PSU banks are facing headwinds like deterioration in their asset quality and higher provisioning requirements, which is affecting their profitability. Thus, it would indeed be surprising for readers to see a PSU bank as our Low Priced Scrip recommendation.

However, the story has been quite different for Syndicate Bank. When we look at the bank’s Q2 FY12 numbers, we can see that it is performing well as compared to its peers. The bank’s asset quality is improving. On a YoY basis, its Net NPAs decreased by only 4 bps to 0.93%. On the other hand, banks like UCO Bank (Net NPAs increased by 93 bps to 2.11%) and Corporation Bank (NPAs increased by 52 bps to 0.91%) have done much worse.

Usually, in a rising interest rate environment, the Net Interest Margins (NIM) of banks tend to get affected. However, Syndicate Bank has kept its NIM consistently above three per cent for the last six quarters. Though the NIM of the bank contracted by 11 bps to 3.44%, it was much better than the NIM of Corporation Bank, which decreased by 45 bps to 2.43%, and that of UCO Bank, which decreased by 39 bps to 2.84%. The bank also has a good dividend payment history, with the current dividend yield standing at 3.63%, which further makes it an attractive grab.

The global business of the bank increased by 20% to Rs 2.55 lakh cr as on 30th Sept, 2011, against Rs 2.12 lakh cr last year. This was on the back of a growth in deposits by 22% to Rs 1.41 lakh cr, and an increase in advances by 19% to Rs 1.14 lakh cr on a YoY basis. For H1 FY12, the Net Interest Income of the bank increased by 17% to Rs 2423 cr, while its Net Profits grew by 32.51% to Rs 665 cr on a YoY basis.

In Q2 FY12, the Provisioning Coverage Ratio (PCR) of the bank stood at 78.50%, which is higher than the mandatory coverage ratio of 70%. Even though its Capital Adequacy Ratio (CAR) decreased by 41 bps to 11.80% on a YoY, basis the bank is not in any urgency of capital infusion in its business, unlike other banks.

As on 30th Sept, 2011, the bank’s exposure to the corporate sector is 62.15%, while that to the retail sector is 37.85% of the total advances. The priority sector lending of the bank is 41.27%. The risk associated with the bank is that 10% of its total exposure is to the power sector. However, backed by a high PCR, the bank will be able to manage these exposures. Also, for FY11, the savings deposits contribute 23% of the total deposits. With the savings account interest rate getting deregulated though, we could see the profitability of the bank being affected.

On the valuations front, the bank is available at PE multiples of 5.53x and a Price to Book Value of 0.87x. The bank expects the credit and deposits growth to be in line with the RBI’s projections. We feel that steady growth, with improvement in asset quality and the ability to survive in uncertain times, make Syndicate Bank a good buy.