AndhraBank-2QFY2012RU-141111

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Please refer to important disclosures at the end of this report 1

Particulars (` cr) 2QFY12 1QFY12 % chg (qoq) 2QFY11 % chg (yoy)

NII 951 910 4.5 783 21.4

Pre-prov. profit 687 700 (1.8) 565 21.7

PAT 316 386 (18.0) 303 4.3

Source: Company, Angel Research

For 2QFY2012, Andhra Bank registered 4.3% yoy growth in its PAT to

` 316cr, slightly above our estimate due to higher net interest income and

lower tax expenses than factored in by us. We recommend a Neutral rating

on the stock. Asset quality deteriorates significantly: The bank’s loan book declined sequentially

by 2.8% to ` 73,592cr (up 21.5% yoy); however, deposits grew by 3.9% qoq to

` 94,435cr (up 20.2% yoy). CASA deposits declined by 2.4% qoq (up by weak

3.4% yoy), leading to CASA ratio dropping sequentially by 169bp (substantial

435bp yoy decline) to 26.1%. The bank’s yield on advances rose by 22bp qoq to

12.5% in 2QFY2012, however further deposit re-pricing during 2QFY2012 led to

cost of deposits increasing by relatively higher 43bp qoq to 7.5%. Consequently,

reported NIM remained flat sequentially at 3.8%. The bank’s asset quality

deteriorated substantially during 2QFY2012, with gross NPA rising by 68.9% qoq

to ` 1,987cr and net NPA more than trebling to ` 1,087cr. The bank switched overaccounts worth ` 25lakhs and above to system-based NPA recognition during the

quarter. Gross NPA ratio as of 2QFY2012 stood at 2.7% (1.6% in 1QFY2012)

and net NPA ratio stood at 1.5% (0.5% in 1QFY2012). Provision coverage ratio

(including technical write-offs) declined sharply to 61.7% in 2QFY2012 from

82.0% in 1QFY2012.

Outlook and valuation: At the CMP, the stock is trading at 0.7x FY2013E ABV

compared to its five-year range of 0.8x–1.4x one-year forward ABV with a

median of 1.1x. Considering the banks hefty exposure to the power sector (more

than 20% of the loan book) and sharp deterioration in asset quality during

2QFY2012, we recommend Neutral on the stock.

Key financials

Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E

NII 2,195 3,221 3,800 4,115

% chg 34.9 46.8 18.0 8.3

Net profit 1,046 1,267 1,341 1,242

% chg 60.1 21.2 5.8 -7.3

NIM (%) 2.8 3.3 3.3 3.0

EPS (`) 21.6 22.6 24.0 22.2

P/E (x) 5.1 4.8 4.6 4.9

P/ABV (x) 1.2 0.9 0.8 0.7

RoA (%) 1.3 1.3 1.1 0.9

RoE (%) 26.0 23.2 19.2 15.6


NEUTRALCMP ` 109

Target Price -

Investment Period -

Stock Info

Sector Banking

Market Cap ( ` cr) 6,113

Beta 0.9

52 Week High / Low 182/109

Avg. Daily Volume 109,776

Face Value ( ` ) 10

BSE Sensex 17,118

Nifty 5,148

Reuters Code ADBK.BO

Bloomberg Code ANDB@IN

Shareholding Pattern (%)

Promoters 58.0

MF / Banks / Indian Fls 15.8

FII / NRIs / OCBs 13.2

Indian Public / Others 12.9

Abs. (%) 3m 1yr 3yr

Sensex (1.7) (15.7) 82.4

Andhra Bank (17.6) (38.6) 112.1

Vaibhav Agrawal

022 – 3935 7800 Ext: 6808

[email protected]

Shrinivas Bhutda

022 – 3935 7800 Ext: 6845

[email protected]

Varun Varma

022 – 3935 7800 Ext: 6847

[email protected]

