Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Andhra Bank (ADBK.BO)
Downgrade to Sell: Asset Quality, Funding Key Concerns
Downgrade to Sell; 3Q11 largely in-line but asset quality is a concern — We
are downgrading Andhra to a Sell (from Buy). While the 3Q11 results were
marginally (3%) below estimates, its asset quality surprised negatively and
coupled with a deteriorating funding mix (CASA down ~200bps qoq) – suggests
there could be more pain going forward, especially on NIMs and credit costs.
Revising target price to Rs135 — We reduce our EVA-based target price to
Rs135, factoring in 3-11% higher earnings but offset by slightly higher operating
costs. We also lower our benchmark valuation multiple to 1.1x 1Yr Fwd P/BV (1.2x
earlier) and roll forward to Mar’12. While the stock has already corrected
significantly (down 25% from peak), we believe the stock is likely to remain weak
near term and should trade at a discount to larger PSU bank peers with stronger
deposit franchises and better asset quality outlook.
P&L: Margins hold but … is that enough? — Andhra’s NIMs at 391bps were
stable QoQ and ahead of our estimates; however, we believe rising costs are
building up NIM pressure and management also guides to a possible 20bps dip in
4Q11. The rest of the income statement was, however, relatively weak – a) fee
income was up only 7% yoy, well below asset growth; b) operating expenses were
up 29% yoy due to higher employee benefits (should stabilize at current levels);
and c) credit costs also increased to 1.2% (0.9% last quarter) and management
guidance suggests will likely stay at current levels near term.
Balance sheet: Asset quality and funding mix key concerns — Andhra’s loan
off-take was strong and management guides to a likely 25% FY11 growth.
However, it comes with a deteriorating funding mix (28.5% now) and weakened
asset quality performance. Incremental slippages for 9M11 were high at 1.4%
annualized, coverage levels dipped (80% now from 91% a year ago) and
recoveries remain sluggish. Its greater concentration in Andhra is also likely to
raise asset quality vulnerability and will remain a stock overhang.
Andhra Bank currently lies in the Attractive quadrant of our Value-Momentum
map with strong value and momentum scores, having been a resident there
since the past 12 months. Compared to its peers in the Banks sector, Andhra
Bank fares better on the valuation metric and on the momentum metric.
Similarly, compared to its peers in its home market of India, Andhra Bank fares
better on the valuation metric and on the momentum metric.
From a macro perspective, Andhra Bank is likely to benefit from Small cap
outperformance, falling Commodity (ex-oil) prices, falling EM yields, and a
weaker US Dollar.
Andhra Bank
Valuation
Our target price of Rs135 is based on CIRA's EVA model, which captures longterm
business value, and is a standard valuation measure for our India Banking
coverage. We factor in a risk-free rate of 8.0% and also slightly higher-thanindustry
average longer-term margins (220bps) and capital ratio (6%). We
benchmark our target price on a 1.1x 1-year-forward P/BV multiple, a 20-30%
discount to larger well-run PSU banks with a pan-India franchise (PNB, Union).
This translates to a fair value of Rs146 per share. We believe this discount is
warranted - despite Andhra's above-sector average RoEs/margins and lower
gross/net NPLs - to factor in possible risks of its relatively small balance sheet
size and regional concentration. We use EVA as our primary valuation measure
as we believe it better adjusts for the relatively dynamic cost of capital, and
better captures the long-term value of the business.
Risks
We rate Andhra Bank shares Medium Risk, even as our quantitative risk-rating
system, which tracks 260-day historical share-price volatility suggests Low
Risk. We believe Andhra’s relatively small size, regional concentration and
moderate funding franchise raise its risk profile. Key upside risks that could
prevent the stock from achieving our target price include: 1) Easing off in asset
quality pressures - Andhra does carry some mid-market, geographic
concentration and specific industry risk; 2) Easier liquidity and stable interest
rates; and 3) Improvement in the bank's funding mix.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Andhra Bank (ADBK.BO)
Downgrade to Sell: Asset Quality, Funding Key Concerns
Downgrade to Sell; 3Q11 largely in-line but asset quality is a concern — We
are downgrading Andhra to a Sell (from Buy). While the 3Q11 results were
marginally (3%) below estimates, its asset quality surprised negatively and
coupled with a deteriorating funding mix (CASA down ~200bps qoq) – suggests
there could be more pain going forward, especially on NIMs and credit costs.
