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South Indian Bank (SIB) reported a moderate set of numbers for 3QFY2016. Its
net profit rose by 15.6% to Rs101.6cr, helped by strong NII growth of 27.1% yoy,
thereby partially offsetting the impact of rise in provisions. However, the asset
quality continued to slide further with slippages increasing to 3.93% and with
Gross and Net NPA ratios too rising sharply for the quarter.
Moderate growth in Advances: The bank’s advances and deposits grew at a
moderate pace of 9.7% and 10.3% yoy respectively, during the quarter. The bank is
shifting its focus to retail, SME and agriculture loans. During the quarter, retail advances
continued to dip; they declined by 4.6% yoy as gold loans continue its downward trend.
CASA ratio and NIM improve: CASA deposits grew by 18.1% yoy and the CASA
ratio improved to 23.0%, during the quarter. The Reported NIM for the quarter
increased by 11bp qoq to 2.92% while it increased by 42bp yoy. The bank
reiterated its NIM guidance in the range of 2.75-2.80% for FY2016. Other
income excluding treasury climbed 26.1% yoy to Rs103cr, while treasury gains
declined by 36% on a yoy basis. The cost-to-income ratio for the quarter was at
53.0% and the Management expects to improvise on the same, going forward.
Asset quality slipped further: On the asset quality front, the GNPA ratio increased
by 51bp qoq to 2.75%, while the NNPA ratio came in at 1.80% as compared to
1.39% in 2QFY2016. SIB has been reporting high slippages from the corporate
book since the last few quarters. Slippages for 3QFY2016 were at Rs367cr which
is essentially because of some trading accounts including gold and also some
contracting accounts. The bank has expressed that it has zero divergence with the
regulator and it has completely reckoned and provided for fully as per the
guidelines. The bank did not participate in 5/25 refinancing in 3QFY2016, but
has 1 account under SDR of ~Rs150cr.
Outlook and valuation: Issues pertaining to asset quality continue to be a key
concern for the bank. Going forward, asset quality pressures could be detrimental to
the bank’s growth. Given the current macro environment, we recommend a Neutral
rating on the stock. At the current market price, the stock trades at 0.7x FY2017E ABV.

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