Alteration in asset mix to aid valuation structurally…
About the stock: Established in 1929, South Indian Bank is old south based private sector bank headquartered in Thrissur, Kerala. Digitization, product and process innovation and granular sustainable growth remains a key focus, enabling resilient performance amid change in asset mix.
• Advances mix: Corporates – 42%, Retail – 27%, Agri – 17%, MSME – 14%.
• As of June 30, 2025, the bank operates 948 branches branch across 26 states and 4 union territories, complemented by 1,274 ATMs and CRMs for enhanced accessibility.
Investment Rationale
• De-risking legacy book and building healthy portfolio: South Indian Bank’s pre2020 defaults in corporate exposures and Covid related delays spiked NPAs to 5.9% in FY22, forcing large provisions that hammered profitability. The bank has since derisked sharply—legacy stressed book down from ₹65,349 crore (63% of advances in FY22) to ₹16,973 crore (19% in FY25) via recoveries/exits—driving GNPA to 3.2%, NNPA to 0.9%, and PCR to 85%, with ~98% of corporate book now being AAA/A+ rated. Newly originated granular retail/MSME and selective corporate lending shines pristine (GNPA 0.46%), backed by tighter underwriting, digital platforms, and robust collections, with fresh slippages easing to 1.5% for sustained turnaround.
• Recalibrating the mix remain core strategy: Management is driving a structural rebalancing of the loan mix, targeting a reduction in the corporate share from 42% to ~35% by FY27E, while scaling up MSME & retail (~41% in FY25) to improve yields from current 8.9% levels. On the liabilities side, focus on granularity is evident — bulk deposits have fallen to 2.6% (vs. 5.2% in FY21) and the top 20 depositors now account for just 2.9% of total deposits. Coupled with a CASA base of 32% and sticky NRI franchise (28.7%), this has lowered the cost of funds to 4.8%, one of the best among peers, providing a strong cushion for margin expansion.
• Non-branch distribution to drive scale and quality: South Indian Bank has embraced a digital-first model, with 98% of transactions now digital, supported by STP platforms, Video KYC, and fintech tie-ups that enable faster turnaround and strengthen asset quality (new book GNPA <0.5%). Non-branch distribution and partnerships have been key growth drivers, powering 26% retail loan growth in FY25. At the same time, strong employee productivity of ₹20.6 crore per head — ahead of most peers — underscores scalability without heavy branch expansion. With opex-toassets steady at ~2.4% in FY25, we expect operating efficiency to remain intact even as the bank accelerates growth.
Rating and Target Price
• South Indian Bank offers a compelling re-rating opportunity, trading at just 0.8x P/B, a steep discount to regional private peers. Management’s strategic pivot towards higher-yielding retail & MSME lending alongside gradual rundown in legacy book is set to reshape the asset mix and aid yield profile. We expect advances to grow at 11.5–12% CAGR over FY26–27E, broadly in-line with industry, while asset quality gains, margin stability, and digitisation-led efficiencies support a sustainable RoA of ~1%. We value the bank at ~0.85x FY27E ABV and initiate with a BUY rating.
