South Indian Bank Equity Research

Date of Research – 21 January 2016

Price – Rs. 18.25

About the Company

South Indian Bank Limited (“South Indian Bank” or the “Bank”) was incorporated on January 25, 1929 in Thrissur and has its registered office in Baroda, Gujarat and its corporate office in Mumbai, India. The Bank is engaged in providing a wide range of banking and financial services in retail banking and corporates.

As of March 31, 2017, the Bank distribution network includes 850 branches and 1320 ATMs as compared to 834 branches and 1287 ATMs as of March 31,2016.

For FY 2017, South Indian Bank’s net interest margins stood at a healthy 2.72 % (2.73 % for FY 2016). For the same period, net NPA’s stood at 1.45 % (2.89% for FY 2016).

The Bank has maintained its CASA account ratio at 23.8 % for FY 2017 as compared to 22.4 % for FY 2016.

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Interest earned 4,434.29 5,015.07 5,286.22 5,557.20  5,847.08
Interest expended 3,153.46 3,616.29 3,919.99 4,047.50  4,171.65 
Net Interest Income 1,280.83 1,398.78 1,366.23 1,509.70  1,675.43 
Other income 334.93 368.46 497.07 517.42  715.56 
Operating expenses 767.17 882.89 1,047.04 1,147.84  1,176.40 
Operating Profit 848.59 884.35 816.26 879.28  1,214.59 
Provisions (other than provisions for tax) and contingencies 161.01 155.41 414.05 369.62  614.37 
Exceptional items 31.72 (43.39) –  – 
PBT 655.86 728.94 445.60 509.66  600.22 
Tax 153.59 221.44 138.40 176.39  207.72 
PAT (before Minority Interest and share of Associates) 502.27 507.50 307.20 333.27  392.50

Profitability Analysis

Standalone (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Profit Margin Ratio 10.53 9.43 5.31 5.49   5.98 
Cost to Net Income Ratio 47.48 49.96 56.19 56.62  49.20 
Other Income to Net Income Ratio 20.73 20.85 26.68 25.52  29.93 

Net profit margin is arrived at by dividing profit after tax by the total income generated (i.e. interest earned plus other income) and shows what is left for the shareholders as a percentage of total income.

Cost to net income ratio is particularly important in valuing banks. It is derived by dividing operating expenses by the net income generated (i.e. net interest income plus the other income). The ratio highlights the efficiency with which the bank is being run – the lower it is, the more profitable the bank will be. If this ratio rises from one period to the next, it means that costs are rising at a higher rate than income. Together these ratios help in understanding the cost and profit structure of the bank and analysing business inefficiencies.

Other income largely constitutes of fee income such as commission and brokerage fees and client based merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management services), syndication and placement fees, processing fees from loans and commission on non-funded products (such as letters of credit and bank guarantees) etc. Banks in developed countries derive nearly 50% of their income from these non-funded sources. A high other income to net income ratio is good for the bottom line (i.e. net profit) as income from this stream is derived without significant mobilisation of deposits and hence the cost associated with this income is relatively lower compared to interest income.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 113.39 133.85 134.39 135.02 135.03 
Reserves & Surplus 2,054.11 2,869.76 3,233.65 3,454.39 3,706.90 
Employee Stock Option Outstanding 2.90 2.61 2.30 2.38 3.65 
Net worth (shareholders funds) 2,170.40 3,006.22 3,370.35 3,591.79 3,845.58 
Deposits 36,500.53 44,262.30 47,491.09 51,912.49 55,720.73 
Borrowings 588.19 1,284.55 2,730.78 2,232.47 2,314.96 
Other liabilities and provisions 1,110.93 1,241.96 1,393.75 1,379.57 1,293.61 
Total Liabilities 40,370.06 49,795.03 54,985.97 59,116.32 63,174.88 


Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 377.50 396.12 412.20 479.05 486.99 
Cash and balance with RBI 1,571.84 1,696.70 2,200.81 2,441.58 2,476.13 
Balances with banks and money at call and short notice 1,068.70 2,639.20 1,017.12 1,153.50 623.34 
Advances 27,280.74 31,815.54 36,229.86 37,391.64 41,085.75 
Investments 9,399.87 12,523.47 14,351.78 16,717.16 14,618.93 
Other Assets 671.40 724.01 774.21 933.39 3,883.74 
Total assets 40,370.06 49,795.03 54,985.97 59,116.32 63,174.88 

