India Equity Institutional Research | BFSI

South Indian Bank

Sales Note

INR 19

A turnaround story

Margin expansion stands imminent: Steady business growth and anticipated

decline in policy rate would lead to speedier re-pricing of liabilities leading to margin
expansion. However, the new base rate methodology based off marginal cost of
funding should not have material impact on margins with Management expecting
mere 20 bps dent. That said, improving low-cost deposit base (CASA ratio at 22.8%),
benefits accruing from higher investment grade, declining costs and change in asset
mix should continue to aid margins enhancement; expect 2.9% NIMs by FY17E.

Market Info:
24492

SENSEX

7437

NIFTY
Share Price Performance

100
80

Sensex

Jan-16

Nov-15

Sep-15

60
Jul-15

Renewed business focus leading to accelerated credit growth: Post complete

liquidation of pawn business and curtailing stressed corporate exposures, SIB today
boasts of a diversified loan book. Replacing big ticket loans with working capital
financing to SMEs, SIB has strategically adopted cautious approach. De-focusing from
beleaguered power and infra sectors, the bank has tilted loan book towards retail
(auto, housing, gold, LAP), SME and agriculture loans. SIB has identified 150 branches
that are credit oriented for growing retail and SME vertical. As at the end of Q3FY16,
the corporate book stood 40.9% of total loans, retail (ex-gold) at 19.5%, SME at
22.4%, agri 13.7% and gold at 3.6%. Against this backdrop, we believe SIB is set to
clock 17% loan growth during FY16-18E.

1350
1350
25045
28/17
4616
1
SIB IN

Shares outs (Mn)

Equity Cap (Mn)
Mkt Cap (INR Mn)
52 Wk H/L (INR)
Avg Vol(3M avg K)
Face Value (INR)
Bloomberg Code

May-15

Benefits emerging from favorable geographic location and niche positioning:

Historically, SIB has focused its business operations in southern India; with dominant
presence in Kerala. With >80% of the network located in Southern India and almost
54% in Kerala, SIB generates almost 45% of the loans from the home turf and 33%
from the southern India. By virtue of the banks favorable geographic location and
healthy relationship with the locals, SIB derives benefits in terms of increased NRI
business (NRI deposits form 25% of total deposit base-Q3FY16) and gold loan
business (gold loans form 15.5% of total loans); maintaining its market share.
However, going forward SIB aims to focus largely on moving out of home turf and
increasing its pan-India footprint (aims to add 50 branches/extension counters every
year) by focusing on high growth geographies (Tier I and Tier II), opening cluster
branches and smaller branches in the vicinity of one big unit and improving branch
profitability. This should enable the bank to reduce dependence on home state paving
the way for growth and scalability.

Market Data

Mar-15

with portfolio mix comprising of corporate banking, personal banking, NRI banking, third
party products and now diversification into retail and SME franchise. Post the top
Management change at helms with Mr. Mathew taking over from Dr. VA Joseph (back in
2014), the bank has been recalibrating business re-engineering exercise. With the right
business strategy in place, SIB is treading the path of structural metamorphosis which should
prove value accretive in a two to three year time frame.

Not Rated

Jan-15

We interacted with Mr. C. P. Gireesh, Chief Financial Officer (CFO), South Indian Bank
Limited (SIB) to understand business dynamics, current financial position and business
strategy ahead. Headquartered at Thrissur City in Kerala, India, SIB is a private sector bank

South Indian Bank Ltd.

Share Holding pattern (%)

Particulars

Dec15

Sep15

Jun15

Promoters

FIIs

17.80

19.34

28.16

DIIs

23.22

12.59

12.89

Others

58.98

68.07

58.95

100

100

100

Total

Shweta Daptardar
shweta.daptardar@krchoksey.com
91-22-6696 5574
www.krchoksey.com

Asset quality improvement on the anvil; troubled sector exposures curtailed:

Historically, the bank has demonstrated improving book quality by successfully
clearing the bad assets with gross NPAs declining 493 bps from as high as 6.64% in
FY05 to 1.71% in FY15. However, the turbulent period of FY15 was marked by higher
slippages from infra, steel and tyre sectors. Given the macro challenges, the bank
continued to observe stress with gross NPAs at 2.75% (51 bps spike Y-o-Y-Q3FY16)
and net NPAs at 1.80% primarily due to fresh slippages from pharma and road sectors
during the quarter gone by. The restructured book stood at INR 22.4 bn during
Q3FY16; down Q-o-Q from INR 23 bn (Q2FY16). While stressed sector exposures such
as power discoms at 46%, construction EPC at 33%, these assets fall under standard
restructure category.

