Stock Pick From The Banking Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is a a leading bank.

• Syndicate Bank has seen an improvement in its Net NPAs at a time when the most of the players in the banking space are facing concerns on the asset quality front.
• In the June 2012 quarter, the Net Profit of the company grew at a healthy rate of 28 per cent despite higher provisions (increased by 57 per cent).
• It has an attractive dividend yield and is available at a fair valuation.

In the banking space, when a majority of players saw their asset quality worsening on a sequential basis, there were very few that saw an improvement in the same. Syndicate Bank is one such bank whose asset quality has improved. In addition to this, the bank has seen decent business growth and is available at an attractive valuation, which also makes it a good grab. We believe that Syndicate Bank is a good bet as it is insulated from the current volatile environment and investors can park a portion of their funds in the same.

In the June 2012 quarter, the bank has seen improvement in its asset quality. Its Gross NPAs decreased by 15 basis points to 2.38 per cent, while the Net NPA decreased by three basis points to 0.93 per cent on a sequential basis. On a YoY basis, the Gross NPAs were down by one basis point while the Net NPAs remained stable at the same level. Further, the Provision Coverage Ratio (PCR) improved by 228 basis points to 80.71 per cent YoY, which should also be considered a good level. A higher PCR usually indicates that the probability of the asset quality being worsened is lower. We believe that the improvement in the bank’s asset quality in this quarter was one of the most important factors in its favour, as the industry has witnessed exactly the opposite situation.

The Net Interest Income (NII) of the bank increased by 18.83 per cent to Rs 1319 crore, while the Net Profit saw a robust growth of 28 per cent to Rs 440 crore on a YoY basis. The robust growth in the bottomline was despite the higher provisions, which increased by 57 per cent to Rs 513 crore. Further, the Cost to Income ratio also decreased by 113 basis points to 45.9 per cent YoY. A lower Cost to Income ratio indicates that the bank is operating efficiently.

The bank faced some issues when it came to the margins front. Its Net Interest Margin (NIM) increased by three basis point to 3.19 per cent on a YoY basis, but declined by 24 basis points on a sequential basis. We believe that going ahead, the bank would maintain stable margins, which will further help it to post good growth.

As on 30th June, 2012, its Capital Adequacy Ratio (CAR) stood at 11.72 per cent, with the Tier 1 CAR at 8.63 per cent. As on 30th June 2012, the global business of the bank grew by 17.67 per cent to Rs 286447 crore, with a decent growth in terms of deposits as well as advances. Even in this uncertain time, its global deposits increased by 18.35 per cent to Rs 157276 core, while the advances grew by 16.85 per cent to Rs 129171 crore. The bank currently has a network of around 2707 branches in 32 states and two union territories and one overseas branch in London. The management has ambitious plans to cross the 3000 branch network landmark by the end of FY2013.

Syndicate Bank’s Board of Directors recommended a dividend of Rs 3.80 per share. This translates into a current dividend yield of almost four per cent, which is commendable. On the valuations front, the bank is currently available at a trailing Price to Earnings multiple of 4x and a Price to Book Value of around 0.61x, which should be considered fair. We believe that one could invest in the scrip to garner better returns.