Efficiency Analysis

Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Advances / Loan Funds Ratio 73.56 69.85 72.14 69.06 70.79 
ROE / RONW 18.51 16.71 15.06 8.55 8.67 

Advances to Loan funds ratio: This ratio indicates the efficiency with which the bank is able to deploy the funds it mobilises and is arrived at by dividing the banks total advances by its total deposits (i.e. deposits + borrowings). A high advance to loan fund ratio indicates that the bank might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be.

Return on Equity (ROE) or Return on Net Worth (RONW) : measures the amount of profit which the company generates on money invested by the equity shareholders (i.e. share capital + reserves and surplus). In short, ROE draws attention to the return generated by the shareholders on their investment in the business. ROE is widely used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Interest Income Rs. 1,280.83 1,398.78 1,366.23 1,509.70  1,675.43 
Growth (%) 25.36 9.21 (2.33) 10.50  10.98 
PAT (Rs. Cr.) 502.27 507.50 307.20 333.27  392.50
Growth (%) 25.05 1.04 (39.47) 8.49  17.77 
Earnings Per Share – Basic (Rs. ) 4.03 3.78 2.28 2.47  2.61 
Earning Per Share – Diluted (Rs. ) 3.99 3.77 2.27 2.47  2.61
Price to Earnings 6.15 5.90 10.55 7.39  10.69 

Dividend History

The Company has maintained an average dividend yield of 2.50 % over the last 5 financial years.

Liquidity and Credit Analysis

Standalone (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Net Interest Margin Ratio (“NIM”) 3.21 3.02 2.70 2.73 2.72
Capital Adequacy Ratio 13.91 12.53 12.06 11.8 12.4 
Net NPAs 0.78 0.78 0.96 2.89 1.45 

NIM: Banks focus on lending or advancing money at a rate higher than the rate at which they accept deposits. Net Interest Margin is calculated by dividing the difference between Interest earned (on advances) and interest expended (on deposits) by the amount of (average) Invested Assets. If this ratio rises from one period to the next, it indicates that the bank is able to deploy its funds more efficiently which results in greater profitability.

Capital Adequacy Ratio (CAR): or Capital to Risk Weighted Assets Ratio (CRAR) is a measure of a bank’s capital (net worth plus subordinated debt) expressed as a percentage of a bank’s risk weighted credit exposures (loans).

Two types of capital are measured: tier I capital, which can absorb losses without a bank being required to cease trading (such as ordinary share capital and free reserves); and tier II capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors (such as long term unsecured loans and revaluation reserves which is taken at a discount of 55 % while determining its value for inclusion in Tier II capital).

Measuring credit exposures requires adjustments to be made to the amount of assets shown on a bank’s balance sheet. This is done by weighting the loans made by a bank according to their degree of riskiness, e.g. loans to Governments are given a 0 %weighting whereas loans to individuals are weighted at 100 %. Similarly off-balance sheet items such as guarantees and foreign exchange contracts are also weighted for their riskiness. On-balance sheet and off-balance sheet credit exposures are added to get total risk weighted credit exposures.

As per the Basel II norms the minimum capital adequacy ratios that apply are:

Tier I capital to total risk weighted credit exposures to be not less than 4 %;

Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit exposures to be not less than 8%.

The RBI currently prescribes a minimum capital of 9 % of risk-weighted assets, which is higher than the internationally prescribed percentage of 8 %.

Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and efficiency of the financial system.

For details on classification of tier I and tier II see

NPA: Non Performing Asset or NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. Any rise in the percentage of NPAs results in a sharp decline in the overall profitability.

Ownership pattern

South Indian Bank is one of India’s biggest professionally managed companies with no clear promoter group. Many financial institutions hold varying amounts of stakes in SIB but no one in particular exercises significant influence in decision making. This gives the management enormous freedom and autonomy in diversification.

In the latest stock exchange filing dated 31 March 2017, institutional holding in South Indian Bank stood at 31.93 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.