91-22-6696 5555
91-22-6691 9569

January 28, 2016

South Indian Bank

That said, the banks new strategy of laying thrust on small ticket advances and high-rated corporate advances, de-focusing
from stressed power and infra sectors and formation of credit monitoring cells should arrest major delinquencies ahead. For
instance, the bank has categorically refrained from lending to large corporates since past two years. Moreover, around onefifth of agri, MSME and retail loans are collateralized by gold. As per the Management, the stressed assets have already been
cleansed and the bank continues to provide aggressively with no meaningful delinquencies expected to emerge ahead.
Therefore, with significant worries overdone and no major negative surprises lying ahead, we reckon SIB should restore its
better asset quality numbers sooner than later.
Valuation & Outlook: Post the consolidation of business (FY15) and realigning its balance sheet, SIB today stands poised to
tread on a growth path. The structural metamorphosis of business with loan mix tilting towards higher yielding retail and SME
products should aid bank to mitigate incremental stress, resulting in lower provisions and lower interest reversals.
Furthermore, reducing corporate exposure, collateral based retail/SME lending, expected robust loan CAGR, thrust on highvalue NRE deposits, should translate into healthy return ratios; expected RoA at 0.9% and RoE at 12%+ (FY17E). This in
turn reinforces our belief in the banks earnings enhancement going forward and we maintain our positive outlook stance on
SIB. The stock is currently trading at compelling valuations of 0.7x P/BV FY17E; with turnaround in business strategy and
anticipated earnings improvement we reckon 1.0x P/BV is what SIB deserves.
Key Financials:
Particulars (INR mn)

FY13

FY14

FY15

FY16E

FY17E

12,810

13,990

13,660

3,718

4,369

8490

8840

8160

966

1,188

PAT

5020

5080

3070

679

771

EPS

4.03

3.78

2.28

58

65.9

22.44

25.06

26.59

25.99

27.19

3.21

3.02

2.70

18.25

17.64

Net Interest Income

Operating Profit

BVPS
NIM (%)

SIBs business mix

Asset mix- Q3FY16

Liability mix - Q3FY16

4%
14%

15%

4%
41%

20%

19%

62%

22%
Corporate

SME

Agriculture

Gold

Retail Ex gold
Term

Savings

Current

Others

Source: Company, KR Choksey Research

KRChoksey-Institutional Research

South Indian Bank

BUSINESS OVERVIEW
Company Brief

Business Model

South Indian Bank Limited (SIB) is a

private sector bank headquartered at
Thrissur
City
in Kerala,
India
incorporated in 1928 South Indian

Bank was one of the earliest banks in

South India. SIB was the first private
sector bank in Kerala to become a
Schedule Commercial bank in 1946
under the RBI Act. Spearheaded by
Mr. V.G. Mathew (MD and CEO), the
banks portfolio mix comprises of
corporate banking, personal banking,
NRI banking, third party products and
now diversification into retail and SME
franchise.
The Bank had been successful in
widening its network pan India with
831
branches
(grown
~2x
duirngFY05-FY15) and 1260 ATMs
(increased ~10x FY05-FY15).

While South Indian Bank has gained renewed focus on

building up a robust liability franchise (current CASA:
22.8%) while maintaining asset quality and improve
margins, it aims to expand its retail business strengthen
SME relationships. With corporate loan book witnessing
stress, SIB strategically has planned to diversify into retail
segment (through home, auto, MSME and LAP) capitalizing
upon the existing set of customer base and strengthen MSE
relationships. As part of boosting retail growth strategy,
SIB aims to lay greater thrust on low-cost housing loans
through centralized processing and faster approvals. For
accentuating SME vertical growth, the bank has created
MSE hubs that possess expertise to serve the SME
clientele.
The bank aims to enhance branch profitability by focusing
on both geographies outside Kerala and the home turf
(currently, South India: 83%, Kerala: 54%) aided by
formation of branch clusters. Not just that, the bank has
identified 150 branches that will lay major thrust on retail
and SME portfolios.

Strategic Positioning

High market share in both advances and deposits amongst

the old generation small private banks.
60% of the total branch network is located in semi-urban
and rural areas.

