South Indian Bank

I have been tracking this company for a while and remained invested for the past year. But post this Q2FY24 result and call, I have exited as there are concerns that are not comforting like:

1. Ex-MD Murli had made a huge transformation in SIB, but deviated from the original agenda to grow the personal, MSME Loan segment. Business + Personal Loan formed 55% of Loan Book Mix as of Q1FY21, which stands at 43.7%.

2. He wanted to de-grow the Corporate Book which he initially did from 30.5% of the Loan Book to 24.5% of the Loan Book till Q1FY22, but due to the market environment, he started giving back High Quality Corporate Loans with A-rating. This led to an increase in Corporate Loan Book to 36.7% as of today. Although the quality of loans has tremendously improved from 70% of the total corporate loan under A-rating to 96% of the total corporate loan under A-rating.

3. What is more disappointing is, all this corporate lending has been very short-term. In H1FY24 so far, he has disbursed 43k Cr. but managed to grow the loan book only from 72k to 74k in two quarters. The loan book did not increase v/s disbursement because the new corporate book which was short-term was churned basically. So, now another round of short-term loan disbursement is given? and upon all these the larger scheme of growing retail books has vanished?

4. Now, the new MD Mr. P R Seshadri has again reiterated to grow MSME loans. But, it will take a lot of time to grow and reduce the short-term loan book of corporate. If the disbursement is too fast in MSME to quickly turn around the loan book mix, the riskiness will be higher if not underwritten well. In fact, since FY21 the Business Loan mix & absolute size have reduced but segments GNPA have increased from 10.2% to 14%. This means the corporate loan book will remain in the mix for some time.

5. 30% of the liability franchise is pending for repricing. Along with this, the new churned book will be at very competitive rates if I assume. There can be temporary stress on NIMs/Spread.

6. And, the legacy loan book is reducing. New Loan book since 2020 now forms 64% of the overall book. And that too most of it being A-rated corporates. It is very obvious that GNPA and NNPA will fall. I feel it was more of an illusion that GNPA has been reducing, rather it should be obvious that it has to reduce.

7. And lastly, the new MD is just 3 weeks old and did not confidently answer the questions on call (as per my basic understanding). He wanted to have more time at SIB before commenting.

All these reasons were urging me to take an exit, and I wanted to have more clarity on the progress at SIB. Things over the past 2 years have changed a lot in this Bank. And transformation led by the ex-MD was just superb, but currently, things are not so clear.

I am just learning and have listed down things from my perspective. I request members following this company to post views on the same.

Regards,
Mukul Jain
Exited post Q2FY24 call.