Stock Review: South Indian Bank

South Indian Bank has shown tremendous growth in its loan book. Investors can consider the stock for the long term

 

SOUTH Indian Bank, with a market capitalisation of around Rs 2,100 crore, is among the smaller banks in India. However, the bank is in the top league in terms of margins and asset quality.

BUSINESS:

The bank operates primarily in south India. However, it is expanding its reach in the other parts of the country as well. The bank had a network of 580 branches at the end of this fiscal and also plans to add another 60 branches to its network. A wider branch network will help the bank in increasing the base of low-cost current account and savings account (CASA) deposits, which in turn will help it in lowering the cost of funds.

   CASA balances formed 23% of total deposits at the end of FY10. It is interesting to note that the bank has been able to maintain net interest margin (NIM) in excess of 3% even though its share of CASA is much lower than the large banks. NIM is a measure of spread between the cost of borrowing and the yield on loans. Meanwhile, the bank grew its loan book by 34% year-on-year in FY09. This is almost double the rate at which the industry credit grew during the same time period. As per the management, the bank plans to grow its loan book in excess of 30% growing forward.

FINANCIALS:

The bank has consistently reported NIM in excess of 3% in the last twelve financial years. Only a handful of Indian banks have managed to achieve this feat. Moreover, the bank has tight control over its asset quality. Net non-performing assets formed 0.4% of net advances at the end of FY2010 as against 1.1% in the previous financial year. This will enable the bank to lower the provisioning for NPAs thereby increasing net profit going forward.

   While Indian banks operate at an average return on assets (RoA) of around 1%, South Indian Bank reported 1.1% RoA in FY2010. This shows the bank's asset utilisation is marginally better compared to most other banks.

   It is interesting to note that even though the bank outgrew its industry in terms of loan growth and has maintained good asset quality, its net profit growth in FY2010 was much lower at 20% compared to the previous three years where the bank averaged 58% growth in net profit. This is because the bank had to pay penalties worth Rs 33 crore last year, which is a one-time factor. Excluding the effect of this one-time factor, the net profit would have grown by 30%.

   The current quarter results have shown that the bank is moving forward on the growth path. While the bank outgrew the industry in terms of loan growth by growing its advances by 34% in the June '10 quarter, its asset quality remained intact. Net NPAs formed 0.4% of net advances.

VALUATION:

At a price-to-book value of 1.4, South Indian Bank's stock is trading at its all-time high valuations. Its peers such as Karur Vysya Bank, Federal Bank and City Union Bank are trading at an average price-to-book value of 1.1. This shows that the stock is relatively costly. However, the bank has shown a tremendous growth in its loan book, of late. If this trend continues, the future growth will definitely make the current valuations appear reasonable. Investors can consider the stock for the long term.