Shareholders of South Indian Bank were ecstatic with its remarkable performance over the past six months as the stock witnessed a surge from ₹8.60 apiece to the current trading price of ₹18.80, resulting in a substantial return of 118.60%.
Notably, after hitting a 52-week low of ₹7.2 in June last year, the stock has demonstrated a consistent upward trend, and by December, it had surged by an impressive 202% to reach ₹21.80. As of now, the stock is trading 161% higher than its 52-week low.
Brokerage firm ICICI Securities believes the stock has the potential to go even higher. The brokerage stated that after the onboarding of a new managing director in September 2020, the bank is delivering in line with its Vision 2025 program.
The bank is focusing on growing its balance sheet in a calibrated manner, with an emphasis on net interest margins (NIMs) and asset quality, it added.
Considering the legacy of higher stress in the bank's corporate and mid-corporate segments, the new management revisited the business strategy and put emphasis on ‘quality over quantity'.
Further, it completely revamped the sourcing and underwriting process with a clear focus on margins and asset quality. GNPLs were at only 0.06%, with SMA-2 at 0.2% as of December 2022, the brokerage highlighted.
The financial performance of the bank in Q3FY23 was affected by a one-time provision of ₹3.1 billion made towards security receipts (SRs). If we exclude this provision, the profit after tax (PAT) stands at ₹3 billion, which is higher than the reported figure of ₹1 billion, says ICICI Securities.
Key performance indicators such as NIM expanded by 30 bps QoQ to 3.52% in Q3FY23, the slippage ratio fell to 1.9% from 2.25% in Q2FY23, credit cost sustained at 1% for the past 4 quarters, and overall loan growth was at 13% in FY23 to date, it added.
The major contribution to loan growth has been from the corporate sector, with over 60% of disbursements going towards large corporations in the last quarter.
However, the majority of lending towards corporations has been for those with AAA/AA/A ratings, as shown by increase in their share from 75% in September 2021 to 95% in December 2022, the brokerage noted.
With an improving credit outlook, the management estimates double-digit credit growth in FY23, with a focus on scaling up the retail segment.
The PCR has improved and is now at 60%, and the slippage ratio has decreased to 2% in Q3FY23 as compared to 2.9% in Q1FY23, suggesting that credit costs are likely to sustain at current levels. Overall, the brokerage has projected that RoA will reach 0.80% in the fiscal year 2024.
The brokerage retained its "buy' call on the stock and raised the target price to ₹25 apiece from ₹14 earlier, indicating an upside of over 33% from the stock's last trading price.
ICICI Securities has increased its earnings estimates for FY23E and FY24E by 12% and 24%, respectively, on the back of higher NIMs and lower credit cost assumptions.
The bank has a low C/D ratio of 74%, which will allow it to manage its deposit growth effectively. This, in turn, will enable the bank to keep deposit rates lower until the excess liquidity on the balance sheet is exhausted, said the brokerage.
6 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.