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

Ladies and gentlemen, good day, and welcome to South Indian Bank Q1 FY '27 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Aman from ICICI Securities. Thank you, and over to you, Mr Aman.

Thank you, Ranju. Good afternoon, everyone, and thanks for joining the call. On behalf of ICICI Securities, we welcome you all to Q1 FY '27 Post Earnings Conference Call of South Indian Bank. From management side, we have with us Mr. P. R. Seshadri, Managing Director and CEO; Mr. Dolphy Jose, Executive Director; Mr. Anto George, EVP and Chief Operating Officer; Mr. Vinod Francis, SGM and Chief Financial Officer; and Mr. Jimmy Mathew, SGM and Company Secretary, along with other senior executives of the bank. I'll now hand over the conference to management for their opening remarks, post which we can start with the Q&A session. Thank you, and over to you, sir.

Thank you very much, Aman. Good evening to everybody on the call. Thank you very much for joining us for the South Indian Bank Limited Q1 FY '27 Earnings Call. My colleagues, as Aman had mentioned, are with me in the room, and we look forward to our conversation today. Let me preface the conversation that we are going to have subsequently with some of the key highlights from our financial performance for the quarter. The bank declared net profit of INR 378 crores for quarter 1 FY '26-'27, registering a growth of 17% compared to INR 322 crores in the-- in Q1 FY '25-'26. Total deposits grew by 11% to INR 125,817 crores from INR 112,922 crores on a Y-o-Y basis. Retail deposits, which includes -- which excludes, sorry, bulk deposits, grew by 14%. That is to say that whilst total deposits grew by 11%, retail deposits grew by 14% to INR 124,306 crores from INR 109,368 crores. Gross Advances grew by 17% to INR 104,368 crores from INR 89,198 crores. During the last financial year, we had a technical write-off of INR 1,163 crores. And if we were to exclude the impact of this, then the Y-o-Y growth is actually 18%. Total business of the Bank grew by 14% to INR 230,185 crores. Net interest margin for the quarter was 3.23%. With this, we have clawed back the dip in net interest margin that occurred as a consequence of the repo rate cuts. The net interest margin for the quarter was up sequentially 28 basis points. And on a Y-o-Y basis, the NIM was up 20 basis points. The Bank was able to show a healthy growth in average advances during the period with a growth of 17%. Return on assets at 105 basis points and return on equity at 12.84%. Bank declared the highest ever net interest income in the quarter at INR 1,025 crores, which is a growth of 23% compared to INR 832 crores registered during Q1 FY '25, '26. It also represents a sequential growth of INR 110 crores between Q4 and Q1. Capital adequacy ratio for the bank was at 19.62% and the Tier 1 ratio stands at 18.93% as on June 30, 2026. CASA grew by 15% year-on-year to INR 41,496 crores versus the earlier year period amount of INR 36,204 crores. Provision coverage ratio, including write-off, improved by 569 basis points to reach 54.91% and PCR, excluding write-off, improved to 81.40% during the year. Overall, gross NPA reduced by 177 basis points from 3.15% to 1.38% on a Y-o-Y basis. Net NPA reduced by 42 basis points from 68 basis points to 26 basis points, again on a Y-o-Y basis. Slippage ratio for the quarter was at 12 basis points, which when annualized comes to 48 basis points. The credit cost for the bank for this quarter was 9 basis points. I'd like to now take you through some other operational and financial performance indicators of the bank. Our focus on MSME loans continues. On a Y-o-Y basis, our business loans improved from INR 14,391 crores -- sorry, improved to INR 14,391 crores from INR 12,660 crores. This number includes a INR 554 crores charge-off. If you were to exclude the impact of this, that amounts to a growth of 18% on a Y-o-Y basis. The gold loan business grew by 43% and now stands at INR 24,930 crores with an average LTV of 65.25% and an average ticket size of INR 2.94 lakhs. Mortgage loans, home loans and auto loans are other areas of focus. On a Y-o-Y basis, we were able to achieve 34% growth in mortgage loans, 19% growth in home loans and 34% growth in auto loans. And these numbers exclude the impact of IBPC/DA or other bulk transactions that we may have entered into. We will continue to maintain the momentum in disbursements and collections in the coming quarters, and we aim to achieve the desired targets that we've set out for ourselves. As many of you know, this is the last conference call that I will be attending in my current capacity as the Managing Director and CEO of South Indian Bank. So before I conclude and open the floor for questions, I'd like to thank all the folks on this call for working together with us as we've built the franchise for South Indian Bank over the last 2 years and 9 months. During this period, we have made a very significant process -- I mean, very significant progress in terms of new products, changes to existing products, new systems so that we are able to do business better with our counterparties, significant improvements to our processes, changes to our organizational structure, significant enhancement in our capabilities that enable us to compete better. And all of this was possible because, a, I was given this opportunity to be part of this organization for which I thank the Board and the others who are responsible for it. And I'd also like to thank all my colleagues within South Indian Bank who have afforded me the trust and collaborated with me in making possible whatever progress that we've had over the last 2 years and 9 months. I'd also like to thank all of you on this call for your forbearance, for your advice, for your help in transitioning South Indian Bank from where it was to where it is today. So with that, I'd like to open the floor for questions. Thank you very much once again.

