The Hindu Business Line : Syndicate Bank: Hold

Rapid expansion in balance-sheet
Sharp dip in the share of lowcost deposits
Asset quality remains good
Leeway to deploy excess SLR in lending
P/BV of 1.3 and ROE of 20 per cent

Mr C. P. Swarnkar, CMD.

Investors can consider retaining their holdings in the Syndicate Bank stock. Though the bank appears comfortably placed in terms of capital adequacy, and valuations appear undemanding, concerns about resource mobilisation and quality of earnings compel us to take a cautious view on the stock.

Pressure on margins

Syndicate Bank's performance in the September quarter was rather disappointing. That the bank has been struggling to contain cost of funds is clearly reflected in the margins. The bank's balance-sheet, which has been growing at a scorching pace over the last 18-20 months, is putting pressure on margins. For the quarter ended September, Syndicate Bank's advances rose by 49 per cent and deposits by 51 per cent. These numbers are way above-the-average growth rate seen by the banking sector. Typically, in such a situation, rising yields on advances would contribute to improvement in net interest margins for banks. However, for Syndicate Bank, this has not been the case. While yields on advances have improved by 45 basis points to 9.07 per cent on a Y-o-Y basis, the benefit of this has been more than offset by declining yields on investment and the rising cost of deposits. Its net interest margins for the quarter have contracted by about 85 basis points to 2.55 per cent.

There has been a clear sign of deterioration in the bank's deposit mix. In this regard, two issues that need to be looked at are, the proportion of low-cost deposits and incremental deposit mix. The share of low-cost deposits has recorded a sharp decline from 41 per cent a year ago to about 30 per cent now. Further, more than 90 per cent of the incremental addition to deposits in the September quarter has come from term deposits.

This clearly shows that a high growth in balance-sheet has come at a higher cost. While the bank management has indicated that it is finding attractive opportunities, mobilising low-cost resources is likely to remain a key challenge over the medium term.

In the near term, we expect the cost of funds to remain high as the scramble among banks to raise short-term deposits is likely to intensify on concerns of liquidity constraint. However, the excess SLR of five per cent that the bank has, eases the concern to some extent as it can deploy the same in funding fresh advances.

Yield on investments also recorded a dip of 25 basis points in the quarter to 7.4 per cent as the bank sold off high-coupon investments and deployed the proceeds in low-yielding investments to take care of liquidity requirements. However, as about 15 per cent of the bank's high-cost deposits are set to mature by December 2006, we expect pressure on NIMs to ease off to come extent.

Key variable

Another key variable that needs to be watched out over the next few quarters is the non-performing assets (NPAs). For the quarter-ended September, the bank's level of net NPAs has remained stable at 0.9 per cent. However, absolute level of gross NPAs has gone up with increase in asset base to about Rs 1,700 crore from Rs 1,590 crore a quarter ago.

That recoveries are taking place at a faster rate is also a positive. However, with assets being added at such a scorching rate, the bank's ability to check fresh NPAs holds great significance from an earnings perspective.

With a capital adequacy ratio of about 11.7 per cent (Tier-1 at 6.5 per cent), the bank is likely to require additional capital to fund growth. The government's holding at about 66 per cent, leaves room for raising fresh equity. The bank is most likely to go for a hybrid capital issue next year before exercising the equity option.

From a valuation perspective, the stock of Syndicate Bank is quoting at a price-to-book multiple of 1.3 as against the peer-group average of 1.5. Even a profit growth of 10 per cent, which appears attainable over the next year, is likely to generate return on net worth of about 20 per cent. This appears healthy.

However, considering the challenges over the medium term, remaining invested appears the appropriate strategy.

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