Andhra Bank - Slippages rise; NIMs expand :: Kotak Sec

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Andhra Bank (ANDB)
Banks/Financial Institutions
Slippages rise; NIMs expand. Andhra Bank reported a healthy core earnings growth
with margins improving 77 bps yoy (19 bps qoq) to 3.9%. However, results did
disappoint on asset quality with slippages at 1.7% for the quarter. We see the current
slippages as a means to strengthen balance sheet rather than any emerging structural
issue. We maintain BUY rating with TP of `210 but expect near-term trends to be
driven by likely issues of pension provisions and asset quality outlook.


Slippages higher at 1.7% resulting in sharp increase in gross NPLs
Andhra Bank’s gross NPLs almost doubled yoy and 33% qoq to `7.7 bn as of September 2010.
Slippages for the quarter were at 1.7%, one of the highest in recent quarters. Net NPL increased
76% qoq to `3 bn (0.5% of loans). The management highlighted slippages were relatively broadbased
with no large account slipping during the quarter. However, we see this more as an attempt
to improve balance sheet strength, with focus on recoveries in the coming few quarters. Provision
coverage declined to 61% (inc. write off at 79%) from 71% in June 2010. Sharp increase in
slippages resulted in loan loss provisions to increase to 70 bps for the quarter. We currently model
loan loss provisions at 70 bps in FY2011E to factor credit risk, especially given the higher exposure
to SMEs. Outstanding restructured book has declined to `22 bn from the peak of `31 bn with
recoveries of `7 bn and slippages of `2.4 bn (7.6% of peak restructured loan book).
Loan book growth gains pace; focus on SMEs continues
Andhra Bank’s loan book as of September 2010 was `605 bn (up 26% yoy). Compared to
1QFY11, which saw a muted sequential loan growth of 1%, 2QFY11 was impressive at 6% qoq.
SME loans grew by 35% yoy (6% qoq), retail loans grew by 29% yoy (up 5% qoq) while
agriculture loans grew by 24% yoy (10% qoq). Share of SME loans has increased to 15% of loans
in September 2010 from 14% of loans in September 2009. The focus on retail and SME has
enabled them to increase lending yields helping the bank improve margins for the quarter.

Margins impressive at 3.9%; improve 19 bps qoq
NIMs for the bank continued to impress with a qoq improvement of 19 bps to 3.9%. Net interest
income grew by 52% yoy to `7.8 bn. However, the bulk of the improvement in margins has come
from improvement in investment yields. Cost of deposits increased by 18 bps qoq to 5.7% while
lending yields increased by 9 bps qoq. CD ratio for the quarter was maintained at 77%. CASA
ratio improved for the quarter by 100 bps to 30%. We see margins declining from current levels as
higher cost of funds starts reflecting in NIMs. We factor margins to decline by 20 bps to 2.9% (KS
calculated).