[Operator Instructions] The first question comes from the line of Akshat Agrawal with Nirmal Bang Institutional Equities.

Sir, if you can provide some color on what drove such a sharp decline in cost of deposits? Have we absorbed all residual deposit repricing or is some left? And how much contribution was from the very strong growth in CASA during this quarter?And Sir, similarly on the asset side, what drove the better yield on advances? Was it better shift -- was it a shift towards the better yielding retail MSME and Mid-Corp or was there something else? And overall, sir, what's the outlook for the margin going forward? That was my first question, sir.

Thank you, Akshat. I think basically, we've been working on our cost deposit a while and a substantial chunk of our liability base -- sorry, we are getting some kind of background noise.

Yes, it's been managed. Please go ahead.

Okay. So there was -- the -- as you are all aware, the interest rate cycle changed when RBI started cutting repo rates. At which point in time, we started marking down our deposit rates as well. And during the period from the first quarter and the second quarter of this year, so I'm saying from January of this year to June of this year, a very substantial portion of our high rate deposits actually rolled off and repriced downwards by anywhere between 40 to 60 basis points. And that in large measure is what is reflected in the significant reduction in our cost of funding. There's also a very significant impact that is coming from the increased CASA balances that we have. The good news is that our average CASA balances grew 119% -- I'm sorry, grew 19% -- so they went from 100% to 119%. And that, in turn, has helped manage our cost of funding. And the final element that helped us manage our cost was the fact that our -- the bulk deposits rolled off. So we basically dropped bulk deposits by 50% from where they were a year ago. And if you're overfunded, then you end up having -- paying x on the deposit and then receiving Y when you place the money overnight with Reserve Bank of India. So the arbitrage losses that we were suffering was reduced very considerably. So there was a lot of active management on the funding side that enabled us to do all of this. But the principal reason is the fact that the higher cost deposits rolled off. Now your question was, will it continue going forward? I suspect that a substantial portion of the repricing impact is already baked in. Going forward, there may be this kind of sharp reduction is quite unlikely. And the second part of your question was how did we get the 5 basis points increase in our asset yields or asset -- that was largely driven by a shift in mix. And we were also helped by the fact that our corporate, a portion of our corporate book is linked to T-bills and T-bills moved up very sharply during this period. So there was a mixture of various things that happened, change in mix, us being on the right side of the rate cycle movement, all of that helped to get the yield on assets up. So I hope this answers your question. If there is NIM, you want a guidance?

Right. Yes.

So with respect to NIM guidance, what I would like to say is that when the rates were going down, we were perhaps the most impacted bank because we give effect to a repo rate change on a T+1 basis. So if rates go down, we are the most impacted. And the logic for us to adopt that was, a, it's in line with RBI's policy of rate transmission and so on and so forth. But equally importantly, if you are the first one to be impacted, you're also likely to be the first one to take action to counter the impact of the change. And so now we are in a position where our belief is the rate cycle has switched. So it's more likely to increase then to reduce. And if that belief is right, then our view is that the NIMs from here should harden as the repo rate changes come into effect. So while I cannot give a guidance on the number, all I can say is that we are reasonably well positioned with respect to NIM. And we do expect that the outcomes for us during the year will be positive.

My second question is on OpEx. The bank has resumed employee hiring and branch expansion this quarter. So do you expect further hiring and branch addition for the rest of the year? And how should we think about the cost going forward?

