Friday, May 6, 2011

South Indian Bank

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 Union Territories. Nearly 55% of the branches of SIB are in Kerala.

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.

Industry prospects:
1. Financial & banking services is the mother of all services and provides a huge opportunity at the current stage of India'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.

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.

Management:

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.
.
Financial summary:                                                    
                                                                       
Particulars
FY2008
FY2009
FY2010
FY2011E
FY2012E
NII (Rs crore)
394
523
568
791
923
Op. Income (Rs crore)
537
687
777
988
1,151
Pre-prov prof (Rs crore)
289
359
411
525
630
PAT (Rs)
152
195
234
293
339
EPS (Rs)
1.7
1.7
2.1
2.6
2.9
BVPS (Rs)
10.2
11.5
13.1
15.3
18.0
CAR (%)
13.8
14.8
15.4
14.0
12.3
NIM (%)
2.6
2.9
2.7
3.0
2.9
Cost/Income
46.2
47.8
47.1
48.8
48.5
Net NPA (%)
0.3
1.1
0.4
0.3
0.2
Gross NPA (%)
1.8
2.2
1.3
1.1
1.2
ROE (%)
16.4
15.8
16.9
17.8
17.4
ROA (%)
1.0
1.0
1.0
1.0
0.9

Investment Rationale
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.

Risks:
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.

Stock parameters:
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

Valuation parameters:
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.

Outlook:
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.

6 comments:

  1. Hi,

    Nice post, i agree with your analysis on south indian bank.

    Sanjeev.

    ReplyDelete
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  3. Very Neat Analysis on south indian bank. This is a good framework for banking stocks. kudos to you sir !

    What do you think of GIC Housing & CAN fin home ? Both are available for less than book value. Looks conservative on loan loss provision and NPA is below 1 %. only weakest link i can think of is they are not bank and hence need to borrow money. do you see anything negative ?

    ReplyDelete
  4. Hi Sagar,

    Thanks for compliments.

    On GIC Housing, recent results have been a disappointment which has somewhat undone the buffer building they did thru excess provisioning in year end results and Q1 on the back of extraordinary gains realised post sale of AMC stake.

    I don't see not being bank as a disadvantage for the stock since housing finance companies can trade at respectable multiples.

    Last dividend should be normalised for special component of Re 1.

    In a falling market, and on current evidence, banks are looking more attractive compared to HFCs and NBFCs.

    Regds

    Shikhar

    ReplyDelete
  5. Thanks Shikhar..i'm considering the worst scenario of credit crunch in economy. For that scenario, it is difficult for HFC companies to raise money from market. Banks always have access to low cost deposits. These HFC's have survived for last 30 years gives assurance as they can raise money as long as they maintain good credit rating. so you don't see any negatives for GIC and CAN FIN HOME ? I welcome your negative thoughts on these companies.

    ReplyDelete
  6. Sagar, I don't want to say more on HFCs on this thread. You can email me for details.

    Regds

    ReplyDelete