The South Indian Bank Limited (SOUTHBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to South Indian Bank Q3 FY '26 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jai Mundhra from ICICI Securities Limited. Thank you, and over to you, sir.

Yes. Thanks, Ikra. Good afternoon, everyone, and thanks for joining the call. On behalf of ICICI Securities, we welcome you all to Q3 FY '26 post results -- post-earnings conference call of South Indian Bank. From the management side, we have with us Mr. P. R. Seshadri, MD and CEO; Mr. Dolphy Jose, Executive Director; Mr. Anto George T., Chief Operating Officer; Mr. Vinod Francis, CFO; and Mr. Jimmy Mathew, GM and Company Secretary; and other senior officials. I'll now hand the conference over to management for their opening remarks, post which we can start the Q&A session. Thank you, and over to you, sir.

Thank you very much, Jai. Thank you all for joining our call today. As Jai has mentioned, I'm joined by all the colleagues that Jai mentioned in the opening remarks in the room with me and on the phone lines elsewhere. So -- once again, thank you very much for joining us today. Let me start this call by highlighting our performance for the quarter ended December. The bank declared a net profit of INR 374 crores for the quarter, registering a growth of 9% compared with INR 342 crores in Q3 FY '25. Total deposits grew by 12% to INR 118,211 crores from INR 105,387 crores on a Y-o-Y basis. Gross advances grew by 11.3% to INR 96,764 crores from INR 86,966 crores on a Y-o-Y basis. During March 2025, the bank had technically written off INR 900 crores. Had it not been done, the Y-o-Y growth for this quarter would have been 12.4%. Total business for the bank grew by 12% to INR 214,975 crores. Pre-provisioning operating profit for the quarter grew by 11% to INR 585 crores from INR 529 crores. Net interest margin for the quarter stood at 2.86%, which is an improvement of 6 basis points on a sequential basis. The bank declared a return on assets of 1.7% (sic) [ 1.07% ] and return on equity of 13.49% for the December quarter. Capital adequacy ratio for the bank is at 17.84% and the Tier 1 ratio stands at 16.88% as at December 31, 2025. CASA balances grew by 15% year-on-year to INR 37,640 crores versus the earlier figure of INR 32,830 crores. Provision coverage ratio, excluding write-off, improved by 1,177 basis points Y-o-Y to reach 83.5% and PCR, including write-offs, improved to 91.57% during Q3 FY '26. The bank declared a return on assets of 1.07% and return on equity of 13.49% for the December quarter. Slippage ratio reduced by 17 basis points from 33 basis points in Q3 FY '25 to 16 basis points in Q3 FY '26. Overall, gross NPA reduced by 163 basis points from 4.3% to 2.67% on a Y-o-Y basis. Net NPA reduced by 80 basis points from 1.25% to 45 basis points on a Y-o-Y basis. Let me now take you through the other operational and financial performance indicators of the bank. We continue to grow our Gold loan business, which now stands at INR 21,303 crores with an average LTV of approximately 55%. This includes portfolios that may have been acquired by the bank and an average ticket size of approximately INR 2.46 lakhs. The Gold loan book grew on an annualized basis by 26%. We continue our focus on MSME and Retail. MSME business loans now stand at INR 14,019 crores, which is a growth of 12%, excluding the write-off done during March 2025. Mortgage loans, which are mainly given to MSME is mapped in the investor deck given to you under the Retail segment. And if this were to be remapped to MSME, the Y-o-Y growth would stand at 14%. Retail segment continues to grow for us. It has grown Y-o-Y at 23%. The Home Loan book as at December 2025 is INR 8,430 crores and the Auto Loan book is INR 2,393 crores. As at December 2025, our PL loan book stands at INR 2,217 crores. This quarter, we also saw good traction on the disbursal of MSME and Retail, including Gold segments. On a Y-o-Y basis, MSME, in this case, including LAP, disbursements grew by 45% year-on-year and Retail Loans, including Gold disbursements, grew by 60%. These numbers are available in the investor deck for you to view. We hope to continue to maintain the momentum in disbursements and collections in the coming quarters and to achieve our desired outcomes. With this, we open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Digant Haria from GreenEdge Wealth.

Congratulations on the good performance. Sir, the first question is last quarter and maybe even for the quarter before that, you said that in Q3 is when you may look to revise or keep the guidance of 12% asset growth. Sir, you would like to give any guidance on the loan growth?

