The South Indian Bank’s largely semi-urban branch network is concentrated in the Southern states of the country.
While enjoying customer loyalty spanning many years, the Bank has ensured that it remains sufficiently in step with product, technology and service level developments in the industry.
Underpinned by this, the bank has maintained its marketshare in not just Advances and Deposits, but also CASA deposits over the past ten years.
In our view, the Bank’s cost efficient and technologically up-to-date network constitutes a reasonably attractive standalone franchise that underpins the bank’s profitable growth in line with industry.
SIB’s overall strategy and execution has been creditable in the past few years and the management’s enunciated strategy continues to be sensible and reasonable, underpinning our positive outlook.
The Bank’s deposit franchise includes a niche NRI customer base that contributes a meaningful 20% of total deposits and gives it a distinguishing cost advantage over several of its peers.
Moreover, the environment has become more conducive for inflow of NRE deposits at cheap rates.
The RBI mandated maximum spread to LIBOR permitted for NRE deposits stands at a high of 175bp and is unlikely to be brought down for the time being considering that overall forex inflows into the country remains subdued.
The LIBOR itself is at very low levels of 1-2% due to the substantial global liquidity created by major central banks such as the US Federal Reserve. Moreover, the outlook on the Rupee exchange rate is also benign in the near term, creating the incentive of further upside on NRE deposits through Rupee appreciation.
Added to the bank’s existing customer base in this Segment, the increasing tie-ups with Middle-Eastern exchange houses are also expected to help the Bank garner a reasonable share of incremental inflows.
Together with a fall in bulk deposit rates, we believe the Bank will be in a position to largely maintain its NIMs at around 2.8% in FY2010E.
At Rs107, the stock is trading at 4.5x FY2011E EPS and 0.7x FY2011E ABV. We value the stock at 0.9x FY2011E ABV to arrive at a Target Price of Rs135, implying an upside of 26% from current levels. We recommend a BUY recommendation.