South Indian Bank’s (SIB) Gold loans formed 16% of advances and accounted for a third of YTD growth in advances in current fiscal (yields at approximately12%). Management intends to remain aggressive in the segment given the strong underlying demand.
Management is adopting a cautious stance on expanding its housing loan book. Within the housing segment, houses are being preferred over flats. Contribution of Kerala in overall business is steadily declining (stood at 50% in 9mFY10); it is likely to decline further to 35% over the next three years.
Contribution of NRI deposits declined from 19% of deposits in Q3FY09 to 17% by Q3FY10; similar trend witnessed in Federal Bank. NRI deposits grew 12% Y-o-Y (against overall deposit growth of 25%)
Until eight months ago the bank was in corporate agency relation with ICICI Prudential. It recently broke the pact and entered into corporate agency relationship with LIC (which apparently is a sweeter deal) which resulted in loss of commission income during the transition phase. However, income from insurance sales is likely to pick up in FY11.
Over the past few quarters, SIB has posted stable margins while balance sheet growth has continued to be resilient with low restructuring, lower slippages, and strong provision coverage ratio. With robust asset quality, we believe the bank is well positioned to play the upcycle in growth.
We are factoring in stable margins and 25% credit growth over FY11-12. The stock is trading at attractive valuations of 0.9x FY11E book, delivering RoE of approx18%. Overall, we continue to maintain our positive stance on the fundamentals of the stock and maintain our BUY recommendation and rate it sector outperformer on relative return basis.
Popularity: 13% [?]