South Indian Bank fixes its house in the thick of demonetisation

South Indian Bank’s stock has gained an impressive 9% in the New Year, after being hammered 17% in the 50 days of demonetisation in 2016


South Indian Bank’s core income growth has slowed to 3% from 14% in the previous quarter, which is not a good sign. Graphic: Subrata Jana/Mint
South Indian Bank’s core income growth has slowed to 3% from 14% in the previous quarter, which is not a good sign. Graphic: Subrata Jana/Mint

South Indian Bank’s stock has gained an impressive 9% in the New Year, after being hammered 17% in the 50 days of demonetisation in 2016, a testament to a growing expectation that the lender may be unscathed by the currency withdrawal.

The old generation private sector lender’s financial results for the December quarter should give faith to investors that their bets have indeed not gone wrong. The bank made a net profit of Rs111.38 crore for the quarter ended December, a growth of 9.59% from the year-ago period. The profit growth is, of course, far less than the pace seen in the previous quarters.

However, that the source of the deceleration is a slowing core income growth should be worrying. South Indian Bank’s core income growth has slowed to 3% from 14% in the previous quarter, which is not a good sign. The bulk of the profits came from treasury that contributed to the massive 70% jump in the non-interest income.

But the bank has used its treasury profits to beef up provisions and the provision coverage ratio, all signs that it is putting its house in order. Its coverage ratio surged to 38% from 31% in the September quarter.

The biggest positive is that the private sector lender’s loan book grew 11%, faster than in the previous two quarters. It is evident that the bank hasn’t seen any slowdown in disbursals despite anecdotal evidence in the economy that both companies and individuals are postponing their consumption and credit after the cash purge.

Granted that both the gross and net non-performing ratios have surged, but much of the rise is also due to a decelerating credit growth over three quarters. Also, analysts had already expected a rise in the ratios as a large portion of the bank’s stressed assets, totalling Rs1,800 crore as of September quarter, was expected to slip. During the December quarter, South Indian Bank reported slippages worth Rs196 crore, lower than the previous quarter.

Notwithstanding the recent rise, the stock has still underperformed the BSE 200 index to which it belongs. The rally may have gotten a boost from a stable financial report card but for it to sustain, South Indian Bank will have to do a repeat performance in the fourth quarter as well. Keeping in view the December quarter results, at a price-to-book value multiple of 0.7 times its estimated 2016-17 earnings, the stock doesn’t look dear.

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