We maintain our ‘buy’ rating on South Indian Bank (SIB) with a target price of R40 which implies 1.3x FY16 BV. We expect SIB to report EPS of R3.6 and BV of R26.8 in FY15 and EPS of R4.3 and BV of R30.1 in FY16. The stock trades at P/BV 1.1x FY16e BV.
While GNPAs increased q-o-q, overall stress addition remains lower than Q4FY14. Further, in the last few quarters, the bank has demonstrated a conscious effort to step up recovery efforts and mitigate risk on the balance-sheet by prudent growth. GNPAs are up 5% y-o-y, whereas NNPAs are lower by 10% y-o-y.
A shift in the strategy towards retail and SMEs, with focus on improving liability profile, is structurally positive. We expect core PPP and earnings growth of 13% over FY14/17. RoAs are expected to be healthy at 0.9% and RoEs to improve to 17% by FY17.
SIB’s Q1FY15 PAT grew 10% y-o-y to R130 crore. However, core operational performance was weak, led by 30 bps q-o-q decline in NIMs to 2.7%. Slippages for the quarter were R97.5 crore (annualised slippage ratio of 1.2%). Significantly lower upgrades and recoveries, which amounted to R12.9 crore, came as a negative surprise. GNPAs grew 20% q-o-q in absolute terms.
The bank utilised an one-off income of R43 crore (because of change in depreciation policy) to shore up PCR (now at 40% versus 34.9% in FY14). SIB restructured loans of R96.4 crore (0.3% of loans) in Q1FY15 and outstanding standard restructured loans stood at R1,780 crore (5.2% of loans).