|Banking is a well-regulated sector in India and stocks in this sector are known to provide good returns over the long run. However, there are some risks that come from NPAs, in-efficiencies in operations, losses due to frauds, etc. The public-sector banking space is generally known to have high NPAs and slower growth, whereas private sector banks have relatively better asset quality. Large private sector banks such as HDFC Bank, ICICI Bank, etc. are good picks for those looking for safe but moderate returns. However, someone looking to take a higher risk can look at small and medium-sized banks.
South Indian Bank (SIB)
This bank incorporated in 1929 in Thrissur has a long 85 year history. Earlier it was predominantly a Kerala-based bank with focus on that state and some exposure to other southern states. Today the bank is expanding across India and is present in 27 states and 3 union territories. But still the major concentration of business comes from Kerala and the southern states, but the contribution of other regions is gradually increasing with growth.
Lets briefly look at the numbers to understand the broad fundamentals
Price & Valuation Summary – South Indian Bank
Price Rs.26.15 (Oct 17, 2014) P/E 6.78
Market Cap Rs.3518 crore P/B 1.04
Book Value per share 24.99 Dividend Yield 3.07%
EPS (TTM) 3.85 Face Value Rs.1
P/E ratio of around 7 times is good, which works out to an earnings yield of 14.75%. Dividend yield of 3% provides a decent margins of safety and a return for conservative investors. Price to book is also decent. But how about the baking business?
SIB has been steadily adding branches and ATMs outside its home base and also modernizing its technology to create internet, mobile, point of sale and other touch points.
Deposits grew at 13% p.a. over FY 12-14, while advances grew at 21% p.a. in the same period. The bank’s advances are well-diversified between agriculture/MSME (30%), retail (30%) and corporate (40%) segments. CASA ratio has been in the 20-22% range over last 3 years. Most of the deposits come from retail term deposits (55%), and this is followed by CASA (22%) and bulk deposits/others (23%).
NPAs: There has been some issue in non-performing asset (NPA) front, which is why the price has taken a known despite decent valuations.
The chart below shows how gross NPAs have gone up from 1% to 1.5% and similar trend for net NPAs. These numbers are not bad compared to the overall industry averages but slightly worse when compared to top private sector banks such as HDFC Bank, Yes Bank, etc. The asset quality is deteriorating and this could be due to the sluggish economic scenario in the last 2 years. What is alarming is the rise in NPAs during Q1 FY 15 as seen in the amount of GNPAs going up from Rs.4.3 billion to Rs.5.2 billion.
Karnataka Bank is another bank with a regional focus and with plans to expand pan-India. This bank has gross NPAs of 3.43% and net NPAs of 2.37%, which is too high for comfort. Of course there are several other banks in this space including Karur Vysya Bank, City Union Bank, etc. A details comparison of these is beyond the scope for now, so lets look at the recent updates of SIB to know what’s happening.
Recent changes to management show that the board is taking steps to address the NPA and other issues faced by the bank. Recently the bank announced on Sep 22, 2014 to stock exchanges about the appointment of Mr.V. G. Mathew as MD & CEO of the Bank for a period of three years w.e.f. October 01, 2014. Hopefully the new management will try to fix the asset issues and also calibrate the growth of the bank. The high growth phases in the last few years have also deteriorated asset quality. Some experts also attribute the higher NPAs to some technical changes in the way bad/doubtful loans are recognized.
SIB to focus on increasing CASA. The plan is to link employee incentives to CASA business generation and also to have representative offices in Middle East to boost CASA. Although the savings rate is higher for savings balances, the CASA still serves as a good low-cost funding option, which is easily accessible and more reliable
The bank is migrating to 10.1 of Finacle for Core Banking Solutions. This is expected to help in fraud detection, integrated risk management and aid CRM initiatives. Being a small bank if they implement and leverage IT solutions and provide good service it can help in retaining customers and building a stable growth going forward.
Portfolio Investment Flows: Interestingly Pabrai Investment Fund bought 19,606,634 shares at Rs.32.50 in July 4, 2014 according to a BSE bulk deal records. This fund is managed by Mohnish Pabrai, a classic value investor in the tradition of Warren Buffett and Charlie Munger. This gives a hint that the stock may be attractively valued. The stock price also shot up beyond Rs.34 but calmed down in the later period.
What appears from past trends is the aggressive expansion, which has increased the cost. Over last two years SIB has been adding 50 branches a year, which represents strong growth, but it also come with higher capital costs, which can take years to recover. The bank now plans to growth the branch count to just 825 in FY 15, which appears to be good news. So from 802 branches (as of July 21, 2014) they will be adding just 23 branches, which could help moderate the investments in new branches. Instead the focus can be shifted to growing existing business at the branches that were started in last 3 years. In today’s world given the availability of technology SIB can definitely reach more people with multiple channels including ATMs, internet banking, point of sale machines, etc. Some branch presence in rural areas could give it a competitive edge against private peers who are focused on large towns and cities.
Weighing the positives and negatives the stock price appears to be attractive at Rs.26 level, but it’s obvious that the price is low due to the perceived risks, else it would have been much higher. For further clarity and validation one can wait for Q2 FY 15 results and then decide on investing.
Original Article Link: http://184.108.40.206/~elegaoh8/?p=215
Disclosure: This is not a recommendation to buy or sell. I have personal holdings in SIB. Please do your own due diligence or take professional help before taking decisions.