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Andhra Bank (ANDB)
Banks/Financial Institutions
Balance sheet cleansing. Andhra Bank 2QFY12 saw gross NPLs rise 70% qoq as
system migration brought out slippages of 6% during the quarter, primarily from
agriculture, retail and marginally more from SME. The bank’s large corporate portfolio
continues to remain healthy. We reduce our estimates to factor higher provisions but
expect recoveries to improve (including coverage ratio) in the next few quarters. Healthy
NIMs are providing support to higher credit costs. Maintain BUY with a TP of `170
(from `190).
Strong earnings but slippages rise sharply while coverage ratio drops
Andhra Bank reported earnings growth of 4% yoy, well ahead of our estimates, to `3.2 bn on the
back of stable NIM and lower-than-expected growth in operating expenses. NII grew 21% yoy
while operating expenses grew 8% yoy. However, the bank reported a sharp increase in gross
NPLs, primarily from agriculture and retail, as the bank has completely moved to a more stringent
reporting platform while relatively lower provisions reduce coverage ratios to 60% levels (from
80% earlier). A higher share of the power sector (about 22% of loans) is the only medium-term
risk that we see in the bank as NPLs are currently low at a sector level despite clear headwinds
emerging from various areas. We lower our estimates for FY2012-14E by increasing our loan-loss
provisions, lower credit growth and fee income outlook. We maintain our BUY recommendation
on the stock and find valuations comfortable at 0.9X book and 5X FY2012E EPS for 18% RoEs.
Last phase of migration results in 6% slippages during the quarter
Andhra Bank reported 6% slippages in the current quarter resulting in gross NPLs rising 69% qoq
to `19.9 bn (2.6% of loans) as of September 2011. The current quarter covered all loans below
`2.5 mn. Since March 2011, agriculture NPLs has increased 5.6X to 6% of the portfolio; retail
NPLs has increased 2.3X to 5% of the portfolio while SME NPLs has increased 1.6X to 5% of the
portfolio. However, NPLs in others (primarily large corporate portfolio) declined 22%, indicating a
reasonably strong large corporate portfolio. Our discussions with the management indicate that
retail NPLs have risen sharply from some of its earlier restructured portfolio – which is worrying as
the bank does not appear to have monitored this portfolio as closely as expected.
A migration exercise is focusing the bank to look at the portfolio closely. We see recovery trends
improving with reductions in gross NPLs at about 1.5% (annualized) in the current quarter.
Aggressive recovery camps are being conducted and the management has shifted focus to NPL
recovery over growth. Net NPLs increased 222% qoq to `10.9 bn (1.5% of loans) as the coverage
ratio dropped to 45% from 71%. Including the technically written-off portfolio, the coverage ratio
has declined to 62% from 82% in June 2011. Loan loss provisions were at 1.3% in September
2011. The bank outstanding restructured loans are at 3.8% of loans
Loan growth slows to 22% yoy; weak growth in large corporate
Andhra Bank’s loan book as of September 2011 was `745 bn (up 22% yoy and 2% qoq
decline) on the back of weak growth in the large corporate segment. Large corporate
segment, which contributes to over 55% of loans grew by 25% yoy (3% qoq decline) while
SME grew 25% yoy (flat qoq). Agriculture loans grew by 10% yoy while retail loans grew
19% yoy. We are factoring loan growth at 15% CAGR for FY2011-13E; moderation from
current levels given the limited scope to expand (reaching internal limits) in segments like
infrastructure which has been their primary driver of growth in the past few years and the
focus of the bank towards improving asset quality.
NIMs stable qoq despite a steep rise in slippages; CASA ratio down 400 bps yoy
NIMs were stable qoq at 3.8% despite a challenging environment for banks on the back of
rising slippages that resulted in higher de-recognition of interest income. NII grew by 21%
yoy to `9.5 bn. Cost of deposits increased by 21 bps qoq to 7.2% while lending yields
improved 10 bps qoq to 12.3%. CD ratio for the quarter was at 79%. CASA ratio declined
to 26% from 30% in September 2010. With deposits clearly close to peak levels, there is
strong scope for NIM to remain (we factor moderate NIM compression going forward) at
current levels (especially with better recoveries and lower slippages resulting in higher
contribution to NII), unless the bank raises savings deposit rates very sharply.
Other highlights for the quarter
Non interest income declined 7% yoy to `1.8 bn mainly due to lower contribution from
forex income.
