Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the short-term fixed deposit programme of The South Indian Bank Limited (SIB).

 

The rating continues to reflect adequate capitalisation in relation to scale and nature of operations of SIB and its stable resource profile as indicated by the high retail deposits. These strengths are partially offset by the modest scale of operations and asset quality, the subdued earnings profile and exposure to geographical concentration risk.

 

Gross advances stood at Rs 59,418 crore as of March 2021, indicating about 9% de-growth over the previous fiscal. However, the bank intended to consciously trim its exposure to corporates and focus on growing the retail book. As a result, share of the corporate book declined to 25% in fiscal 2021, from 29% in the previous fiscal. This was partly offset by 15% growth in the gold loan portfolio during the same period. Advances too declined by 11% to reach Rs 58,309 crore for the first half of fiscal 2022, posting a year-on-year decline of 11%, amidst the second wave of the pandemic and the localised lockdown. As of September 2021, retail loans (25%), business loans (32%) and agriculture loans (18%) account for 75% of the overall portfolio of the bank.

 

Asset quality was hit adversely during the Covid-19 pandemic that disrupted cash flows of several borrowers, especially smaller ones. As a result, gross and net non-performing assets were high at 6.65% and 3.85%, respectively, as of September 2021 (6.97% and 4.71%, respectively, in March 2021). As of September 2021, size of the restructured book stood at Rs 2,310 crore and comprised 4.0% of total advances (vis-à-vis 2.1% as of March 2021). During the second quarter of fiscal 2022, the bank sold loans worth Rs 1,049 crore to Asset Reconstruction Companies (ARC) which led to incremental provisioning of Rs 52 crore towards these assets. This, coupled with increase in the provision coverage ratio by nearly 500 basis points, led to a net loss of Rs 177 crore for the first half of fiscal 2022 (compared to net profit of Rs 147 crore during the corresponding period of the previous fiscal. SIB estimates total slippages to be in the range of 2.5-2.7% in the current fiscal. Ability to manage asset quality and performance of the restructured book will remain key monitorable.

 

Nevertheless, the bank is adequately capitalised, having raised Rs 240 crore in fiscal 2021. It is expected to raise around Rs 500 crore by end of the current fiscal. The common equity tier (CET)-I capital stood at 11.7% (3.7% higher than regulatory requirement) and overall CAR at 15.7% as of September 2021.

Key Rating Drivers & Detailed Description

Strengths:

• Adequate capital position

SIB has an adequate capital position with regards to its scale of business. As on September 30, 2021, networth stood at Rs 5,633 crore with CET-I and overall CAR of 11.7% and 15.7%, respectively. The bank has raised equity capital of Rs 240 crore in fiscal 2021 and may further raise around Rs 500 crore by the last quarter of fiscal 2022. Networth coverage of net NPAs was steady at 2.5-2.6 times till fiscal 2020 and stood at 2.6 times as of September 2021. While the capital position of the bank is expected to remain adequate over the medium term, in a steady state scenario, the ability to curtail asset quality challenges would be crucial so as to prevent any potential erosion of networth. Furthermore, the bank will need incremental capital to grow at a robust rate. Hence, timely raising of capital will be a key monitorable.

 

• Stable resource profile as indicated by high retail deposits

The deposit profile benefits from the stable pool of non-resident Indian (NRI) deposits and a vast retail depositor franchise. As of September 30, 2021, overall deposits stood at Rs 86,840 crore up from Rs 82,711 crore in March 2021. However, there was a reduction in bulk deposits and nil certificate of deposits during the same period.  Moreover, share of retail deposits (term deposits and savings) was resilient at 89.6% as of June 2021, improving from 83.7% during the same period previous fiscal. NRI deposits formed 30.9% of total deposits as on September 30, 2021.

 

Share of current account and savings account (CASA) deposits also rose to 30.8% as on September 30, 2021, from 29.7% in March 2021. This however lags the industry average. Cost of funds dropped to 4.97% in the first quarter of fiscal 2022, from 5.54% in fiscal 2021. While the high proportion of retail deposits lends stability to the resource profile, improving share of CASA deposits will play a key role in enhancing the overall deposit profile of SIB.

