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ANDHRA BANK 2QFY11: In-line; Impressive margins, asset growth; Asset quality disappoints; Valuations attractive; Buy
Andhra Bank’s (ANDB IN, Mkt Cap US$1.9b, CMP Rs175, Buy) 2QFY11 NII grew 52% YoY and 6% QoQ (4% higher than est), but higher NPA provision dragged down PAT growth to 11% YoY (4% higher than est).
Key highlights
- Deposits grew 5% QoQ and 26% YoY to Rs786b, whereas loans grew 7% QoQ and 27% YoY to Rs610b. CD ratio increased further to 77.6% in 2QFY11 vs 76.5% in 1QFY11.
- Margins expanded ~19bp QoQ to 3.91% led by strong loan growth and expansion in yield on investment.
- Slippages in 2QFY11 were ~Rs2.5b (1.8% annualized slippage ratio). GNPAs in absolute terms increased 33% QoQ to Rs7.7b, whereas in % terms GNPA increased to 1.28% v/s 1% in 1QFY11 and 0.83% in 2QFY10. In 1HFY11, slippages stood at Rs4b (annualized slippage ratio of 1.43% vs 0.9% a year ago). Management is guiding for lower slippages in 2HFY11 and expects recoveries to be strong.
- Non-interest income (excluding treasury) continued to show good traction and grew 25% YoY and 8% QoQ to Rs1.7b in 2QFY11.
- Employee expense increase sharply by 52% YoY but down 9% QoQ (as bank had provided for one time expenses towards PF arrears). Revised estimated liability for 2nd pension option comes to Rs4.4b (earlier Rs2.1b). The bank has so far provided Rs350m for 2nd pension related option. The bank has estimated a liability of Rs1.4b for gratuity related provision and plans to provide the same in FY11 itself.
- The stock trades at P/E of 5.4x and P/BV of 1.3x FY12E with an RoE of 25%+ and RoA of ~1.3% in FY11-12.Maintain Buy with a target price of Rs205 (1.5x FY12 BV).
Asset quality a disappointment in the quarter
- GNPAs in absolute terms increased by 33% QoQ to Rs7.7b, whereas in % terms GNPA and NNPA increased to 1.28% and 0.49% v/s 1% and 0.3%, respectively, in 1QFY11. Slippages in 2QFY11 were ~Rs2.5b and Rs4b in 1HFY11. 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 (excl technical write-off) declined to 62% v/s 71% in 1QFY11. PCR including technical write-off is healthy at 79%, though down from 86% a year ago.
- Outstanding restructured loan stood at Rs24.8b (4% of the loan book, in line with industry average), of which ~9.5% (Rs2.2b) have already slipped into NPA.
Impressive business growth QoQ
- Loan growth on a remained strong at 27% YoY and 7% QoQ led by strong disbursement in agriculture and SME segments. CD ratio increased further to 77.6% in 2QFY11 vs 76.5% in 1QFY11.
- Deposits grew 26% YoY and 5% QoQ to Rs786b. CASA deposits (+19% YoY and +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%.
Expansion in margin continues, but expect moderation
- 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 management expects moderation in NIM due to rising cost of deposits but expects NIM to be 3.5%+.
Fee income growth moderates on a higher base; Employee expenses increase YoY
- Core fee income grew 6% QoQ and 18% YoY; however, lower treasury profit led to 8% QoQ and 18% YoY decline in other income.
- Trading gains in 2QFY11 declined sharply to Rs180m vs Rs480m in 1QFY11 and Rs950m in 2QFY10. Income from recovery was muted at Rs110m.
- Employee cost increased 52% YoY but declined by 9% QoQ (on a higher base) to Rs2.6b. Bank provided ~Rs520m towards (1) 2nd pension option (Rs175m), and (2) gratuity related liability (~Rs350m), stable QoQ.
- Management has indicated pension related liability to be ~Rs4.4b to be amortized over 3-5 years (Rs350m provided till 1HFY11) and Rs1.4b towards gratuity to be provided in FY11 (Rs700m provided till 1HFY11).
Valuation and view
- We expect ANDB to report EPS of Rs27 in FY11 and Rs32 in FY12. BV will be Rs112 and Rs137 in FY11 and FY12. We expect RoE of 25%+ and RoA of 1.3% in FY11-12.
- Valuations are attractive at 5.4x FY12 EPS and 1.3x FY12 BV. Maintain Buy with a target price of Rs205 (1.5x FY12E BV), upside of 14%.
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