It's a very good question. We are in a very small way restarting branch rollout. Essentially because we had frozen almost everything for the last 3 years. So in fact, we had reduced our branch count by a little bit, and we are now coming back to where we were. The branch rollout this time is going to be in very key locations for us. We think that we are going to make better choices in terms of where to put the branches and our whole process of managing the branch rollout in such a fashion that we get outcomes that we want, which is revenues to come reasonably quickly after the expenses crystallize is something that we are working on. So the idea is to be very, very careful as to where we put the branches and how we get them to actually be accretive to ourselves. So at this point in time, there is no significant change in our process. We think that we should be able to manage our costs quite tightly going forward. As an institution, we are aiming to get operating leverage, positive operating leverage. So the last 2 years, we've demonstrated positive operating leverage. This quarter, we do not have it. But for the full year, our aim is to get full positive operating leverage. And I think the traction that we have on NIMs, the traction that we have on business lines in general gives us some confidence that whilst the costs will increase a little bit, our total revenues will increase more and consequently, pre-provisioning operating profit should actually increase. I'm going to request our CFO, Vinod Francis, to give you further details if you so desire.

I concur to the points what MD Seshadri sir has mentioned. So the -- My end, we are not expecting that any significant increase in the OpEx that to come in the current year to materially alter the P&L structure. We should be within the range of, say, maybe 5%-6% in that range.

My last question, sir. It has been a little bit soft declining Q-o-Q. And other income, which includes the bancassurance and recoveries were on a lower side. So what would be the outlook for the rest of year? Can we expect fee recovery this year? Or will it -- is it more of like FY20 agenda? And within others, how did banca trended versus the recovery, sir?

What was the last question versus recovery? I'm sorry, I couldn't hear you.

Yes. So there's an other part of the noninterest income where we put bancassurance as well as the recovery income. So I wanted to understand what's like how both are trending, as in, is bancassurance income increasing and recoveries coming down, something like that happening over there?

So to answer your question, a, firstly, we think that there is a one-off. We were very busy working on our NIMs, and we were not laser-focused on fees. So we will start our -- renew our focus on this element. And we do not see this as a trend. I think we should be able to address this going forward. We are also working on a series of new systems, which will enable us to participate in other products more effectively. So our trade and FX platform, we are hoping will go live by end of September with all capabilities. So it will enable our customers to do everything electronically with us, FX bookings, LCs, guarantees, the ability to send money overseas, receive money from overseas or everything being done electronically, settling the export bills, import bills, all of that. So currently, we -- on the FX side, we have limited revenues, but you can see from our presentation that our revenues, whilst they are limited, have been growing at 40%, 50% year-on-year. So with these new systems coming in place, business volumes will grow and revenues will also grow. So with respect to fees, my own view is that it's a one-timer. We shouldn't read this as something that is going to last forever. It is something that we can work out of. It is perhaps because we were focused on other elements, and we did not focus on this as much as we should have. The second question was how much was -- the first quarter of any financial year is traditionally a softer year, softer quarter when it comes to recoveries. So our recoveries for the quarter were around -- was approximately INR 170 crores, INR 179 crores in reality. And our slippages were INR 120-odd crores, INR 128 crores. So the difference between slippage and recoveries was lower than normal and a small proportion of that comes in as revenue into the revenue line, which would have been significantly lower than the numbers that we've had historically. But to give you the exact number, I'll request Vinod Francis to walk you through the numbers.

With regard to the recovery side, if you see, we had the recovery from technical write-off accounts was [INR 16 crores] and that remains with the last quarter, that is March quarter. So -- but on the other side, the contribution of the recovery towards the interest income is slightly lower and because of the total recoveries are slighly lower when compared with the March quarter because this quarter, we had a total recovery of INR 179 crores.

Next question comes from the line of Prashant Kumar with Sunidhi Securities & Finance.

First of all congratulations sir, on a remarkable tenure of South Indian Bank. And under your leadership, the bank has delivered a significant turnaround and we wish you all the very best for your future endeavor. My first question is on corporate credit, I mean, asset side and corporate credit has grown at a healthy pace over the past few quarters. And with the corporate portfolio now accounting for around 40% of total loan book, but our strategic objective was to reducing around 30%. So has the bank consciously recalibrated its portfolio mix? Or do you still intend to gradually bring down the book to around 30% over the medium term?

