25 November, 2014
Price: Rs. 27.00
Incorporated in 1929, South Indian Bank Limited (“SIB” or the “Bank”) provides a wide range of banking and financial services in retail and corporate banking. The Bank’s total distribution network includes 794 branches, 9 service branches and 1000 ATMs spread across the country.
Robust Growth in Deposit Coupled With Strong Loan Growth
Over the last ten years, total deposits with South Indian Bank have grown at a CAGR of 21.29 %. For the same period profit after tax grew at a CAGR of ~ 21%. For financial year 2014, SIB reported a healthy 13.71 % loan growth (compared to 16.53% for financial year 2013) despite sluggish economy and lower loan off-take in both wholesale and retail segments.
The chart below shows growth in the total deposits for South Indian Bank over the last 6 year period.
In order to improve share of CASA deposits; the Bank has been aggressively expanding over the last 3 years and is looking to gain value from planned branch expansion and increased penetration. Extensive branch expansion will strengthen its retail client base leading to increase in the bank’s low cost CASA deposits. South Indian Bank is planning to add 25 new branches for the financial year 2015.
Strong Financial Position and Healthy Dividend Payouts
South Indian Bank has shown consistent growth over the last 6 years (i.e. 2008-09 to 2013-14). Its net interest income over this period grew at an impressive CAGR of 21.75 %. For FY 2014, net interest income increased by 9.21 % to Rs. 1,398.78 Cr. from Rs. 1,280.83 Cr. and PAT increased by 1.04 % to Rs. 507.50 Cr. from Rs. 502.27 Cr. Over the last 5 years South Indian Bank maintained an average dividend Yield of 2.49 %. The below table lists SIB price and dividend yield for the past 6 years:
At CMP of Rs. 27.95 (24th November, 2014), the stock is trading at a P/E of 7.01. We believe that at this price, SIB looks attractive and offers great long term potential –reasonable valuation compared to peer group.
Focus On Increasing New Sources of Revenue
The Bank intends to focus on increasing its fee-based income by expanding third-party product offerings, increasing fee-based services and cross-selling offerings to the customers. For example, the Bank has entered into agreements with 13 leading mutual fund companies for the distribution of mutual fund products. SIB is also planning to increase the fees received from ATMs and POS terminals and is installing more number of ATMs and POS terminals across the country.
Over the last few months, Indian banking sector as a whole has suffered from lower availability of loanable funds as R.B.I. has kept the interest rates high in order to control inflation. There are signs of improvement in the rate of inflation over the last 2-3 quarters. For October 2014, inflation was recorded at 1.77 % as compared to 7.24% in October 2013. We still expect tight monetary policy to continue until inflation is fully under control. At the same time R.B.I. has mandated that all banks pay a minimum of 4% interest rate on all savings accounts. This has increased the cost of funds and kept margins under pressure.
Unless inflation comes under control and R.B.I. cuts policy rates the cost of funds will continue to remain high creating margin pressures which could have a negative impact on the financial performance of the banking sector as a whole.
Intense competition and threat of new entrants
Many of the services that were traditionally performed by the banks are now being performed by other players such as depositories, NBFCs and brokerage houses which has intensified competition in the Indian banking industry. Additionally, R.B.I. has released the new Banking License Guidelines for NBFCs and has awarded new banking licenses to two NBFCs – IDFC and Bandhan Financial Services, which in time will create even more competition in the banking sector. Additionally, development of technology has resulted in availability of multiple delivery channels for customers such as ATMs and phone and internet banking. As technology develops further, some of the advantage enjoyed by larger banks including a large branch network and employee base will become disadvantageous and put an unnecessary pressure on the revenue stream of larger banks such as the South Indian Bank.