasury gains fell 64% yoy, leading to 25.6% drop in non-interest income. Healthy asset quality, adequately capitalized. Although gross NPAs rose 5.7% qoq, NPA coverage has been stable at 71%. Net NPAs are just 0.4% of loans, one of the best among peers. Capital adequacy is now at 16%, with tier-I capital comprising 13.1% of risk-weighted assets. Hence, there is considerable headroom to raise tier-II capital without further diluting equity in the immediate future. Valuation. At our target price of Rs192, the stock would trade at 1.2x FY11e and 1.1x FY12e BV. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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