So I think it's a very good question. Our aim in the long run is to bring corporate down. But under the current circumstances, given the disturbances in West Asia and so on and so forth, our belief is that high-quality corporates offer lower risk than some of the other segments we operate in. And the other thing that has happened was pricing on corporates had improved very dramatically during the last quarter, especially for the shorter duration facilities. So we took advantage of that because we already had credit lines on many large corporates. And given the fact that we had liquidity, we chose to deploy it with the corporates because the view was that in an environment which is uncertain, deploying money which is marginally accretive with low-risk counterparties was better than trying to grow high-risk assets. And that's why corporate grew last quarter. The environment hasn't changed very dramatically. The uncertainty associated with the Persian Gulf continues. So our view now is that we will continue to look for opportunities on the corporate side. As long as they are remunerative, we will engage with them. But long run, those balances will be wound down. Please remember that these are all very short duration assets, and we have the ability to wind them down practically at will. I mean it's not really at will, but they are short duration, so they roll off very quickly. And therefore, this is a onetime adjustment, which has occurred on account of environmental conditions and also given the strengths that we have on the corporate side. I mean if we did not have lines on these same counterparties, we would not have been able to grow this. But given the fact that we had them and we had the liquidity and we were a little wary about credit risk that is likely to hit us in the future, we took this opportunity. I trust I answered your question.

Next question comes from the line of Suraj Das with Sundaram Mutual Funds.

I have 3 questions. But before that, sir, one clarification...

Mr. Das, sorry for interrupting. We cannot hear you. Can you speak a little louder?

Is it better now?

No. Can you speak a little more louder?

Is it better now?

Yes.

I have 3 questions, but one clarification on this fee income that you were mentioning, there was some one-off. But if I look at your core fee income line item, which is INR 179 crores this quarter, if I look at this trend in terms of, let say, ROA contribution, the contribution seems to be coming down only, let's say, from 60 basis points to now 50 basis points for last 2, 3 quarters consistently. So if you can highlight what are the factors behind this weakness? I mean is this that the new products that you are doing, you were more focused on, let's say, margin or yield rather than the fee component. So the new products that you are doing are of lesser fee component. Is that the plan? So that is question one. Question two sir, in terms of employee cost, I think there was some one-off in the last quarter in terms of actuarial thing of INR 80 crores. It looks like that this quarter, this has reversed fully while the G-SEC movement has been half of only the movement in 4Q. So can you clarify that thing? The last 2 questions are, one on the credit cost. So right now, I think on a run rate basis, you were 30, 35 basis points. After ECL, do you think this could be the run rate or it can go up because eventually there is a higher requirement on the SMA-1 plus -2. And sir, the last question is on FCNR(B) deposit growth. So this quarter it has been good, I think 6% Q-o-Q growth. Question is, sir, do you still think this kind of growth post June as well? Because I think there are a lot of noises in terms of this leveraging talks within RBI and within central banks so and so forth. So are you seeing that the growth remains good or it has come down or if you can give some color? And also what is the landed cost of these deposits?

Okay. Those are a lot of questions. So let me answer the first one first, your question on fees. We basically multiple lines. One line, which is treasury and ForEx has been very, very muted for us, as you can see. So it was very good in Q1 FY '26, but now it is -- Q4 FY '26, it was actually 0. Now we've recovered a little bit. We have INR 44 crores, but it is 80% below what it was in Q1. With respect to the core fee income, you are right in the sense that it has come off a little bit from INR 191 crores in Q4 down to INR 179 crores, and it's a little lower than Q1 of FY '26, which is INR 188 crores -- and there are some technical reasons for it. We seem to have changed some product setup on our system where when an account is renewed, the way we renew it and the way we charge the fee by way of an oversight or by way of a change in the process, it helped -- unfortunately resulted in lower fees being charged for a particular product. So that difference between INR 191 crores and INR 179 crores can in large part be sort of attributed to that, which we will now fix going forward, and we should be able to change the mix. And the other area where we have a reduction is in terms of recoveries, a portion of which gets attributed to interest income because of the nature of the loan and where it is and the quantum of recoveries that we get. So as I told you, Q1 is lower than Q4 of last year, and it tends to improve as time goes along. And therefore, my view is that this lower noninterest income line is an aberration, which will get fixed as we move forward. So we are aware of it. We are addressing it. And our belief is that this is something that we will be able to fix as we go forward. The credit cost guidance, from a credit cost perspective, our cost was 9 basis points for the year -- for the quarter. Slippage was 12 basis points for the quarter. Slippage is INR 128 crores. We think that our slippage will be in the neighborhood of INR 500 crores to INR 750 crores, INR 800 crores will be the maximum slippage given the current trend lines that we can see, even assuming that there is some deterioration on account of the West Asia problem. And our recoveries will be in the neighborhood of INR 800 crores to INR 1,000 crores. So that's the current view that we have. Obviously, we'll try and restrict the slippage to the maximum possible. The exact credit cost that translates into our P&L is a factor of many -- is a function of many things that go into it. We think that the 9 basis points that we currently have is probably on a generous side. So hopefully, as we go forward, our credit costs will moderate from here, if anything. But I'll turn this over to our CFO for a more detailed answer.