Competitive Edge

SIB happens to be the first Kerala-based bank to

implement core banking system.
81% of its lending is to investment grade; this largely
guards on asset quality.
71% of liabilities will be re-priced within one year;
boosting its pricing power.
17% of the agri and SME loans are backed by
additional security by way of gold.
Young workforce (average age of employees 34
years); has aided cost efficiencies.

Financial Structure

SIB continues to lay major thrust on branch profitability.

SIB has raised INR 3 bn Tier II bonds to strengthen capital
base and pursue growth.
During FY15, Management took the strategic decision to
exit the pawn broking business that impacted the gold loan
portfolio growth and also resulted into higher slippages in
turn hampering the profitability of the bank.
The bank has shifted focus from large corporate to SMEs
and de-focusing from power and infra sectors. Slippage to
advances ratio has stood lower across retail, SME and agri
portfolios.

Key Competitors

DCB Bank, Federal Bank, City Union Bank, Karur Vysya

Bank, ING Vysya Bank, Jammu Kashmir Bank.

Strategy
ahead/Focus areas

Expansion in Retail business: (a) Focus on retail loans.

(b) Improvement of branches for faster TAT.
Strengthening SME base: (a) Cluster based approach in
industry hubs. (b) Aims to be sole banker to SMEs.
CASA improvisation: (a) Strategy to increase CASA base.
(b) Centralized processes allowing branches to focus on
garnering low cost of funds.
Enhancement of asset quality: (a) Granularity in loan
portfolio to minimize risks. (b) Cautious strategy on
corporate lending. (c) Special recovery cell for monitoring
NPAs and restructured assets.
Boosting other income: (a) Focus on increasing banking
services for MSEs, retail and NRI clients.
(b) Enhancing treasury capabilities. (c) Expansion of PoS
and ATM network.

Source: KR Choksey Research

KRChoksey-Institutional Research

South Indian Bank

Key Q3FY16 Earnings Highlights

Q3FY16 earnings performance stood mixed bag for SIB. While NII and PAT stood strong recording 27.1% and 15.6% Y-o-Y
growth respectively, the gross NPAs spiked 51 bps Y-o-Y to 2.75%.

The Management maintains focus on retail loans; have stayed away from large corporate books for two years now. The loan
growth for the quarter was predominantly driven by retail loans; viz, MSME and agri that grew robust 21% Y-o-Y, home
loans by staunch 31% and sturdy show by auto loans that grew 40% Y-o-Y. The strategic focus on retail loan book
expansion should continue to boost NII traction going forward.

NIMs have jumped almost 42 bps Y-o-Y to 2.92% on the back of reduced costs and healthy CASA augmentation.

CASA ratio stood at 23% primarily supported by traction in SA balances which grew 18% Y-o-Y and CA growing 17% Y-o-Y.

NRI deposits stood strong; reporting 26% Y-o-Y growth.

Sustained traction in transaction fees and profit on sale of investments drove the sequential other income growth for the
quarter; y-o-Y it stood down.

The asset quality pressures have emerged from the corporate loan book; however, Management has already tilted focus
towards retail assets. Moreover, the bank continues to focus on early identification of bad assets and timely provisions for
the same.

The slippages stood at INR 2150 mn during the quarter. While few trading and contractor accounts have slipped during the
quarter, these stand highly collateralized as cited by the Management. While the corporate slippages stood higher at 1.8%
as against 0.77% a year ago, the agri slippages were down to 0.02% in Q3FY16 from 0.04% a year ago. Retail slippages
stood tad higher at 0.15% in Q3FY16 v/s 0.14% in Q3FY15.

The restructured assets stood nil during Q3FY16. The restructured book, overall, stands at INR 22.4 bn; o/w INR 3.06 bn
stand as NPAs. 50% of the remaining pertains to 3 discoms which are expected to get resolved through UDAY schemes.
Moreover, there were no slippages from

While Q3FY16 did not observe any 5/25 refinance account, till date the bank has opted for 5/25 scheme for mere one
account.

Around INR 890 mn were sold to ARCs during the quarter.

As at the end of December 2015, the branch count stood at 831, ATM network stood at 1272.

Employee headcount stood at 7048 as at the end of December quarter.

Interestingly, this quarter the RWA assets growth exceeded the overall advances growth primarily due to decline in gold
loan portfolio.

CAR stood at 11.7%, Tier I at 9.4% during the December quarter 2015.

