South Indian Bank (SIB), a private sector bank, was incorporated at Thrissur in Kerala, south India. The bank has a pan-India presence with a network of over 500 branches and over 210 ATMs across 23 states, and two Union Territories. Approximately 56% of the branches are in Kerala. The bank has no identifiable promoter and is managed by a team of professionals. Dr V.A Joseph is the chairman and has been at the helm of affairs since 2005. He was a career banker with Syndicate Bank before taking up responsibilities at SIB.
SIB came out with an initial public offering in 1998, followed it up with a 1:3 rights issue at a premium of Rs 30 in 2004, and launched a follow-on public issue at Rs 66 in 2006. The bank raised an equity capital of Rs 326 crore (two crore shares at Rs163 a share) through qualified institutional placement in September 2007. It has a 100% float. Among the largest shareholders are foreign institutional investors (FIIS) India Capital Fund, with a 7.7% holding; India Fund (4.5%); and Goldman Sachs Investments (3.7%). India’s another old private sector bank Federal Bank owns a 3.5% stake.
SIB’s interest earned grew a healthy 27% to Rs 371.61 crore in the first quarter ended June 2008 over the June 2007 quarter. With interest expended increasing 34% to Rs 268.83 crore, net interest income (NII) advanced 11% to Rs 102.78 crore. Other income was up 19% to Rs 34.28 crore, leading to net total income rising 13% to Rs 137.06 crore. Operating expense were steady at Rs 67.68 crore against Rs 67.72 crore. As such operating profit jumped 29% to Rs 69.38 crore. However, provisions & contingencies spurted by a notable 42% to Rs 10.68 crore. Thus, profit before tax rose 27% to Rs 58.70 crore. After providing for tax (up 26% to Rs 20.08 crore), profit after tax was up 27% to Rs 38.62 crore.
Around 44% of SIB’s deposits comprise low-cost current account and savings account (CASA) deposits and non-residential external (NRE) deposits. Of this, around 24% are CASA deposits and around 20% NRE term deposits, which collectively enable the bank to contain its deposit costs. Recently, due to a widening differential between interest rates of NRE deposits and domestic deposits, a slowdown in this deposit base has emerged, leading to slight pressure on margin. However, this is expected to be a temporary blip and the NRE proportion in total deposit base is likely to be maintained at around 20%. Going forward, it will sustain its margin due to its strong deposit franchise, despite upward pressures on cost of term deposits. SIB is working to add five lakh new savings accounts in the year ended March 2009 (FY 2009). This would mark a 3% increase in CASA.
Going forward, there is a scope of improvement in fee business. SIB’s fee income, as a percentage of assets (of 0.7%), is low compared with its peers (0.8-1%) and, thus, does not contribute significantly to its return on assets (RoA). The fee income is expected to grow strongly in future on growing remittances and increasing revenue from distribution of third-party products (insurance and mutual funds). With a 100% core banking solution (CBS) platform, bundling of various banking products will help the bank improve its fee revenues.
Capital adequacy ratio (CAR) of SIB stood at 13.93%. SIB has been able to manage its asset quality better over the past few years through higher recoveries and low delinquencies. Currently, gross NPAs stand at 1.99% and net NPAs just 0.49%.
SIB has a technology-enabled network of 500 branches, with a predominant presence in Kerala, Tamil Nadu, and Karnataka. The bank’s widely held shareholding, technology enabled network and private ownership structure makes it a prime acquisition candidate.
We expect SIB to register NII and net profit of Rs 423.50 crore and Rs 173.19 crore, respectively, in FY 2009. On current equity of Rs 90.4 crore and face value of Rs 10 per share, EPS works out to Rs 19.2. The share price trades at Rs 113 and P/E is just 5.9.
SIB’s current book value (BV) stands at Rs 126.3. Price to BV (P/BV) is 0.89. BV is expected to rise to Rs 142 (without considering bonus) in FY 2009. P/BV on FY 2009 estimated BV falls further to 0.80. SIB’s board and AGM have approved a bonus in the ratio one share for every four shares of face value of Rs 10 each.
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