Pick for Diwali " South Indian Bank "

Diwali Pick by “Dalal Street Journal” South Indian Bank CMP: Rs.160.40 BSE Code: 532218 Face Value: Rs.10 ()Takeover candidate with strong FII investment ()Efficient small bank with strong net-worth and ability to raise tier-two capital. ()Bank taking initiatives to improve asset quality and increase low-cost CASA deposit. We are recommending South Indian Bank considering some quality aspects. The bank registered a good growth in H1FY08, and with a busy season ahead in the second half we expect it to go forward with the same momentum. The bank has registered a strong growth. The total business of the bank stood at Rs.23,100 crore (as on the end of H1FY08), showing a growth of 29.50 percent over H1FY07. During the same period deposits grew by 28.30 percent to Rs.13,932 crore, where the advances showed a growth of 31.50 per cent at Rs.9,150 crore. At this pace, we feel, the bank will not only achieve the target of Rs.25,000 crore business set for FY08, but is expected to exceed the target in FY08. Says its Chairman Dr.V.A.Joseph, “Now as we are nearing the target set by us. Instead of revising the target, we are trying to replace our high-cost deposits to low-cost deposits. This will improve our NIM going forward.” The bank’s NIM currently stands at 2.93 per cent. It declined compared to last year, but going forward the bank expects to improve its NIM to around 3.10 to 3.15 percent. The business growth in the next year is expected to come from new branches. SIB currently has 485 branches and 34 extension counters and holds licence for 28 new branches. Says Joseph, “We will open 15 new branches till March 2008. The rest would be opened in the first half of FY09.” With addition of new branches, the low-cost CASA deposits are also expected to improve from the current level of 23.94 percent. Here, one should also notice that the bank has 4.50 per cent NRI deposits, where the rate of interest is low, but is not included in CASA deposits. On the NPA front, the bank has improved a lot with net NPA for H1FY08 standing at just 0.71 per cent as compared to 1.69 percent in H1FY07. The bank is making conscious efforts to bring down NPAs to 0.50 per cent till March 2008. These levels of stressed assets are very credible in the wake of the bank’s strong growth in its customer assets. SIB has recently made a qualified institutional placement (QIP) of 2 crore equity shares at Rs.163 per share to raise Rs.326 crore which has improved the CAR of the bank to 14.30 percent with tier-one capital comprising 12.50 percent of risk weighted assets. The bank did have sufficient headroom to raise tier-two capital without diluting equity. However, considering the higher cost of subordinated debt in the current scenario and taking advantage of favourable capital market conditions, it has opted to raise fresh equity; which we feel is a smart move. Going forward, the bank has no plans to raise further tier-two capital in FY08. With the QIP, the FII holding in the bank now stands strong at 44.07 percent. Now, with this we feel the bank is a strong takeover candidate by foreign banks. For H1F08, the company showed good growth and posted a net profit of Rs.66.06 crore as compared to Rs.56.72 crore in H1FY07. But here one should note that H1FY07 included Rs.22.84 crore as extraordinary income. Otherwise, the bottomline growth is strong 94 per cents. For FY08, the bank expects to post a bottomline of Rs.142-147 crore, resulting in EPS of Rs.16.45 and P/E of 9.60x at CMP of Rs.160.40. At present the price to book ratio stands at 1.54x. With all these factors, we emphasize the counter with a target price of Rs.205-210.