South Indian Bank (SIB) reported Q1FY16 PAT of Rs 6,530 crore, which was lower than estimates on account of slower revenue momentum and high asset quality stress. Key highlights: 1) NII growth remained muted on continued pressure in NIMs (down 15bps q-o-q to 2.55%); 2) muted other income traction weighed on revenue; 3) slippages stood elevated at 1.9% ; however, higher write-offs restricted the rise in GNPLs to 1.85% (1.7% in Q4FY15); and 4) moderation in gold loans continued to rein in overall loan growth.
Slippages continued to be elevated at R175 crore, largely driven by one corporate account (R6,000 crore, however management expects this to be upgraded during Q2FY16). Restructuring was R115 crore (contributed by one steal account of R100 crore), taking outstanding restructured book to R1,970 crore (5.2%). The bank enunciated controlled incremental stress and focus on recoveries will help reduce headline GNPLs.
We expect near term growth to be slower, but expect momentum to build up as retail and SME segments start defining large part of book. Factoring in lower growth and higher credit costs, we cut our FY16E/17E earnings by ~14%/10%. SIB has the potential to generate RoA/RoE of 0.9%/16% by FY17e. At 0.8x FY17E ABV valuations, SIB is attractively positioned and risks are adequately captured leaving limited downside. We maintain ‘buy’ with with target price of R36.
