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Asset quality a disappointment
GNPAs in absolute terms increased by 33% QoQ to Rs7.7b and in percentage terms
GNPA and NNPA increased to 1.28% and 0.49% v/s 1% and 0.3% in 1QFY11, respectively.
Slippages in 2QFY11 were ~Rs2.5b and Rs4b in 1HFY11. The management is guiding for
lower slippages in 2HFY11 and expects recoveries to be strong. We model in slippages of
1.75% for FY11 and credit cost of 60bp (stable YoY).
Despite higher provisions of Rs957m v/s Rs170m in 1QFY11 and Rs428m in 2QFY10,
PCR (excluding technical write-offs) declined to 62% v/s 71% in 1QFY11. However
PCR including technical write-off is healthy at 79%. Outstanding restructured loans were
Rs24.8b (4% of the loan book, in line with the industry average), of which ~9.5% (Rs2.2b)
has slipped into NPA.
Loan growth was strong at 27% YoY and 7% QoQ led by strong disbursement in the
agriculture and SME segments. CD ratio increased to 77.6% in 2QFY11 from 76.5% in
1QFY11. Deposits grew 26% YoY and 5% QoQ to Rs786b. CASA deposits (up 19% YoY
and up 8% QoQ) outpaced overall deposits growth led by 20% and 5% QoQ growth in
current and savings deposits, respectively. As a result CASA mix improved 82bp QoQ to
30.4%.
Margin expansion continues, expected to moderate
NII grew by 52% YoY and 6% QoQ (on a higher base) led by improvement in margins
and strong loan growth. Despite pressure from CoD (up 18bp QoQ) expansion in NIM by
19bp, QoQ was a positive surprise. Higher CD ratio and improvement in yield on loans
and investment led to margin expansion. Going ahead the management expects moderation
in NIM due to the rising cost of deposits but expects NIM to be 3.5%+.
Fee income growth moderates on a higher base; staff expenses up YoY
Core fee income (ex-treasury, forex and recovery) grew 6% QoQ and 18% YoY but
lower treasury profit led to 8% QoQ and 18% YoY decline in other income. Trading gains
in 2QFY11 declined sharply to Rs180m v/s Rs480m in 1QFY11 and Rs950m in 2QFY10.
Income from recovery was muted at Rs110m. Income from forex stood at Rs240m v/s
Rs100m in 2QFY10.
Employee cost increased 52% YoY but declined by 9% QoQ (on a higher base) to Rs2.6b.
The bank provided ~Rs520m towards (1) the second pension option (Rs175m), and (2)
gratuity related liability (~Rs350m), stable QoQ. The management indicated pension related
liability to be ~Rs4.4b to be amortized over 3-5 years (Rs350m provided until 1HFY11)
and Rs1.4b towards gratuity to be provided in FY11 (Rs700m provided until 1HFY11).
Valuation and view
We expect Andhra Bank to report EPS of Rs27 in FY11 and Rs32 in FY12. BV will be
Rs112 and Rs137 in FY11 and FY12 respectively. We expect RoE of 25%+ and RoA of
1.3% in FY11 and FY12. Valuations are attractive at 5.7x FY12E EPS and 1.3x FY12E
BV. Maintain Buy with a target price of Rs205 (1.5x FY12E BV), an upside of 14%.
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