Financial highlights

INR mn
Net Interest Income
Other Income
Profit After Tax
Total Advances
Deposits
GNPA
NNPA
NIM
CASA

Q3FY16
4067.2
1533.2
1016.3
406,010
534,410
2.75%
1.80%
2.92%
12,307

Q3FY15
3199.2
1603.4
879.3
369,980
484,590
1.80%
1.04%
2.50%
10,424

Yo-Y growth
27.13%
-4.38%
15.58%
9.74%
10.28%
95bps
76bps
42bps
18.06%

Source: Company, KR Choksey Research

KRChoksey-Institutional Research

South Indian Bank

Income Statement:

INR Mn

FY11

FY12

FY13

FY14

FY15

Net Interest Income

7910

10,220

12,810

13,990

13,660

Other Income

1970

2470

3350

3680

4970

Total Income

9880

12,690

16,160

17,670

18,630

Operating Expenses

4630

6170

7670

8830

10,470

Operating Profit

5250

6520

8490

8840

8160

800

790

1610

1550

4140

Profit Before Tax

4460

5720

6880

7290

4020

Provision for Tax

1530

1710

1540

2210

1380

Exceptional Items

317.2

-430

Profit After Tax

2930

4020

5020

5080

3070

FY11

FY12

FY13

FY14

FY15

1130

1130

1340

1340

1350

17,320

20,540

28,700

32,340

34540

297,210

365,010

442,620

474,910

519,120

Borrowings

2900

5880

12,850

27,310

22,320

Other Liabs. & Provisions

9640

11,140

12,450

13,960

13,830

328,200

403,700

497,950

549,860

591,160

18,280

15,720

16,970

22,010

24,420

6380

10,690

26,390

10,170

11,540

89,240

94,000

125,230

143,520

167,170

204,890

272,810

318,160

362,300

373,920

Fixed Assets

3570

3780

3960

4120

4790

Other Assets

5850

6710

7240

7740

9320

328,200

403,700

497,950

549,860

591,160

Provisions & Contingencies

Source: Company, KR Choksey Research

Balance sheet:

INR Mn
Capital & Liabilities
Capital
Reserves and Surplus
Deposits

Total
Assets
Cash & Balances with RBI
Balances with Banks
Investments
Advances

Total
Source: Company, KR Choksey Research

KRChoksey-Institutional Research

South Indian Bank

Key Ratios

Particulars

FY11

FY12

FY13

FY14

FY15

Net Interest Margin (%)

3.06

3.1

3.21

3.02

2.7

14.01

14

13.91

12.53

12.06

CRAR Basel II (%)

RoAA(Annualized) (%)

1.05

1.12

1.17

0.56

Provision Coverage (%)

73.94

71.36

60.33

62.71

60.63

CASA (%)

21.55

19.67

18.6

20.69

20.59

Gross NPA (%)

1.11

0.97

1.36

1.19

1.71

Net NPA (%)

0.29

0.28

0.78

0.78

0.96

Book Value per Share (INR)

16.33

19.12

22.44

25.06

26.59

Earnings per Share (INR)

2.59

3.55

4.03

3.78

2.28

Dividendper Share (INR)

0.5

0.6

0.7

0.8

0.6

Branches
-

Kerala

358

383

409

436

444

South Ex-Kerala

173

200

213

227

236

Others (Rest of India)

100

105

116

131

142

Kerala

280

382

461

552

651

South Ex-Kerala

124

184

221

293

362

Others (Rest of India)

86

97

118

155

187

ATMs

Source: Company, KR Choksey Research

Branch dynamics
Region
Kerala
South-Ex-Kerala
Rest of India
Total

FY05
251
117
51
419

FY15
444
236
142
822

CAGR %
6.5
8.1
12.1
7.8

Region
Kerala
South-Ex-Kerala
Rest of India
Total

FY05
58
33
30
121

FY15
651
362
187
1200

CAGR %
30.8
30.5
22.5
29.0

Distribution Network
Branch
ATMs

FY11
631
490

FY12
688
663

FY13
738
800

ATM Network

Source: Company, KR Choksey Research

KRChoksey-Institutional Research

South Indian Bank

ANALYST CERTIFICATION:
We Shweta Daptardar (BCoM, MBA) research analyst & Nikhil Kothari (B Com, CA,), research associate, author and the name subscribed to this report, hereby certify that all of the
views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be
directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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