Andhra Bank (ANDB)
Banks/Financial Institutions
Slippages in corporate loans drive weak performance. Andhra Bank’s PBT declined
17% yoy on the back of subdued NII growth (4% yoy) and high provisions. Margins
declined 30 bps as costs of deposits remained high. Loan impairment ratios were high
on the back of high slippages from a few corporate exposures, a negative impact of the
skewed loan portfolio of the bank. Earnings growth is likely to remain under pressure
from weak NII growth, high operating and credit costs. Maintain ADD on inexpensive
valuations; better return ratios drive our rating; TP at `110 (`125 earlier).
Cautious on volatile slippages and weak NII growth; maintain ADD on inexpensive valuations
Andhra Bank displayed a disappointing quality of earnings, despite the earnings beating our
estimates primarily on the back of lower tax rates (1% tax rate) while PBT declined 17% yoy. NII
growth was subdued at 4% yoy (declined 2% qoq) on the back of 18% yoy growth in loans
(sequential decline was at 30 bps qoq). Cost-income ratio increased to 45% from 41% in 3QFY13
on 19% growth in operating expenses while revenues increased 8% qoq. Fresh slippages were
high at 3.9% of loans but better recoveries and high write-offs led to flat gross NPLs sequentially.
Restructured loans declined 1.8% qoq as a percentage of loans on high repayments/upgradation.
Earnings growth is likely to remain under pressure over FY2014-15E driven by (1) weak revenue
growth (~12% CAGR) on the back of slower loan growth (high dependence on capex lending in the
past) and margin pressure, (2) high operating costs on the back of revised wage settlement and (3)
increased provisions to factor high loan impairment and improvement in provision coverage ratio.
However, we maintain our ADD rating on inexpensive valuations as we expect return ratios to be
better than most mid-tier PSU banks. We value the bank at `110 which implies 0.8X book and 5X
EPS for RoEs at 14-15%. We expect subdued earning growth due to loan impairment charges.
Recoveries and write-offs cushion impact of high slippages; restructured loans decline
Gross NPLs remained flat qoq at 3.7% as high recoveries/upgradation (1.6%) and write-offs
(0.6%) cushioned the impact of high slippages (3.9%). Of the `8.9 bn slippages during the
quarter, >60% came from one single group while three large accounts accounted for ~20% of
slippages, highlighting the impact of a skewed corporate loan portfolio. Net NPLs increased 20 bps
qoq to 2.5% as provision coverage, including technical write-offs, declined marginally to 50%.
Outstanding restructured loans declined 7% qoq on an absolute basis, 1.8% as percentage of
loans to 9.7% on the back of high repayments during the quarter. Of the fresh restructuring of
`12 bn, 60% is from 3 corporate accounts (power, sugar and steel). We maintain our cautious
outlook on loan impairment ratios (high exposure to sectors like power, iron & steel and textiles)
and expect the slippage volatility to continue. We factor in slippages at 2.7-3.0% of loans and
credit costs at 1.3% of loans for FY2014-15E.
Loan growth above industry average; decline in share of corporate loans
Loan book grew 18% yoy led by 32% yoy increase in agriculture loans, 28% increase in
SME loans and 27% increase in retail loans. Loans to large corporate segment declined
further to 10% yoy, the slowest pace in past few quarters, broadly indicating the declining
opportunity. Share of large corporate loans declined to 52% from 55% in 3QFY13 and 56%
in FY2012. The bank has high exposure to stressed sectors like power (21%), iron and steel
(6%), textiles (5%) and construction at 3% of loans as of Dec 2012. While the fresh
sanctions have dropped sharply, undisbursed limits from this portfolio is likely to keep overall
exposure at elevated levels in the medium term. We are factoring loan growth at 13-14%
CAGR for FY2013-15E.
NIM declines 30 bps qoq driven by high costs of deposits
NIM declined 30 bps qoq to 3% on the back of higher costs of deposits (up 25 bps qoq) and
stable asset yields. CASA ratio declined marginally to 25.7% from 26% in the previous
quarter. Yield on loans remained stable qoq at 12%, while yield on investments remained
broadly stable at 7.9%.
We expect margins to decline by ~10 bps by FY2014E as lending spreads decline. However,
the high impairment-related charges on interest income, which resulted in a steep decline in
NIMs in FY2013, are unlikely to be repeated – which should cushion the pace of
compression in asset yields in FY2014E.
Other highlights for the quarter
Non-interest income increased 54% yoy led by sharp increase in treasury income (3.5X
increase) and forex profit (4.4X increase). Core fee income remained flat (1% yoy).
Cost-income ratio for the quarter stands at 45% compared to 41% in the previous
quarter. Staff expenses have been higher than expected (22% qoq growth), while nonstaff
expenses increased 15% qoq. The bank has made `300 mn provision for wage
revision in the current quarter.
Overall capital adequacy is currently at 11.8% with tier-1 capital at 8.5%.
The bank has made lower tax provisions at 1% for the quarter. Await clarifications on the
same.
No comments:
Post a Comment