Banks accept various forms of deposits from
their customers for X% of interest, and lends it back to the customers at Y%
interest. The difference between Y and X is the spread, which is used for all
the expenses like employee costs, branch leases etc. After all the expenses, an
average bank makes about 1% of total assets per year which can be distributed
to shareholders or invested in more branches and loans.
South Indian bank has 801 branches and 1020 ATMs
across India. It is the second largest private bank in Kerala. The bank has 86
years of operational history. It is also a
pioneer in technological development in terms of serving customers needs. South
Indian Bank Limited (the Bank) provides retail and corporate banking, as well as other
banking activities, such as debit card, third party products distribution like
insurance and brokerage operations.
Number of branches
per state:
Andhra Pradesh 48
|
Gujarat 18
|
Maharashtra 30
|
Rajasthan 2
|
Assam 2
|
Haryana 4
|
Meghalaya 1
|
Tamil Nadu 137
|
Bihar 1
|
Himachal Pradesh 1
|
Mizoram 1
|
Tripura 1
|
Chandigarh 1
|
Jammu & Kashmir 1
|
Nagaland 1
|
Uttar Pradesh 9
|
Chattisgarh 3
|
Jharkhand 2
|
Orissa 2
|
Uttaranchal 1
|
Delhi 24
|
Karnataka 43
|
Pondicherry 2
|
West Bengal 16
|
Goa 5
|
Kerala 439
|
Punjab 4
|
Madhya Pradesh 2
|
Qualitative aspects
of the bank:
Growth &
Profitability:
Total
deposits have grown 3 times over the last 6 years, 24.45% per year; Profit after tax growth of
26.45%; improving asset yield as bank builds fee income streams in addition to
interest income. Profitability of any bank can be identified by return on total
assets; South Indian Bank makes more than 1% of the total assets consistently.
Low cost funding
growth:
Low
cost funding (interest rates on deposit base) is the recipe to have better
profit margins and return on total assets, bank identifies them clearly &
they have implemented specific strategies to achieve low cost deposits.
Asset Quality:
Higher
asset quality; Gross Non Performing Assets at 1.57%, Net Non Performing Assets
1.12%
Employees:
Young
workforce (avg. age of 34 years) with continuity of management and only 2 CEOs in
the last decade
Private bank
advantage:
Private
banks in general don’t have legacy issues and poor quality loans as in many of
the Public/government controlled banks.
Shareholders:
Strong
shareholders with a long term perspective can be a huge advantage; here are the
biggest shareholders with a long time horizon for investments:
1
First Carlyle Ventures Mauritius 4.94%
2
India Capital Fund Ltd 4.65%
3
LIC ltd 4.44%
4
Multiples Private Equity FII I 4.03%
5
GKFF Ventures 3.85%
Successful
investor Mohnish Pabrai recently bought about 2% of the company at
Rs.32.5/share.
Valuations:
The
current market capitalization of South Indian bank is 3700 Crs (Rs.28/share).
It makes income about 1000 Crs before tax and provision. Net of tax, the
company makes about 500Crs. This means, you are effectively buying this bank at
7 times after tax earnings this year. The dividend is 108 Crs, payout ratio of
20%.
Taking
number of branches into account, it means every branch is valued at about 4.7 Cr
in the market today. It means, based on the latest quarter’s profit, each bank
makes about 60 lacs/year after tax.
Here
are some of the financial metrics:
P/E
– 7; Earnings yield – 14.3%
Market
cap/Total assets – 0.071
Market
cap to Total equity (M.cap/Book value) – 1.1
Long
term debt/Equity - 0.80
Risks:
Banks
are leveraged institutions; Loan losses could potentially be a life threatening
risk for any bank. But, South Indian bank makes Rs. 1000 Crs of pretax and
pre-provision income every year; they can handle almost 3% of their assets loss, which is 3 times the current loss provision.
Banks
are also very much influenced by government policies and interest rate settings
by RBI in India. To have a good economic development in any country, banks
should be in the forefront of prosperity. As we all know economic development
in India is still a long road, South Indian Bank should be a net beneficiary of
this development.
Conclusion:
Banking
in India is very well developed (safe), poised to grow revenues/profits in
coming years. Imagine how many people in India don’t have bank accounts and
salary is not deposited directly to the bank compared to other parts of the
world. Banking is a sticky business; I don’t know a lot of people who moved from one bank to another many times in
their lives. The opportunities for South Indian bank are huge and many of them
are yet to develop,
1.
Customers growth as the banking is only moderately penetrated in many parts of
the country.
2.
Growth in deposits per customer as they make and save more money.
3.
Debt/capita is very low for Indian consumers, discretionary income increases
should lead to loans/investments.
4.
Shift from local lending (pawn shops, local finance companies) to bank lending
due to the cheaper lending rates, better technology implementation. Obtaining a
loan from banks is getting much easier now.
5.
More service based revenues such as in insurance, brokerage, bill payments and wealth
management etc.
Here
we have a conservatively managed bank poised to grow their net income in coming
years and selling in the market for 7 times of after tax earnings. So, the
initial yield on our investment is more than 14%.
Disclosure: I/partnerships
managed by me own shares of this company.
