Recommendation From Banking Sectors
This section gives a recommendation of a stock having stock margin padding price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon
South Indian Bank
COUNT ON SOUTH INDIAN BANK TO DELIVER GOOD RETURNS
HERE IS WHY
Prudent management
Improving balance sheet
Revenue visibility
South Indian Bank (SIB) is a private sector bank which operates across the segments of treasury, corporate, wholesale and retail banking, and other banking operations. It also offers insurance products such as life insurance, health insurance, general insurance and credit risk insurance.
Its financial performance for the quarter ended December 2018 stands as follows: CASA surged 12 per cent YoY to Rs.18,905 crore in Q3FY19 from Rs.16,929 crore in Q3FY18. Deposits increased 14 per cent YoY to Rs.77,665 crore in Q3FY19 from Rs.68,109 crore in Q3FY18. Advances surged 15 per cent YoY to Rs.60,064 crore in Q3FY19 from Rs.52,449 crore in Q3FY18. Net interest income (NII) posted a modest growth of 2 per cent as it rose to Rs.520 crore in Q3FY19 from Rs.509 crore in Q3FY18. On the other hand, other income rose 18 per cent to Rs.187 crore in Q3FY19 from Rs.159 crore in Q3FY18. Pre-provision operating orofit (PPOP) increased by a mere 1 per cent YoY to Rs.332 crore in Q3FY19 from Rs.330 crore in Q3FY18.
The company succeeded in strengthening its retail base by 29.4 per cent YoY to Rs.16,857 crore. It also managed to expand its agriculture & SME base by 6.1 per cent YoY to Rs.22,095 crore.
Like most companies operating in the banking space, SIB also suffered stress on asset quality with slippages at 4.7 per cent in Q3FY19. The higher slippages were on account of reclassification of IL&FS to substandard category (funded exposure stands at Rs.4 billion, while non-funded exposure stands at Rs.200 million). There was another account (EPC contractor) of Rs.1.04 billion from the large corporate segment which slipped into the NPA bucket. Nevertheless, SIB managed to contain the negative impact on the NPA ratios, particularly due to robust reductions to the tune of Rs.380 crore.
Owing to the improvement in its balance sheet, improving granularity in loan book as well as the strengthening fee income and margin profile, the company’s growth and revenue visibility has improved. Moving forward, the company’s stock is likely to pick up on the basis of the synergistic M&A activities taking place in similar small private banks.
The MSME segment of the bank was stressed as it lent a major chunk of funds to the cashew industry in Kerala, which tanked over 75 per cent. The bank had at least 40 to 44 per cent share in this and ended up curtailing further lending to the cashew industry. The management is confident in its ability to recover large amount of its exposure in the cashew industry. It is certain about recovering at least Rs.600 crore by traditional means and intends to make further recoveries through resolution of IBC accounts.
Moving forward, the management has provided 65 to 70 per cent PCR guidance in FY20; however, the same can only be achieved by means of substantial recoveries and resolutions. Post the floods that struck Kerala, the construction activity has picked up and credit offtake has improved. By virtue of these factors, we recommend our reader-investors to BUY this stock.
