Andhra Bank - Recoveries momentum the key - ElaraCapital

High slippages continue to impair margins and profitability

Margins were lower by 30 bps sequentially as yields on advances come off on interest reversals and falling lending rates even as cost of funds remain high. High volatility in yields over the quarter supported treasury profits which helped offset higher than expected provisions. Advances grew by 11% sequentially in the fourth quarter, with majority of growth coming from non corporate segments. Adj BVPS for FY13 is lower by ~10% YoY on impaired asset quality.

Recoveries in corporate book a key to asset quality going forward

Gross slippages continue to remain high at 4.2% for the quarter and 3.2% for FY13 compared to average of 1% from FY07-FY12. With 50% of advances and 65% of NPAs coming from the corporate segment (including large and mid corporate), recoveries in the segment remains a key to improvement in asset quality going forward. While there were some recoveries in the mid-corporate segment in Q4, pace of slippages remained way higher than recoveries. Net additions to restructured book amounted to ~INR 11 bn this quarter, roughly half of which came from power sector. Slippage from the restructured portfolio to NPA stands at ~10%.

Valuations: Accumulate purely on weak valuations

Return ratios deteriorated sharply over the last one year with estimated ROE and ROA averaging at 17% and 1% respectively for FY14-15. While asset quality could improve from here on, the pace of improvement is likely to be marginal as concerns remain on slippages and recovery pace has not picked up in a big way yet. With high capital consumption, Tier 1 capital at 8.5% doesn't look very healthy. We value the stock at INR110 per share, implying a FY14 and FY15 Adj P/B at 0.85 and 0.65 relative to long term average multiple of 1.1 Adj PBV on deterioration in numbers. The stock currently trades at 0.7 FY14 Adj P/B.

Source : Equity Bulls

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