Andhra Bank

Performance Highlights

2QFY2012 Result Update | Banking

November 14, 2011



Andhra Bank | 2QFY2012 Result Update

November 14, 2011 2

Exhibit 1: 2QFY2012 performance

Particulars (` cr) 2QFY12 1QFY12 % chg (qoq) 2QFY11 % chg (yoy)

Interest earned 2,783 2,634 5.6 1,941 43.3

Interest expenses 1,831 1,724 6.2 1,158 58.2NII 951 910 4.5 783 21.4

Non-interest income 178 217 (18.0) 191 (7.0)

Operating income 1,129 1,127 0.2 974 15.9

Operating expenses 442 428 3.4 410 7.9

Pre-prov. profit 687 700 (1.8) 565 21.7

Provisions & cont. 261 177 47.3 120 118.0

PBT 426 523 (18.5) 445 (4.2)

Prov. for taxes 110 137 (19.7) 142 (22.5)

PAT 316 386 (18.0) 303 4.3

EPS ( ` ) 5.6 6.9 (18.0) 6.2 (9.6)

Cost-to-income ratio (%) 39.2 37.9 42.1

Effective tax rate (%) 25.8 26.2 31.9

Net NPA (%) 1.5 0.5 0.5


Exhibit 2: 2QFY2012 – Actual vs. Angel estimates

Particulars (` cr) Actual Estimates Var. (%)

Net interest income 951 886 7.4

Non-interest income 178 201 (11.7)

Operating income 1,129 1,087 3.9

Operating expenses 442 457 (3.3)

Pre-prov. profit 687 630 9.0

Provisions & cont. 261 211 23.4

PBT 426 419 1.8

Prov. for taxes 110 126 (12.4)

PAT 316 293 7.9





November 14, 2011 3

Advances decline sequentially

The bank’s loan book declined sequentially by 2.8% to ` 73,592cr (up 21.5% yoy);

however, deposits grew by 3.9% qoq to ` 94,435cr (up 20.2% yoy). Consequently,

CD ratio decreased to 77.9% in 2QFY2012 from 83.3% in 1QFY2012.

CASA deposits declined by 2.4% qoq (up by weak 3.4% yoy), leading to CASA

ratio dropping sequentially by 169bp (substantial 435bp yoy decline) to 26.1%.

We have factored in loan growth of 13% and 17% for FY2012 and FY2013,

respectively.

The bank’s yield on advances rose by 22bp qoq to 12.5% in 2QFY2012, however

further deposit re-pricing during 2QFY2012 led to cost of deposits increasing by

relatively higher 43bp qoq to 7.5%. Consequently, reported NIM remained flat

sequentially to 3.8%.

Exhibit 3: Advances growth strong for 2QFY2012


Exhibit 4: CASA deposit growth declines substantially


Exhibit 5: Cost of deposits rise by 43bp qoq...


Exhibit 6: ...leading to flat NIM at 3.8% in 2QFY2012


6 . 0

8 . 3

8 . 9

6 . 0

( 2 . 8

)

5 . 2

4 . 5

1 2 . 3

( 1 . 4

)

3 . 9

77.1

79.977.5

83.3

77.9

60.0

65.0

70.0

75.0

80.0

85.0

(5.0)

-

5.0

10.0

15.0

2QFY11 3QFY11 4QFY11 1QFY12 2QFY12

Adv. qoq chg (%) Dep. qoq chg (%) CDR (%, RHS)

3 0

. 4

2 8

. 5

2 9

. 1

2 7

. 8

2 6

. 2

18.617.0 17.1

14.5

3.4

-

5.0

10.0

15.0

20.0

24.0

26.0

28.0

30.0

32.0


CASA ratio CASA yoy growth (%, RHS)

5.675.84

6.48

7.02

7.45

5.00

5.50

6.00

6.50

7.00

7.50

8.00


3.72

3.91 3.91

3.69

3.77

3.40

3.60

3.80

4.00





November 14, 2011 4

Asset quality deteriorates substantially

The bank’s asset quality deteriorated substantially during 2QFY2012, with gross

NPA rising by 68.9% qoq to ` 1,987cr and net NPA more than trebling to

` 1,087cr. The bank switched over accounts worth ` 25lakhs and above to

system-based NPA recognition during the quarter. Gross NPA ratio as of

2QFY2012 stood at 2.7% (1.6% in 1QFY2012) and net NPA ratio stood at 1.5%

(0.5% in 1QFY2012). Provision coverage ratio (including technical write-offs)

declined sharply from 82.0% in 1QFY2012 to 61.7% in 2QFY2012. To factor in

the deteriorating asset quality, we have revised our estimates for provisioning

expenses upwards by 15.2% for FY2012.