 

Weaknesses:

• Weakened asset quality metrics

Asset quality of the bank remained weak in the first half of fiscal 2022, amidst the second wave of the pandemic, as reflected in gross and net NPA of 6.65% and 3.85%, respectively (6.97% and 4.71% respectively in March 2021). During the second quarter, the bank undertook an ARC sale of Rs 1049 crore, which has led to higher reduction in H1 2022 NPA. Bank has also done incremental provisioning of Rs 52 crore towards these assets. 

 

As of September 2021, the bank has a restructured portfolio of Rs 2,310 crore, for which 45% of loans were restructured in the April-September period. Among the segments, the business loan portfolio alone accounted for 44% of overall slippages reported. Any change in the payment discipline of borrowers can adversely affect asset quality. Hence, going forward, the bank’s ability to manage asset quality and the extent of restructuring will remain a key monitorable.  

 

• Subdued earnings profile

Profitability has been subdued over the last 4-5 fiscals on account of increased provisioning requirements. While pre provisioning operating profit (PPOP) has remained steady over the quarters at 1.65-1.75% (PPOP to average total assets), higher credit cost has led to a moderation in overall profitability. In the first half of fiscal 2022, the bank reported a loss of Rs 177 crore on account of higher provisioning due to sale to ARCs and increase in PCR, resulting in a negative return on assets ratio of -0.36%, as compared to 0.06% in fiscal 2021. Resultantly, the PCR improved to 44% in September 2021 as compared to 34% in fiscal 2021.

 

Operating margin is likely to sustain, supported by a steady net interest income (NII) and fee income. However, overall earnings will remain susceptible to asset quality and provisioning requirements thereof. The impact of the second wave of Covid-19 on the bank’s earnings profile, if any, will be a key monitorable.

 

• Modest scale of operations with geographical concentration

SIB operates as a mid-sized bank largely in and around Kerala. With gross advances of Rs 58,309 crore as on September 30, 2021, the bank had a small market share of ~0.5%. The Kerala region alone formed 45% of total advances as on June 30, 2021, although the bank has an established position in the state. Modest scale and limited geographic reach make operations susceptible to local regulatory concerns, economic environment, and other calamities such as the Kerala floods.

Liquidity: Strong

SIB runs a fairly conservative asset liability management (ALM) profile with positive cumulative mismatches across buckets over the next 12 months. The treasury department estimates and closely tracks the cash flow of the next one month – current and next fortnight. As of June 2021, around 75% of term deposits outstanding is due for maturity only after 1 year (in the greater than five years bucket). As on June 30, 2021, the bank had a liquidity coverage ratio of 402.4%. In addition, the bank also has access to systemic sources of liquidity.

Rating Sensitivity factors

Downward factors

• Weakening in capital position with CET I below 9%
• Significant deterioration in asset quality metrics from March 2021 levels
• Material reduction in deposits

About the Bank

SIB was set up in 1929, is a private sector bank. The Thrissur (Kerala)-based bank had a network of 926 branches and 1,294 automated teller machines as on September 30, 2021. Advances stood at Rs 58,309 crore as on September 30, 2021 with retail, small and medium enterprises, and agricultural advances accounting for 75% of the book. The proportion of corporate loan book at 25%, although sizable, has declined from 31% as on September 30, 2019. The management intends to cap the exposure to large corporate accounts at 25% so as to maintain the existing degree of granularity and stability in the portfolio. Deposits stood at Rs 86,840 crore as on September 30, 2021, with those from NRIs accounting for 30.9% of total deposits.

Key Financial Indicators

As on /for the period ended	Unit	H1 2022	Mar-21	Mar-20
Total assets	Rs crore	98,624	94,149	97,032
Total income (net of interest expenses)	Rs crore	1617	3592	3363
Profit after tax	Rs crore	-177	52	105
Gross NPA	%	6.65	6.97	5.0
Overall CAR (for banks)	%	15.7	15.4	13.4
Return on assets	%	-0.36	0.06	0.11

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Short Term Fixed Deposits	NA	NA	NA	NA	Simple	CRISIL A1+