buy Andhra Bank -Results ahead of expectations: Emkay

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Andhra Bank

Results ahead of expectations

BUY

CMP: Rs 137                                        Target Price: Rs 165

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n     Andhra Bank’s net profit at Rs3.3bn (up 20% yoy) ahead of expectation with net profit at Rs3.3bn led by better than expected NII at Rs8.4bn, up 44% yoy

n     The balance sheet growth remained healthy with advances growing by 27.7% yoy to Rs656bn driven by healthy growth across the segments

n     The credit cost increased to 0.23% of advances from 0.16% in Q2FY11 as slippage rate continue to remain higher at 0.3% (1.2% annualised)

n     Short maturity of deposits (1.1 years), rising slippages are overhang on the stock. Revise our TP to Rs165 (valuing at 1.3X FY12E and 6% lower ABV). Valuations still attractive at 1.3x/1.0x FY11E/12E ABV

NII growth ahead of estimates… The NII grew by 44.2%yoy to Rs8.4bn ahead of our expectation. The growth in NII was driven by 7.5%qoq growth in advances and 8bps qoq expansion in NIM’s to 3.6%. Short maturity of deposits can put pressure on NIMs Andhra Bank’s deposits maturity is very short at just 1.1 years (FY10) with very low CASA. We believe that in rising interest rate scenario, the margins can take severe beating. The rise in cost of funds for ANDB was the highest amongst the banks at 28bps qoq. We are building ~23bps contraction in NIMs for FY12E in NIMs. The contraction in NIMs will be partially mitigated by lower requirement for NPA provisions and improvement in cost structure. Balance sheet growth remains healthy and broad based The balance sheet growth remained healthy with advances growing by 27.7% yoy to Rs656bn driven by healthy growth across the segments. CASA share declines as the bank raised term deposits aggressively The banks CASA share declined by 185bps to 28.5% as the bank grew term deposits aggressively by 7.2%qoq to fund strong advances growth. Moreover 14.7%qoq decline in current deposits added to the decline. Non-trading other income growth muted The non-trading other income was muted for Q3FY11 as the growth was just at 6.7% yoy. With negligible trading gains, the overall other income declined by 11.4% qoq. Makes ad hoc provision for pension and gratuity Pending crystallization of 2nd pension liability and gratuity, the bank has made an ad hoc provision of Rs1.58bn in 9MFY11 (Rs525mn in 3QFY11). However the as per bank estimates the total liability works out to around Rs5.7bn (Rs4.4bn for pension + 1.3bn for Gratuity). Accelerated provisioning to provide for higher slippages The bank did accelerated provisioning during the quarter to provide for higher slippages. The credit cost increased to 0.23% of advances from 0.16% in preceding quarter as the slippage rate continue to remain higher at 0.3% for the quarter (1.2% annualised). The slippage rate has been in the range of 0.5%-0.7% over FY08-FY10. Asset quality deteriorates; Slippages rise The bank asset quality deteriorated during the quarter as GNPA increased by 13%qoq, however as the bank provided aggressively, the net NPA‘s went up by just 2.9%qoq, resulting in 355bps improvement in provision coverage ratio. Including technical write off the provision cover stood healthy at 80.4%. Valuations and view We believe that short maturity of deposits (1.1 years) and rising slippages will act as overhang on the stock. The rise in the cost of funds at 28bps qoq was highest amongst peer banks. We are revising our TP on the stock downwards to Rs165 (valuing at 1.3x FY12E and 6% lower ABV). But valuations are still attractive at 1.3x/1.0x FY11E/12E ABV and the stock also offers dividend yield of 4.4%. We maintain our BUY recommendation on the stock.