Revising target price to Rs135 — We reduce our EVA-based target price to
Rs135, factoring in 3-11% higher earnings but offset by slightly higher operating
costs. We also lower our benchmark valuation multiple to 1.1x 1Yr Fwd P/BV (1.2x
earlier) and roll forward to Mar’12. While the stock has already corrected
significantly (down 25% from peak), we believe the stock is likely to remain weak
near term and should trade at a discount to larger PSU bank peers with stronger
deposit franchises and better asset quality outlook.
P&L: Margins hold but … is that enough? — Andhra’s NIMs at 391bps were
stable QoQ and ahead of our estimates; however, we believe rising costs are
building up NIM pressure and management also guides to a possible 20bps dip in
4Q11. The rest of the income statement was, however, relatively weak – a) fee
income was up only 7% yoy, well below asset growth; b) operating expenses were
up 29% yoy due to higher employee benefits (should stabilize at current levels);
and c) credit costs also increased to 1.2% (0.9% last quarter) and management
guidance suggests will likely stay at current levels near term.
Balance sheet: Asset quality and funding mix key concerns — Andhra’s loan
off-take was strong and management guides to a likely 25% FY11 growth.
However, it comes with a deteriorating funding mix (28.5% now) and weakened
asset quality performance. Incremental slippages for 9M11 were high at 1.4%
annualized, coverage levels dipped (80% now from 91% a year ago) and
recoveries remain sluggish. Its greater concentration in Andhra is also likely to
raise asset quality vulnerability and will remain a stock overhang.
Andhra Bank currently lies in the Attractive quadrant of our Value-Momentum
map with strong value and momentum scores, having been a resident there
since the past 12 months. Compared to its peers in the Banks sector, Andhra
Bank fares better on the valuation metric and on the momentum metric.
Similarly, compared to its peers in its home market of India, Andhra Bank fares
better on the valuation metric and on the momentum metric.
From a macro perspective, Andhra Bank is likely to benefit from Small cap
outperformance, falling Commodity (ex-oil) prices, falling EM yields, and a
weaker US Dollar.
Andhra Bank
Valuation
Our target price of Rs135 is based on CIRA's EVA model, which captures longterm
business value, and is a standard valuation measure for our India Banking
coverage. We factor in a risk-free rate of 8.0% and also slightly higher-thanindustry
average longer-term margins (220bps) and capital ratio (6%). We
benchmark our target price on a 1.1x 1-year-forward P/BV multiple, a 20-30%
discount to larger well-run PSU banks with a pan-India franchise (PNB, Union).
This translates to a fair value of Rs146 per share. We believe this discount is
warranted - despite Andhra's above-sector average RoEs/margins and lower
gross/net NPLs - to factor in possible risks of its relatively small balance sheet
size and regional concentration. We use EVA as our primary valuation measure
as we believe it better adjusts for the relatively dynamic cost of capital, and
better captures the long-term value of the business.
Risks
We rate Andhra Bank shares Medium Risk, even as our quantitative risk-rating
system, which tracks 260-day historical share-price volatility suggests Low
Risk. We believe Andhra’s relatively small size, regional concentration and
moderate funding franchise raise its risk profile. Key upside risks that could
prevent the stock from achieving our target price include: 1) Easing off in asset
quality pressures - Andhra does carry some mid-market, geographic
concentration and specific industry risk; 2) Easier liquidity and stable interest
rates; and 3) Improvement in the bank's funding mix.
No comments:
Post a Comment