Overall capital adequacy is currently at 13.1% with tier-1 capital at 8.8%
Operating expenses grew 8% yoy as staff expenses increased 5% yoy. Cost-income ratio
was at 38%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Andhra Bank (ANDB)
Banks/Financial Institutions
Balance sheet cleansing. Andhra Bank 2QFY12 saw gross NPLs rise 70% qoq as
system migration brought out slippages of 6% during the quarter, primarily from
agriculture, retail and marginally more from SME. The bank’s large corporate portfolio
continues to remain healthy. We reduce our estimates to factor higher provisions but
expect recoveries to improve (including coverage ratio) in the next few quarters. Healthy
NIMs are providing support to higher credit costs. Maintain BUY with a TP of `170
(from `190).
Strong earnings but slippages rise sharply while coverage ratio drops
Andhra Bank reported earnings growth of 4% yoy, well ahead of our estimates, to `3.2 bn on the
back of stable NIM and lower-than-expected growth in operating expenses. NII grew 21% yoy
while operating expenses grew 8% yoy. However, the bank reported a sharp increase in gross
NPLs, primarily from agriculture and retail, as the bank has completely moved to a more stringent
reporting platform while relatively lower provisions reduce coverage ratios to 60% levels (from
80% earlier). A higher share of the power sector (about 22% of loans) is the only medium-term
risk that we see in the bank as NPLs are currently low at a sector level despite clear headwinds
emerging from various areas. We lower our estimates for FY2012-14E by increasing our loan-loss
provisions, lower credit growth and fee income outlook. We maintain our BUY recommendation
on the stock and find valuations comfortable at 0.9X book and 5X FY2012E EPS for 18% RoEs.
Last phase of migration results in 6% slippages during the quarter
Andhra Bank reported 6% slippages in the current quarter resulting in gross NPLs rising 69% qoq
to `19.9 bn (2.6% of loans) as of September 2011. The current quarter covered all loans below
`2.5 mn. Since March 2011, agriculture NPLs has increased 5.6X to 6% of the portfolio; retail
NPLs has increased 2.3X to 5% of the portfolio while SME NPLs has increased 1.6X to 5% of the
portfolio. However, NPLs in others (primarily large corporate portfolio) declined 22%, indicating a
reasonably strong large corporate portfolio. Our discussions with the management indicate that
retail NPLs have risen sharply from some of its earlier restructured portfolio – which is worrying as
the bank does not appear to have monitored this portfolio as closely as expected.
A migration exercise is focusing the bank to look at the portfolio closely. We see recovery trends
improving with reductions in gross NPLs at about 1.5% (annualized) in the current quarter.
Aggressive recovery camps are being conducted and the management has shifted focus to NPL
recovery over growth. Net NPLs increased 222% qoq to `10.9 bn (1.5% of loans) as the coverage
ratio dropped to 45% from 71%. Including the technically written-off portfolio, the coverage ratio
has declined to 62% from 82% in June 2011. Loan loss provisions were at 1.3% in September
2011. The bank outstanding restructured loans are at 3.8% of loans
Loan growth slows to 22% yoy; weak growth in large corporate
Andhra Bank’s loan book as of September 2011 was `745 bn (up 22% yoy and 2% qoq
decline) on the back of weak growth in the large corporate segment. Large corporate
segment, which contributes to over 55% of loans grew by 25% yoy (3% qoq decline) while
SME grew 25% yoy (flat qoq). Agriculture loans grew by 10% yoy while retail loans grew
19% yoy. We are factoring loan growth at 15% CAGR for FY2011-13E; moderation from
current levels given the limited scope to expand (reaching internal limits) in segments like
infrastructure which has been their primary driver of growth in the past few years and the
focus of the bank towards improving asset quality.
NIMs stable qoq despite a steep rise in slippages; CASA ratio down 400 bps yoy
NIMs were stable qoq at 3.8% despite a challenging environment for banks on the back of
rising slippages that resulted in higher de-recognition of interest income. NII grew by 21%
yoy to `9.5 bn. Cost of deposits increased by 21 bps qoq to 7.2% while lending yields
improved 10 bps qoq to 12.3%. CD ratio for the quarter was at 79%. CASA ratio declined
to 26% from 30% in September 2010. With deposits clearly close to peak levels, there is
strong scope for NIM to remain (we factor moderate NIM compression going forward) at
current levels (especially with better recoveries and lower slippages resulting in higher
contribution to NII), unless the bank raises savings deposit rates very sharply.
Other highlights for the quarter
Non interest income declined 7% yoy to `1.8 bn mainly due to lower contribution from
forex income.
Overall capital adequacy is currently at 13.1% with tier-1 capital at 8.8%
Operating expenses grew 8% yoy as staff expenses increased 5% yoy. Cost-income ratio
was at 38%.
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