South Indian Bank – Q3 earnings review

On January 16, 2012, South Indian Bank (SIB) reported its Q3FY12 numbers. Its net profit has increased by 32 per cent on YoY basis to Rs 102.24 crore but the scrip has not seen any major movement as it seems that the market had already factored in the results. One of the highlights of the results was the announcement of SIB’s plans to raise funds of approximately Rs 1,000 crore through qualified institutional placement (QIP). The following are the bank’s key financial parameters.

In Q3FY12, the net interest margin (NIM) of the bank increased marginally by 5 basis points to 3.05 per cent on YoY basis. This is on the back of the cost of deposit of the bank increasing by 137 basis points from FY11 while the yield on advances increased by 1.61 basis points for the period up to December 2011.

The advances of the bank increased by 31 per cent to Rs 25,050 crore while its deposits grew by 25 per cent to Rs 33,834 crore. Usually during a high interest regime a bank’s deposits tend to rise faster than that of advances. But SIB reflects a different scenario. According to media reports, approximately 28 per cent of the total loan is against gold and with the gold price soaring higher people usually like to take loan against gold. The bank has raised its NRE deposit rate in line with the other banks. However, one should note that the NRI deposits are approximately 3 to 4 per cent of the total deposits.

We believe that there could be higher inflows of funds by the NRIs due to attractive interest rates. With this there could be some pressure seen on the bank’s NIM going ahead. It is good to see that even in a rising interest rate environment the bank’s asset quality has improved further. The gross NPAs of the bank decreased by 39 basis points to 0.94 per cent while its net NPAs contracted by 15 basis points to 0.24 per cent on YoY basis. With its assets quality improving the bank created lower provisioning which to some extent helped the profit to grow. In Q3FY12 the provisions of the bank decreased by 25 per cent to Rs 22 crore on YoY basis.
 
As on December 31, 2011, the capital adequacy ratio (CAR) decreased by 286 basis points to 12.03 per cent when compared to a similar period last year. The Tier 1 CAR stood at 9.61 per cent. As mentioned earlier, SIB also plans to raise funds worth approximately Rs 1,000 crore through QIP which will further help the bank towards its growth and will also support it to maintain its CAR at a good level.

According to media reports, the bank will probably raise this fund in first quarter of FY13 as the management expects the market to stabilise during that period. The management also aims to increase the total business mix to Rs 1.25 lakh crore by March 2015. As on December 31, 2011, the business of the bank stood at Rs 58,884 crore.

The treasury operation of the bank performed well with revenue from the bank having increased by 45 per cent to Rs 205 crore while the profit from the same having increased by 134 per cent to Rs 6 crore. To some extent this may be due to the softening of the government bond yield which had a positive impact on its bond portfolio. However, it was surprising to see that the wholesale business showed de-growth of 65 per cent to Rs 14 crore.

Overall, the bank has posted a good set of numbers. Currently the scrip is available at a price to earnings ratio at 8.65 times which can be considered adequate. The price to book value of the bank is 1.49 times, which is slightly on the higher side as the banking sector as a whole is facing headwinds when it comes to the maintenance of asset quality, improvement in NIMs and the growth of business. The banking sector is to benefit soon as the interest rate cycle will start reversing in the coming quarters. However, SIB has reflected a good performance and therefore one can look at acquiring the counter in a staggering manner with a long-term horizon to garner better returns.