South Indian Bank has been on our list of favourite stocks ever since Raamdeo Agarwal declared that it was his multibagger stock picks (see South Indian Bank:Ramdeo Agarwal’s multi-bagger stock? & South Indian Bank Q2 FY 2011 & Ramdeo Agarwal)
South Indian Bank represents a high growth bank quoting at reasonable valuations. South Indian Bank is well poised to take advantage of the incredible banking opportunities that India offers.
Angel Broking has conducted a fine analysis of South Indian Bank‘s Q1 FY 2012 results.
South Indian Bank has not disappointed at all with its Q1 FY 2012 results. South Indian Bank reported healthy net profit growth of 41.2% YOY to Rs. 82cr. South Indian Bank’s business growth continued to register strong traction, with advances growth at 31.2% yoy (8.1% qoq) and deposits growth at 35.5% yoy (6.4% qoq). South Indian Bank’s CASA deposits grew by relatively lower 16.0%, leading to compression in CASA ratio to 21.5% from 25.1% in 1QFY2011. South Indian Bank‘s asset quality was largely stable during 1QFY2012, with absolute gross and net NPAs rising by relatively lower 2.6% and 5.8% qoq, respectively, and provision coverage ratio excluding technical write-offs at a comfortable 73.1%.
South Indian Bank’s capital adequacy remains healthy at 13.5%, with tier-I CAR of 10.9%.
South Indian Bank‘s Investment arguments
Strong business growth
South Indian Bank Quaterly Results
South Indian Bank grew its advances and deposits at a strong rate of 27.1% and 29.2% yoy, respectively, in FY2011. South Indian Bank‘s Business growth has further accelerated in 1QFY2012, with advances growing by 31.2% yoy and deposits rising by 35.5% yoy. Gold loan portfolio of South Indian Bank has increased at an 84% CAGR over FY2009–11 to reach `4,633cr. The gold loan portfolio has continued its pace in 1QFY2012 and now constitutes ~22.9% of the overall loan book. South Indian Bank had indicated plan to set up a gold loan NBFC to tap customers who are willing to pay higher interest rates in lieu of higher LTVs and faster service. For this, South Indian Bank was planning to deploy ~`300cr of the QIP proceeds towards the NBFC to capitalise on the opportunity currently being exploited by players such as Muthoot and Mannapuram. However South Indian Bank has put the gold loan NBFC plan on hold as of now, considering the uncertain regulatory environment for NBFCs.
South Indian Bank‘s Rs. 1,000cr QIP amounts to 59.0% of FY2011 net worth, which will provide South Indian Bank with substantial capital to maintain its strong growth. The impact of raising ~ Rs. 1,000cr funds has not been factored in at present; however, if any QIP is done at the CMP, South Indian Bank‘s book value as of FY2013E could see an increase of ~7.0%
South Indian Bank’s Outlook and valuation
Due to South Indian Bank’s higher cost of funds and lower CASA, lower NIMs of 2.6% for FY2012 compared to 2.8% in FY2011 is reasonable. There may also be higher slippages in South Indian Bank‘s asset quality. That said, South Indian Bank‘s plans to raise ~ Rs. 1,000cr during FY2012 will enable it to maintain its strong growth, especially in its gold loan business. Currently, the South Indian Bank stock is trading at moderate valuations of 1.2x FY2013E ABV. In light of capital-raising and strong expansion plans, South Indian Bank can be valued at 1.35x FY2013E ABV.