First things first - South Indian Bank is not among the strongest or biggest private sector banks. Still, I find it a very attractive long term investment opportunity for its robust operating parameters, good regional presence, growth plans and a possible M&A play.
Business & Operations:
1. Operating background
South Indian Bank (SIB) was incorporated at Thrissur in Kerala,
South India. It was among the first private sector banks in Kerala to become a scheduled bank in 1946 under the RBI Act.
2. Branch network
SIB has a pan-India presence with a network of 641 branches, 3 extension counters and 494 ATMs across 23 states, and 2
. Nearly 55% of the branches of SIB are in Kerala. Union Territories
3. Robust business growth
(i) NII at Rs 791 crore in FY11 recorded a growth of 39% compared to Rs 568 crore in FY10. Estimates for FY 12 are at Rs 923 crore marking a growth of 17%.
(ii) Loan book is expected to grow at higher rate than this over the next two years through network expansion and increased penetration
(iii) Total Business is expected to grow from Rs 49,076 crore estimated for FY11 to over Rs 62,000 crore by the end of FY12.
(iv) We expect balance sheet size of SIB will cross Rs 40,000 crore as at March 31, 2012.
4. Stable Asset quality
(i) Asset quality has been among the best (gross NPA of 1.1% and net NPA of 0.3%), with lowest restructuring (~2.6% of the loan book).
(ii) PCR for FY11 is quite comfortable at 73%.
(iii) Gold loans that constitute a good portion of SIB's loan book (17% of advances), register strong traction.
(iv) Low exposure to MFI sector and Real estate sectors which are considered higher risk and have been in the news for wrong reasons over the last 1 year is a positive.
5. Decent CASA
CASA ratio of SIB is decent at about 21% which has declined compared to previous quarters, but NIM has improved. It is also supported by NRE deposits of about 13%. We expect CASA to be in the range of 20-21% for ensuing quarters.
6. Tech savvy
SIB implemented core banking solution (CBS) platform covering the entire business many years ago in 2007. It has since made further advances in other technology led initiatives like Anywhere banking, remittance platforms, e-Commerce services, data center upgradation etc.
7. In 2010, SIB was awarded the Businessworld India's Best Bank award.
1. Financial & banking services is the mother of all services and provides a huge opportunity at the current stage of
's economic development. However, in the short term there are headwinds for the banking sector due to increasing trend of interest rates and inflationary pressures. India
2. Savings and capital formation in the economy is at about 34% of GDP which provides a big opportunity in financial intermediation. Over the next decade, nominal GDP is expected to grow at about 8-9%, and excluding agriculture this will be higher. In that case revenues from the financial services sector will grow at around 20%. More efficient and nimble banking players like SIB will utilize this business opportunity to their advantage.
1. SIB does not have any identified promoters.
2. SIB is led by Dr VA Joseph who is the CEO & Managing Director.
3. Public shareholders holding more than 1% of total shares can be seen here.
NII (Rs crore)
Op. Income (Rs crore)
Pre-prov prof (Rs crore)
Net NPA (%)
Gross NPA (%)
1. We like South Indian Bank as one of the best regional-based private banks. It has strong regional presence backed by good technology network. SIB is planning to add 60 new branches to its existing network of branches.
2.Improving asset quality and estimates on business and profits to grow at by 20-22% make it an attractive option at current valuations.DPS increased from Re 0.40 last year to Re 0.50 for FY11.
3. SIB is a possible M&A play which gives it that extra in investing, but it will need patience on the part of investors.
4. Expansion plan - Bank's long term target is to reach Rs. 75000 crores in total business with 1500 delivery channels and a well-trained staff of 7500 by the end of March 2013. CAGR of about 20% is expected in business growth over the next 2 years.
1.High dependence on southern states, particularly Kerala, increases geographical risk.
2. Intense competition among private banks for premium customers.
3. Sectoral headwinds of rising interest rates and RBI moves for controlling inflation through monetary control measures.
CMP: Rs.22.75 (FV Rs 1); Market Cap: Rs.2,559 crore; 52-week high/low (NSE): Rs.29.50/14.10; 200 DMA: Rs.22.93
PE: 8.71; P/BV: 1.48; Dividend yield: 2.20% (based on FY11).
MCap/No. of branches is quite attractive at Rs 4 crore.
Some of you will observe that MCap/Branches was not in the list when I mentioned about few valuation indicators here. Well, these are the nuances of investing which emerge specific to a sector or a stock. We include this due to possible M&A play in SIB (we don't know when, how and at what rate it could happen, if at all).
Among its peers, SIB compares very well in terms of valuation matrix.
SIB offers excellent prospects of capital appreciation to put it conservatively. I would not like to put a number to it but could be worth the while to hold it for next 2-3 years.