SOUTHBANK - South Indian Bank Ltd. Share Price

The management of South Indian Bank outlined a cautiously optimistic outlook, emphasizing profitability, asset quality improvement, and strategic growth in retail/MSME segments. Key highlights from the Q3 FY25 earnings call include:

1. Financial Performance:

   • Record quarterly profit of Rs.342 crores (+12% YoY).
   • Advances grew 12% YoY (Rs.86,966 crores), with deposits up 6% (Rs.1.05 lakh crores), excluding a Rs.1,000 crore reduction in bulk deposits.
   • NIM stable YoY at 3.19% (down 5 bps QoQ due to higher funding costs).

2. Asset Quality:

   • Gross NPA at 4.3% (-44 bps YoY) and Net NPA at 1.25% (-36 bps YoY).
   • Slippages (~Rs.165 crores) primarily from unsecured segments (personal loans/credit cards).
   • Provision coverage ratio improved to 81.07% (including write-offs).

3. Retail Focus:

   • Gold loan book grew 10% YoY to Rs.16,966 crores (avg. LTV 70.6%).
   • Home loan disbursals surged 112% YoY; auto loans up 67%.
   • Credit card book at Rs.1,486 crores (slippages managed; awaiting RBI approval to resume issuance).

4. Cost Management:

   • Operating expenses controlled via attrition (no replacements) and productivity gains.
   • Cost-to-income ratio improved to 59.8% (-220 bps YoY).

5. Strategic Initiatives:

   • Digital transformation in MSME lending (GST-linked loans, LAP) to boost yields.
   • Focus on transitioning from low-yield corporate loans (~41% of book) to higher-yield retail/MSME.

6. Outlook:

   • Aim to grow deposits organically (CASA + NRI focus) while optimizing CD ratio (~82.5%).
   • Monitor RBI guidelines on gold loans; expect gradual retail growth revival.
   • Target RoA/RoE improvement (1.12%/13.93% in Q3) via better asset mix and cost discipline.

Risks include potential NIM pressure from rate cuts and slower-than-expected MSME traction.

Question 1:
Within the retail credit segment, housing and mortgage businesses are growing faster. Do you foresee yield declines due to potential rate cuts, and will this pressure NIMs?
Answer:
Housing loans are repo-linked, so rate cuts would reduce yields. The bank aims to balance repo-linked exposure with T-bill-linked corporate loans to manage volatility. NIMs may face pressure if repo rates drop, but the impact will depend on book composition.

Question 2:
Which segments contributed to incremental slippages in the new book, especially in retail? Is it vehicle loans or unsecured segments like personal loans/credit cards?
Answer:
Slippages were primarily in personal loans and credit cards. Auto loans performed well with no distress observed. The unsecured portfolio remains under scrutiny.

Question 3:
Employee expenses are declining due to attrition. Is this reduction focused on mid/lower levels? Which departments have the highest churn?
Answer:
Cost management involved attrition without replacement, leveraging technology/work realignment. Most exits were at lower, customer-facing levels, slightly worsening the customer-facing-to-non-customer-facing ratio (78:22).

Question 4:
NIMs declined contrary to guidance. Is this due to higher growth in low-yield mortgages?
Answer:
NIM compression (5 bps QoQ) stemmed from a 7 bps rise in funding costs and slower portfolio shift to higher-yielding assets. Retail/MSME growth is prioritized to improve yields, but low-yield corporate book inertia delayed NIM improvement.

Question 5:
When will tech initiatives in SME lending reflect in actual numbers?
Answer:
Digital MSME products (e.g., GST-based loans) are gaining traction, with a Rs.300"“400 crore book. Branch training and product scalability are underway, but material balance sheet impact requires 4"“5x growth, which is a work in progress.

Question 6:
Deposit growth is muted (6%). How will you balance CD ratio and future deposit strategy?
Answer:
Deposit growth aligns with asset growth (10"“12%). Bulk deposits were reduced to manage costs. Focus on NRI/CASA inflows and maintaining CD ratio (~82.5%). NRI deposits grew Rs.2,000 crore YoY, supporting liquidity.

Question 7:
Credit costs are low. Can this sustain?
Answer:
Credit costs (8 bps) reflect stable slippages (1.42% annualized). Limited exposure to high-risk unsecured/credit cards supports stability. Recovery efforts (Rs.1,025 crore YTD) further mitigate risks.

Question 8:
Employee cost reduction impacted business? What's the target cost-to-income ratio?
Answer:
Cost-to-income improved 220 bps YoY to 59.8% via expense control and revenue growth. Further reductions are limited; future focus is revenue growth. Employee cuts targeted lower roles, with minimal operational impact so far.

Question 9:
Old book NPAs still drive slippages (Rs.165 crore). Any recovery expectations? ECL impact?
Answer:
Old book slippages are declining (Rs.165 crore vs. Rs.218 crore prior quarter). Recovery efforts (Rs.364 crore in Q3) remain strong. ECL provisions are unlikely to exceed existing IRAC norms due to stable new-book performance.

Question 10:
New corporate book saw Rs.29 crore slippages. Details?
Answer:
Slippages were isolated (auto/commodities sectors) with no systemic risk. Stressed accounts are preemptively addressed. No near-term recurrence expected.

Question 11:
Gold loan growth slowed. Impact of RBI's proposed regulations?
Answer:
Growth slowed due to regulatory uncertainty. RBI discussions are ongoing; adjustments to processes/LTV may follow. Third-party partnerships (e.g., Fedfina) may offset short-term dips. No asset quality concerns.

Question 12:
MSME product details?
Answer:
Digital GST-linked OD (Rs.350"“400 crore book) and LAP products (launched Sept 2024) offer 10%+ yields. Seamless underwriting via account aggregators/CIBIL aims to scale disbursals. Training 750 branches to boost adoption.

Question 13:
Unsecured loan losses (credit cards/PL) and FLDG impact?
Answer:
Credit cards (higher losses) are winding down pending RBI approval for relaunch. Personal loans (4% loss rate) target existing customers. FLDG impact is immaterial as most portfolios (excluding cards) lack guarantees.

Question 14:
High corporate disbursals (Rs.1.22 lakh crore) vs. book size. Rationale?
Answer:
Short-tenor corporate loans (41% of disbursals) offer liquidity optionality. These low-yield, revolving credits can be replaced with retail/MSME assets as they scale, aiding future NIM expansion.

Question 15:
RBI's gold loan circular: industry-wide or bank-specific?
Answer:
Discussions with RBI are industry-wide, focusing on renewal practices and LTV norms. Clarity awaited; changes (if any) will apply broadly. Growth may slow temporarily but rebound via third-party channels.