We had said that we would do 12%. And actually, we have done 12%. If you were to add back the write-offs that we have done in Q3 -- I mean in March of 2025, which is roughly INR 900 crores, to add it back, we would be 12.43% year-on-year. So on a like-for-like basis, we have done 12%. And we think that this being the busy season, the Jan to March quarter, there's a likelihood that we will participate in the increased demand for loans and have outcome better than that. So what we said the last time around was that we want to be 12% and over. So we are still sticking to that.

Okay. Sir, no, I'm asking this because -- sir, on the Retail part, especially Gold loans is doing very well for the industry, like banks are growing, say, 10%, 15% on a Q-o-Q basis. So in that context, it's a very good time for that Retail portfolio of ours. So I just want to know the Corporate and Retail -- the Retail mix still doesn't shift. The Corporate still continues to be around 40%. Like when do we see that shift really happening? Like over the next 12 months, 18 months? Or will it be much longer where we see that shift? And second is that in Gold loans, are we thinking of capping our Gold loan exposure to something because I think we can grow much faster, but we have somehow constrained our Gold loan growth.

So with respect to the second question first, at this juncture, we have not put any -- imposed any caps. Our total exposure of Gold loans to our total book is roughly about 22%. So we are monitoring it very closely, and we've built new risk measurement mechanisms so that we can see how much risk we are taking, especially against volatility in Gold prices. But this is something that we have been dialoguing with the Board, and it's a decision that we'll have to take as to what level we need to cap this, if at all. So at this juncture, as I had mentioned, we have not capped it. With respect to the second question, this quarter, we had 5% sequential loan growth. Only, I think, approximately 1/4 of the loan growth has come from the Corporate end. And even that is on the transactional banking side. So core Corporate book has not grown. The way we reported to you in the investor deck includes both our transaction banking balances and the Corporate banking balances. So the growth has been on the transaction banking balance and the level of growth there has been just -- has been a smaller component of the total growth. So as a consequence, there has been a realignment in the overall book and -- which is what has led to our increase in NIMs, et cetera. So over time, you will see this happen. I think the size of our balance sheet and the fact that we are mainly reliant on our own branches to actually deliver business volumes imposes certain restrictions on how quickly we can alter the mix. But that is -- but that's definitely what we are trying to do, and you will see a shift as we go quarter-on-quarter-on-quarter. So in the medium term, I think we would near -- I mean head towards 33%, 1/3 Corporate and the rest being Retail, MSME and Agri.

Last question, if I may. In the last 5 quarters, our loan book has probably grown by 15%, 16% and our NII, the net interest income, we have again clocked back to that all-time high of INR 882 crores. Now will it be fair that next 3, 4 quarters, at least whatever the loan book grows, our NII also keeps pace with that?

I think that would be a fair comment to make. I mean we've absorbed 125 basis points reduction in NIM. And as we go forward, we are entering a relatively favorable phase for deposit repricing. So whilst there is going to be a 25 basis points reduction in the repo-linked book, at the same time, approximately 1/5 of our deposit book will also get repriced by approximately 80 basis points. So given all of that, we think that we've hit basically a plateau at this point in time on account of the most recent repo reduction. Please remember that we pass on the repo rate cuts to our customers on a T+1 basis. So as far as from South Indian Bank's point of view, the regulatory aim of transmission is achieved on the first day after the repo rate announcement. So therefore, the full impact of the 25 basis points will be felt by us this quarter. But we think that we should be able to sort of manage that on account of repricing on the deposit book. There will, of course, be this overhang of the repo rate cut. But having said that, we don't think it should materially alter our NIMs for the quarter. And going forward, subject, of course, to no further repo rate cuts, we think that the net interest margin that we report will start climbing as the book starts rising.

The next question is from the line of [ Vides Shah ] from C.R. Kothari & Sons.

Sir, I have 2 questions. So one on the NIM. So what kind of NIM margin do we expect ahead? And what will be the contributor to the same? I think this quarter, we saw that the yield that you charge, that also dropped while the cost of borrowing rose slightly. So what is the NIM trajectory expected in this?

