Target: ₹39

CMP: ₹28.08

Muted NII and lower Treasury income led to the decline in South Indian Bank’s Q4 operating profit. Lower provisions aided profitability, with a 0.98 per cent RoA (down 7bps q-o-q). Asset quality improved across segments. With stress from the legacy book recognised, the focus now shifts to profitability. We expect the bank to deliver a sustainable, 1 per cent, RoA from now.

Slippages were ₹290 crore (1.5 per cent of loans), lower than last quarter’s figure and better than we expected. Lower slippages and strong recoveries led to a 24 bps q-o-q decline in the GNPA ratio, which came at 4.5 per cent. Also, the SMA-2 book fell sequentially and is now more than 1 per cent of loans. The standard restructured book was ₹770 crore (down 13.6 per cent q-o-q), about 1 per cent of loans.

On a steady-state basis, we expect NIM to stabilise near 3.4 per cent. With an easing slippage run-rate, credit cost is expected to be modest. With a stable margin, modest opex and provisioning, we expect the RoA to stabilise near 1 per cent.

Our TP of ₹39 is based on the two-stage DDM model. This implies a 0.9x P/ABV multiple on its FY26e book.

Risks: Higher stress arising from the corporate book; less-than-expected loan growth.