Marching northwards
The South Indian Bank (SIB), by its name, reveals its strong presence in south India. Of its 432 branches in 17 states, 220 are in Kerala and 93 in Tamilnadu. As of December 2005, nearly 87% of its business was networked under the core banking solution.
SIB has started its network in north Indian cities like Amritsar, Ludhiana and Bhopal. Approvals for more than 20 other branches are pending with the Reserve Bank of India (RBI).
An old private sector bank with no identifiable promoters. ICICI Bank, which holds 10.73% of SIB’s pre-issue equity capital, has to bring its shareholding down to 5%, as per RBI guidelines.
SIB had come out with a rights issue (1:3 at Rs 40) in July 2004. The main objectives of the current offer include augmenting the capital base to meet the future capital requirement arising out of the implementation of the Basel II standards. On September 2005, SIB’s capital adequacy ratio (CAR) stood at 10.28% as against the RBI-stipulated 9%.
Strengths
- Good progress has been made in de-risking the investment portfolio from future rise in interest rate.
- SIB has signed a memorandum of undertaking with Hadi Express Exchange Company to provide management services to its NRI clients in Gulf countries. It is a pure fee-based revenue mechanism to provide a single-window facility to NRIs.
Weaknesses
- The net NPA ratio of 2.4% as on December 2005 leaves scope for improvement. Moreover, SIB has a high concentration of its loan and NPA portfolio among certain customers and sectors. As per prospectus, the single largest borrower accounted for approximately 14.32% of its capital funds, while the largest borrower group accounted for 13.09% on September 2005,
Valuation
In nine months ended FY 2006, SIB’s net interest income witnessed a growth of 18% to Rs 230.37 crore. The other income fell by 38% to Rs 43.13 crore. The provisions and contingencies were down by 48% to Rs 58 crore. After providing for tax, at Rs 11.60 crore, the profit after tax was Rs 34.59 crore, up by 243%.
The last two years were extremely bad for SIB’s profit. Hence, this year’s recovery is on low base.
The last one-year, six- and three-month average price of the stock was around Rs 68.
The offer price band is Rs 60-66. At Rs 60, PE on nine-month annualised EPS of Rs 6.3 (on post-issue equity capital of Rs 72.68 crore) works out to 9.5. At Rs 66, PE on its nine-month annualised EPS of Rs 6.5 (on post-issue equity capital of Rs 70.41 crore) works out to 10.1.
Considering the price of Rs 66, post-IPO book value (BV) is Rs 86.0 and adjusted book value (ABV) Rs 61.0. P/BV is around 0.8 and P/ABV around 1.1. In a normal market, SIB will trade around a P/ABV of 1.
The banking sector needs consolidation and small regional banks without strong promoters, such as SIB, will have to ultimately merge with stronger and larger players once the government policy supports such moves. Till then they will have to survive and try hard to keep their presence felt in a highly competitive scenario.