I couldn't hear you very clearly. So I will paraphrase what I thought I heard. You said that you want to know where the NIMs will be. And you were asking cost of our borrowings, I think that is the second question that you asked. Now with respect to NIM, I think going forward, subject to no further rate cuts coming, our NIM will be stabilized during this quarter. There will be some slight downward pressure on account of the 25 basis points reduction that we've had on account of in December. But that will be countered largely by the fact that we have approximately 20% of our deposit book getting repriced during this quarter. So we think that we should remain stably at the level that we are. There may be some marginal movements, but we don't think that's going to be very significant. At least that's the current view. But there is a downward -- how should I put it? There is a bias of it being moving downwards on account of the 25 basis points. Now with respect to cost of deposits, cost of deposits have been coming off. So they came off 7 basis points in the last quarter from 5.41% to 5.34%. Now I think the number that you are really looking at is cost of funds, which also includes certain other activities that we do, including our borrowings on the repo market and so on and so forth and the borrowing for purposes of reinvestments and so on and so forth, where there is a 3 basis point upward movement from 4.74% to 4.77%. I don't think that is a very material number or material change for us to be worried about because that is driven by opportunities on a short-term nature. I think the more important number to be looking at is the 5.41% to 5.34%, which is a 7 basis point reduction in cost of deposits, which from our point of view, is moving in the right direction.

And on the GNPA and NPA. So the GNPA dropped from [ 4.4% ] last year to now approximately 2.9%. So what led to this drop? And do we expect it to continue over here in these levels?

So gross NPA on a year-on-year drop is also partially contributed by a write-off of INR 900 crores during March of 2025. So that's a 100 basis points reduction in the book itself. So from 4.5%, that would have brought it down to 3.5%. The rest is on account of excess of recoveries over new NPA accruals. So our NPA slippage rate is at 16 basis points for the quarter, not annualized. So on an annualized basis, we are at 64 basis points. And recoveries have been significantly larger than NPAs. And as a consequence of which these numbers move in the direction that you mentioned.

All right. So we expect it to stabilize at these levels coming ahead?

We expect these numbers to continue to improve in the near term. And so you will see them trending downwards.

The next question is from the line of Jai Mundhra from ICICI Securities.

Sir, I wanted to check for the last 8, 9 quarters, maybe 10 quarters, we have done ROA at 1%, nearly -- 1% or maybe 1.05%. With now NIM pressure behind, hopefully, and growth also picking up in Gold and MSME, how far are we from, let us say, maybe 1.3% kind of an ROA depending on the loan mix? Or you think that the current run rate will come -- will continue? I mean where are we on a step-up on ROA?

Thanks, Jai. First, we are concerned, I think we will operate in the 100 to 115 basis points in the near term. I think there will be quarters in which there are other income forces that take us still upwards. But I think what is going to happen is as the NIM sort of stabilizes and there are no further rate actions from the Reserve Bank of India. At that point in time, because of the robust portfolio growth that we are having, we will see return on assets inching upwards. So I would say -- if I were to hazard a guess, in a 12-month period, we should end the 12 months at about 1.15% to 1.2% or thereabouts. Beyond that, I'm not -- I do not have a crystal ball to give you a view as to when we'll hit 1.3% [indiscernible].

Sure, sir. And lastly, sir, if you can quantify the impact -- I mean if you have any trade relief measures portfolio, RBI had given some dispensation. And if you can sort of provide some sensitivity to the export portfolio, right, given the global uncertainty on the trade side.

So good question, Jai. We were not getting too many requests for accessing that -- those relief that the Government of India has provided. We are now beginning to get a few. So as of this moment, I think about 16 of our customers have asked us to take a look at whether they can access this funding source. The exact quantum of that, I do not have at this point in time. But from our point of view, the portfolio is continuing to look robust. We are not seeing any trend lines that are worrying right now. And obviously, all these exporters had orders that they fulfill. And we think the importers also had certain commitments or they also had inability to actually switch suppliers very quickly because of the fact that the current Indian suppliers were certified and were producing to a particular standard and so on and so forth. So -- but if this situation were to continue in the long run, I guess, given the steepness of the tariff, alternate sources will be found by the importers. So therefore, these persons will take an impact. The situation is that the new credit that is being provided under the new scheme provides for an ROI advantage to the customer. And many customers are also trying to access that on account of the fact that it gives an interest rate benefit. So I'm not entirely in a position to isolate how many of these customers see this request as a potential method of dealing with stress and how many of them are seeing it as a method of actually reducing their carrying cost of debt. So it's a mixture of both. We are looking at it very closely. And as of this juncture, as I said earlier, we don't see any material deterioration in our portfolio.

The next question is from the line of [ Darshil Jhaveri ] from Crown Capital.

