Buy South Indian Bank; target of Rs 40: Dolat Capital

Dolat Capital's research report on South Indian Bank

Q2FY18 PAT took a major hit owing to upfront provisioning on value diminution of SRs issued by ARCs. The PAT at ` 43.2mn mounted YoY by huge percentage with provisions doubling to ` 4.5bn led by ` 2.52 bn exceptional provisioning. Had it not been for these one-offs, normalised PAT should be ` 1.7bn as against our estimates of ` 1.2bn. What continues to maintain our confidence is the stark improvement in asset quality with 63% QoQ dip in slippages to ` 2.5bn from ` 6.86bn (Q1FY18); GNPAs stood flat QoQ at 3.6% as the bank shifted to daily NPA recognition norm. Subsequently, interest reversals turned out to be lower driving NIMs to 2.87%. Notably, operating metrics strengthened with PPoP growing 55% YoY led by healthy NII (in-line at ` 5.0bn vs our estimates of ` 5.5bn with a growth of 13% YoY), strong other income show (transaction fee income grew 19% QoQ; treasury stood down 24% QoQ) and cost-income decline of 843 bps YoY, 293 bps QoQ to 41% (Opex grew 10% YoY in-line with guidance). With clear indications of formidable balance sheet and asset quality concerns topping out, we reiterate BUY.

Outlook

Healthy operational metrics backed by improving retail architecture, ebbing asset quality pressures and focus on low ticket lending are indicative of solidification of the balance sheet. While we incorporate higher provision for FY18 due to higher valuation loss and therefore unexpected provisioning on 5 IBC accounts referred to ARCs, we cut our PAT estimates by 4% for FY18, but maintain FY19 estimates as revenue streams continue to hold strong for bank. While our earnings estimate CAGR at 40%+ for next two years stand maintained, RoEs at 15% and RoAs at 0.9% by FY19 is achievable. Maintain BUY.

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