In 1QFY08, Syndicate Bank's net profit grew by 22% to Rs2.2 bn compared to our expectation of Rs2.3 bn due healthy growth in non-interest income and lesser provisions. The bank's single digit growth in net interest income (NII) was much lower than our expectation and was due sharp jump in interest expenses; NII grew by 8% to Rs5.5 bn compared to our estimation of Rs6.0 bn. the bank reported strong performance on fee-based income and slight improvement in asset quality. We rate the stock as a BUY with a target price of Rs108.

Strong growth in business:

The bank's total business grew by 26% to Rs1325 bn on the back of 26% growth in deposits and 25% growth in credits. During the period, low cost deposits (LCDs) and term deposits grew by 29% and 26% resulting into increase in CASA's share to 32.3% from 31.9% in 1QFY07. Advances growth came from priority, agriculture sectors. In 1QFY08, deposits and advances grew by 2.8% and 1.8% respectively.

Growth in non-interest income:

The bank non-interest income grew 14% to Rs1.5 bn on the back of 15.5% growth in fee-based income and 58% jump in treasury income to Rs380 mn.

Increase in operating expenses:

Total operating expenses grew by 14% to Rs3.8 bn, higher than expected growth in operating expenses was due to higher depreciation on CBS network. The bank's cost-income ratio increased from 53% in 1QFY07 to 55% in 1QFY08.

Marginal improvement in asset quality:

In the quarter, gross non-performing assets drifted down by 0.5% to Rs15.8 bn and net NPA grew by 20% to Rs4.1 bn. On percentage basis, GNPA and NNPA both improved to 3.06% and 0.82% respectively. We rate the stock as a BUY with a target price of Rs108.