Sir, some of my questions have already been answered. So I just wanted to know what kind of -- what's our guidance in terms of credit cost for this year and maybe next year, if you can help us understand that?

So you're asking for credit cost as opposed to slippage?

Yes.

I think the credit cost for this year that you see will be broadly in line with what we're seeing right now, not any material change, nor are the slippages likely to change in the near term. In this quarter, we don't expect very significant change. So right now, the way the portfolio is behaving and given the fact that the slippages are in the 15, 17 basis point range, our credit costs would be maybe half that. So 7, 8 basis points would be the credit cost in the near term. Next year numbers are being worked out, but we don't see it materially changing from where we are unless there is a very significant event in the marketplace and unless some of the events that Jai Mundhra, the previous gentleman was talking about, creates some form of adverse conditions, which is not currently visible. So as we get into the next year, we think that the current trend lines where the recoveries are greater than the new NPA slippages will continue over the next 12 months.

Okay. That helps a lot, sir. And sir, just wanted to understand like in terms of competition majorly like maybe in the Retail segment and Gold loan, like a lot of players want to get into that and are trying to aggressively grow out there. So how do we see that? Like is there -- like what's the -- is there some kind of undercutting happening? Or is there enough pie in the market for everyone? Just if you could help me understand the competition intensity in Retail and especially Retail Gold, sir?

I think we've -- what we've done during the year is we've broadened our product [indiscernible]. We've increased the types of offerings that we have. We've taken advantage of the new RBI regulation that allows us to do loans for productive purposes where the LTV caps can be relaxed a little bit. So we built on new systems, new processes, et cetera, which has enabled us to compete more effectively in the marketplace. We are now launching ULI-based [ ACC ] agro -- agri in Tamil Nadu, Utta Pradesh, Telangana and Karnataka. We're starting with Tamil Nadu and then we'll roll it across to other regions as well. So we've increased the product types that we have, which is enabling us to sort of compete more efficiently. When it comes to price competition, there is price competition. But this is a product that is, in some senses, a relationship product and it's also a trust product. So people come to a bank that they've trusted because they're leading their goals there, they like to know that when they come back, it will still be available. And since we operate a great deal in semi-urban and rural areas, trust requirements... [Technical Difficulty]

Ladies and gentlemen, the line for management has been disconnected. [Operator Instructions] Ladies and gentlemen, thank you for being on hold. The management has been reconnected. Thank you, and over to you, sir.

Thank you. I tried answering the earlier question. I don't know whether I answered it fully because I kept talking and I didn't know whether I was disconnected. So maybe you could tell me where I...

We heard till I think the trust of the customer is there. So that's why Gold loan, there is no -- that's our USP. I think till that we've heard, sir.

Okay. So I think trust is an important element. And the fact that we've been around in those geographies for a long time, which is a part of trust, I guess, is also an important element. And plus processes, if you've got the processes down pat, then it helps. We write approximately 3,000 to 4,000 Gold loans a day. So when you are doing those volumes, you need to do them relatively efficiently. And I think those are areas where we've spent some time and energy sort of getting things right. So pricing competition is there. I'm not saying it is not there, but it's not insurmountable.

Fair enough, sir. That's helped me, sir. Can you hear me, sir?

Yes, I can hear you loud and clear.

Yes, yes. Fair enough, sir. So that covers a lot of my questions. Sir, just one more thing. Like in terms of partnerships, like are we looking at -- like when we said we are trying to grow mostly from our own branches. So are we looking at some other way of partnership or even like in the credit card segment, a lot of people are coming with co-branded credit cards. So are we looking at some other ways to penetrate in these other categories with the help of partnerships, sir?

So we have an active strategic alliances department, which works on building relationships between us and other counterparties. In Page 27 of our deck, you will see a list of counterparties that we work with currently. So we have -- we are taking advantage of RBI's co-origination guidelines, and we do have an active partnership program. Our current balances on these partnerships is approximately INR 1,900 crores or thereabouts ex credit cards.

The next question is from the line of Suraj Das from Sundaram Mutual Fund.

Am I audible?

Yes, you are.

Sir, a couple of questions. First, on the MSME portfolio, I think the MSME portfolio has seen revival and has started to grow for the past couple of quarters. And I think this is despite you classifying mortgage loan given to MSME under retail. So just wanted to check if you can highlight, let us say, what are the sectors or product or what are the geographies which is driving this growth? And also, I mean what is your outlook on this growth going ahead? That is question one, sir.