Andhra Bank - Asset quality overhang; Hold - Anand Rathi

Driven by slower business growth and weak core earnings, Andhra Bank's 2QFY13 profits grew 3% yoy. Factoring in lower credit growth estimates, we lower PAT 6.0% and 6.8% for FY13 and FY14, respectively. While current valuations appear compelling (0.7x FY13 PBV), we maintain Hold since re-rating is likely only when asset quality consistently improves.

Credit-to-deposits stretched; CASA, NIM down. While advances grew 15.9% yoy (-1.5% qoq), deposits grew slower at 14.8% yoy (0.7% qoq), thereby increasing the credit-deposit 73bps yoy to 78.7%. Advances were driven by farm (26.2% yoy) and SME (16.7% yoy) segments. NIM fell 39bps yoy, to 3.2%, with CASA share falling 19bps yoy to 26%. We expect the stretched credit-to-deposits and low CASA share to result in NIM of 3.1% over FY13-14.

Healthy fee income, but productivity down. While fee income grew 14.2% yoy, (8.8% qoq), core cost-to-income increased 390bps yoy to 43.8%. The average operating profit per branch was steady at Rs.4.1m. With slower business growth prospects, fee income and operating leverage are unlikely to improve substantially. Over FY12-14, we expect fees to grow at 11.4% CAGR, with cost-to-assets at ~1.5%.

Asset quality and NPA coverage worsen. Gross NPAs grew 27.8% qoq, with fresh slippages of Rs.7.7bn (3.9% of loans). NPA coverage fell 592bps qoq to 39.3%. In 2QFY13, Rs.4.5bn of loans were restructured, resulting in this pool growing 34.1% qoq to Rs.90.8bn (10.6% of loans). Perceptions of default risk would persist until the economic environment improves, restricting a sharp short-term valuation re-rating.

Valuation. At our Mar'14 target, the stock would trade at PBV of 0.7x FY13e and 0.6x FY14e. Our TP is based on the two-stage DDM (CoE: 15.7%; beta: 1.1; Rf: 8%). Risks. Faster credit growth, slower low-cost deposit accretion.

Source : Equity Bulls

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