Andhra Bank - High risks persist but priced in - PhillipCapital

Andhra Bank (ANDB IN) results were below estimates due to higher than expected slippages resulting in a 76 bps QoQ spike in GNPAs to 3.48%. Even though GNPAs increased significantly, provisions declined by 32.5% QoQ resulting in a 730 bps decline in PCR to 53.15%. Incremental slippages of Rs 9.15 bn came from a few large accounts namely Sterling Biotech (Rs 3.7 bn), a cement unit (Rs 690 mn), a real estate firm (Rs 650 mn) and a few MSME accounts constituting Rs 1 bn. Risk Weighted Assets (RWA) increased by 36.1% YoY against the balance sheet growth of 14.4% YoY. The positive surprise during the quarter was a healthy non-interest income growth and lower than expected restructuring.

Key highlights

- Net Interest Income (NII) declined by 6% YoY due to compression in NIMs and slower credit offtake. NIM declined by 20 bps QoQ to 3.13% driven by a 29 bps QoQ increase in costs of deposits to 8.03% and interest reversals of Rs 650 mn owing to stressed asset quality.

- Advances growth moderated to 16.1% YoY driven by a 26% YoY growth in agri advances. Even though on a QoQ basis, advances growth was flat, agri advances held up well (up 6.8%) while corporate advances declined 3%. Deposits grew by 15% YoY resulting in a CD ratio of 79.6%. CASA ratio declined by 80 bps QoQ to 25.9%.

- Non interest income grew by 23.4% YoY driven by higher forex income and strong treasury gains.

- Asset quality was further impacted with GNPAs of 3.48% (2.72% in Q1FY13) and NNPAs of 2.16% (1.52% in Q1FY13) driven by slippages of Rs 9.15 bn. The bank restructured loans of Rs 4.5 bn in Q2FY13. Outstanding restructured book stands at Rs 90.8 bn.

Outlook & Valuation

Given Andhra Bank's heavy exposure to sensitive sectors, we believe asset quality will remain under pressure as higher slippages and restructuring are likely to continue on the back of challenging macro environment. However, the bank remains confident of strong recoveries in the ensuing quarters. A Pharma account of Rs 2 bn which slipped into NPA in Q1FY13 is likely to be recovered in Q3FY13. However, the gain will likely be offset by treatment of Rs 2 bn of Deccan Chronicle as NPA in Q3FY13. NIM will remain under pressure given the CD ratio of ~ 80% and challenges on CASA front. The stock currently trades at 0.7x/0.8x FY13E/FY14E Adj BV. However, given sustainable RoAs of 1 and RoEs of 18%+ even after factoring in asset quality stress, we maintain our Buy rating on the stock and a PT of Rs 135 (1x FY13E Adj BV).

Source : Equity Bulls

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