South Indian Bank’s (SIB) Q1FY09 results are broadly in line with our expectations, with NII and PAT rising by 11% and 27% y-o-y respectively.

On a sequential basis, NII registered a decline due to a delay in passing on the higher cost of funds, which crimped margins. Non-interest income increased 19% y-o-y led by growth across segments including treasury income.

However, asset quality deteriorated with gross and net NPAs increasing sequentially to 1.98% (1.78%) and 0.49% (0.33%) respectively.

During the quarter, advances and deposits increased at 25% and 20% respectively. For the full year, the management is targeting business growth of 20%.

Going forward, we expect NII to remain under pressure, while the weakening asset quality remains a major concern (due to the bank’s significant exposure to retail and SME lending).

We have revised our FY09 and FY10 estimates for SIB downwards in view of the lower-than-expected NII and tighter macro environment. At a revised target price of Rs173, the stock would trade at 1.1x FY10E ABV. This represents a 68% upside from current levels. We maintain a BUY on the stock.