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Spark Capital
South Indian Bank (Buy)
CMP: ₹34.35
Target: ₹38
We see South Indian Bank as a 3-year structural transformation story. A smooth management transition is in progress currently, which should be complete by September when the baton passes over to Mathew from Dr VA Joseph as the CEO of the bank. While it is early days, what we like most is the intent to change the loan book mix towards what we believe regional banks should focus more on — SME and agri-bias vis-a-vis the existing corporate loan and gold loans preference seen over the past three years. This we believe will require core DNA changes in the bank in terms of senior- and middle-management mindset, core skills, underwriting processes, which we think is not a quick fix but a long journey, nevertheless achievable given the bank’s wide semi-urban and rural branch network. We think the bank’s return on assets can see structural improvement to as much as 1.3 per cent in three years time vis-a-vis 1 per cent currently. We see the structural transformation to be value accretive, which should improve investor perception of the risk reward equation resulting in the stock re-rating upwards. This we think should address another core concern for the bank — leverage, which is excessive currently.
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