Thank you. With regard to the other income, just to touch upon one more thing in addition to what MD was mentioning. So as you know, there is an element of one-off items if you compare with the last year.

Sorry for interrupting, speaker. Speaker, can you speak a little louder? Cannot hear you.

Am I audible now?

Yes.

Just to add a few points on the other income side, apart from what MD was mentioning. So it is with regard to the -- if you compare with the figures of Q1 of the last year, there are certain one-off items you can see over there. There is one which MD has already mentioned with regard to the treasury. Last year, Q1, we had a spectacular income from the treasury. And apart from that, there was the income what we earned from sale of PSLC was there. So that was amount close to around INR 60 crores. So current year, we were not having that kind of surplus to have that sale. So that is also one of the items which is not there as a one-off income in the current quarter. Then coming to the recovery side, from the recovery from the technical write-off accounts, we are almost flat compared to the last quarter. It's almost INR 57 crores current quarter and last quarter, it was INR 60 crores. So it remains almost flat even though total recoveries have reduced from Q4 to Q1. In Q1, the total recovery is INR 179 crores. But going forward, historically, if you see the recovery pattern, the Q1 seems to be a little bit slower. And thereafter the more and more recoveries to come in the coming quarters. And hopefully, we should be able to close to around INR 1,000 crores for the year.

And sir, on the actuarial thing on the OpEx.

Yes. So the actuarial valuation as we mentioned last quarter, we had a write-back of around INR 80 crores. So this quarter, as you know that in the year beginning, we take the actuarial valuation as a projection for the current year. And based on that, we started providing as normal. So last year also, first quarter, if you see, we had a total actuarial contribution of around INR 80 crores. And this year also, we had made a contribution of INR 84 crores. So it is back to the normal.

Okay. And sir, last on the FCNR, I think is the growthgood after June?

The growth has been robust, and we are participating actively on the FCNR scheme. We have -- internally, our view is that as long as the price matches the price of liquidity within the country in Indian rupee terms, we will price it at that level. So we are offering very attractive rates to our customers, and we are seeing flows. We believe that a vast amount of these flows will come in August and September because the offer is open until September 30. So we are working with our rep office in Dubai. The Dubai rep office, what it can do and what it cannot do has been an area of some focus with the Central Bank of the UAE, and we are engaging with all our -- with them to ensure that we operate to the maximum extent possible and permissible under the law. And one area where we do have a concern is that we do not have credit lines from external entities nor do we have an entity in GIFT City. So consequently, offering leverage for us is not possible. And therefore, by definition, the customers who at this point in time are placing deposits with us are those who are placing unlevered deposits. While we are working with foreign banks to get ourselves lines, but those have been -- those have not materialized as of this moment. So if they do happen, then we will -- our volumes will materially change. But right now, the pace of growth is good, and we are quite confident that we will get reasonable numbers.

Next question comes from the line of Parth Gupta with 360 One Capital.

Sir, I see security receipts have gone down on a Q-o-Q basis, and we would have recorded some income on the same. So what was the quantum?

I'll request our CFO to answer that question. Security receipts, we got some INR 40-odd crores of cash.

Yes. So security receipts in the beginning of the year, we had a balance of INR 119 crores and we closed the quarter with a balance of INR 72 crores. So there was a recovery of close to INR 47 crores.

Yes, right, sir. But then we would have recognized it some portion of it in the P&L as well?

No, we don't have anything upside on that with the P&L side. It's only the recovery of principal.