MR.MARKET KNOWS EVERYTHING, if we have conviction that it can do well just needs to be patients enough to ride
Currently trading at around 5 PE. December, 2024 quarter results are also good. Waiting to see the Investor Presentation and management commentary.
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Q3-2025 Impressions
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Deposits: Deposits grew by 6% YoY. The Bank is trying to move away from bulk deposits as it feels it has the luxury to do so . As a result next quarter deposit growth is also deliberately planned to be low. The Bank sees its ability to keep its cost of funds low compared to peers as a competency and they want not to stray away from the path.The deposits are priced with an expected growth rate of 8-10% and advances are expected to grow at 10-12%.
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Advances : Loan book grew by 12% YoY. Credit to deposit ratio is at 82.5% . For a while they have been growing their loan book without looking too much into the deposits. Now they have almost reached the end of that road. You cannot grow your credit book without growing your deposits.The Bank looks forward to grow their credit in early double digits next quarter and grow it at mid teens after that. The Bank is showing signs of its ability to deliver on its stated strategy of growing its MSME and retail book and to move out of corporate book. For the first time both small sized tickets and medium sized tickets in MSME showed growth.
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NPAs: Recoveries were pretty good in the last one year. They have recovered approx 1000cr. Rs in the last one year. This quarter alone the recovered amount is close to 300 cr. Except credit cards and personal loans all other segments have done well. Exposure to credit cards and MFI is limited and the headwinds against the segment is not supposed to affect the Bank. The lack of exposure to MFI is helping the Bank as the segment is a cause of worry for whoever has exposure. NNPA went down further to 1.25% . Slippages annualised is at 1.41% or 33 basis points this quarter. The bank had been showing its book bifurcated to old and new book. GNPA last quarter was 0.4% of the new book which has grown to 0.5% this Quarter. 98% of the corporate loan in the existing book are A+ rated and it seems that the yield on these loans are relatively low. But these assets gives kind of optionality to the Bank to move into higher priced assets if the environment for retail loans change for better. This is because the corporate loans are largely of short term duration.
The bank is adequately capitalised with CAR at 18+% The book value should be above 35 Rs per share.
In the Quarter it’s a Bank that is operating at 3.19% NIM and gives 13.93% annualised ROE /1.12% RoA.
The Risks as well as negatives that I can see: Assets such as Home loans are tied to repo and these loans have been growing good YoY. However, if the policy rates are brought down it will get directly reflected in the yield. But this should be true for most banks. Other risks such as geographical concentration etc could be there but there is nothing to suggest any concern in the business environment connected with it. After all this is a bank that is still trading below its book; roughly it is trading close to 0.72 of the book.
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I have been reading the quarterly presentations of several mid size/ regional banks in the last few days. South Indian Bank has probably the well put-together document. There are still several issues like elevated CII and how quick they can get away from old loan book, etc but trend is clear. I could see the clarity of thought from CEO and management from these presentations. Can’t say that for other banks, some are deliberately confusing.
p.s. invested and biased.
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SIB continues to be one among the cheapest bank available. Two years of 14% kind of RoE. Now the net NPA figures are also optically better after the last quarter. A guidance of 1% RoA in first half and 1.15% in the latter half for this FY. Market seems to be not convinced yet.
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Hope the CEO and management will stay on unlike the predecessor. Also hope the board gets the incentives right and keeps hiring good management that will steer the bank sensibly.
So for a bank, especially a small regional bank to succeed, they need to have a good underwriting team that will keep the NPAs low even when the credit cycle is on the upswing and they need to invest enough in technology and people for keeping the expenses low. Tough business to be in.
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SIB has been protected by the micro finance burden as they don’t have much of that portfolio. They have been having decent other income including recoveries which has led to a great FY25. However, with the Repo rate cuts; their NIMs will suffer. Also they have decided to not go aggressive for retail deposits, but rather reduce bulk deposits. So deposit (and subsequent advances) growth will be less. If they manage to keep profits similar to last year, it would be great. Low NPAs, less provisions can only help in better profits.
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One can look at South Indian Bank in two ways: either as a cigarette butt stock , offering a few puffs of value before it runs out or as a bank that is laying the groundwork for a more profitable future.
Either way, the current valuation seems to reflect a ₹500 note trading at ₹400. In a hypothetical, frictionless scenario, the bank could wind down operations and distribute assets, potentially leaving shareholders better off than at current market valuation.
The bank has been slow in recognizing and technically writing down its NPAs delaying a clean up of its balance sheet.
What we do know is that the market appears to be pricing in one of two possibilities
a) a likely compression in Net Interest Margin which could push RoE below the bank’s cost of capital, or
b) skepticism about the depth of the reported improvements in underwriting standards and risk management practices.
The first possibility is well acknowledged as given by the bank but the extend of the NIM compression is umcertain. But if we go by the guidance it cannot be disastrous as to deliver an RoA in the range of 1%.The second one is what one can see only in a full credit cycle.
In a market that gives a pass mark to more questionable scenarios, the real reason for the market to not notice could be something else.SIB has slow loan book growth and slower deposit growth. There is no trigger for the market to notice. But a 500 Rs that returns 70 Rs a year should still be valued closer to 500 Rs.
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