Exhibit 7: NPA ratios deteriorate significantly qoq


Exhibit 8: Muted branch expansion in 1HFY2012


Exhibit 9: Employee expenses flat for 2QFY2012


Exhibit 10: Declining opex to avg. assets


1 . 3

1 . 3

1 . 4

1 . 6

2 . 7

0 . 5

0 . 5

0 . 4

0 . 5

1 . 5

78.9 80.4 83.9 82.0

61.7

-

15.0

30.0

45.0

60.0

75.0

90.0

-

0.5

1.0

1.5

2.0

2.5

3.0


Gross NPAs (%) Net NPAs (%) PCR (%, RHS)

1 , 5

6 4

1 , 5

8 7

1 , 6

3 2

1 , 6

4 0

1 , 6

5 2

926

954

981

1,012 1,025

840

880

920

960

1,000

1,040

1,520

1,560

1,600

1,640

1,680


Branches ATMs (RHS)

2 6 0

2 6 0

2 9 8

2 7 3

2 7 4 (9.4)

(0.2)

14.7

(8.3)

0.2

(20.0)

(10.0)

-

10.0

20.0

(50)

25

100

175

250

325


Staff expenses (`cr) QoQ growth (% , RHS)

4

2 . 1

3

9 . 7

3

8 . 7

3

7 . 9

3

9 . 2

1.8

1.7 1.7

1.61.6

1.4

1.5

1.6

1.7

1.8

1.9

-

10.0

20.0

30.0

40.0

50.0

60.0


Cost-to-income ratio (%) Opex to average assets (%, RHS)




November 14, 2011 5

Investment concerns

Continual weak performance in fee income and likely drop in

margins to be a drag on profitability

During the last four years (FY2007–11), fee income (non-interest income excluding

treasury) has risen at a CAGR of only 12.8% compared to advances growing at a

CAGR of 26.5%. This resulted in fee income dropping to 0.8% of average assets

(as of FY2011) from 1.1% in FY2007. We expect the weak performance with

regards to fee income to continue and, hence, have estimated moderate growth of

3.3% and 15.3% in FY2012 and FY2013, respectively.

The bank has one of the highest yields in the industry (12.5% as of 2QFY2012),

also reflected in the relatively stronger calculated NIM of 3.3% (as of FY2011).

Although reported NIM rose sequentially by 5bp during 2QFY2012, the cost of

deposits increased substantially by 43bp qoq to 7.0%. The bank also has arelatively weaker liability profile with a calculated CASA base of sub-30% at

26.2%. Given the high yield on advances, we also expect asset quality pressures to

be on the higher side for the bank.

Outlook and valuation

The bank’s asset quality which till 1QFY2012 was significantly better than its peers,

deteriorated substantially during 2QFY2012, with gross NPA rising by 68.9% qoq

to ` 1,987cr and net NPA more than trebling to ` 1,087cr. Provision coverage ratio

(including technical write-offs) declined sharply from 82.0% in 1QFY2012 to61.7% in 2QFY2012. To factor in the deteriorating asset quality, we have revised

our estimates for provisioning expenses upwards by 15.2% for FY2012.

At the CMP, the stock is trading at 0.7x FY2013E ABV compared to its five-year

range of 0.8x–1.4x one-year forward ABV with a median of 1.1x. Considering the

banks hefty exposure to the power sector (more than 20% of the loan book) and

sharp deterioration in asset quality during 2QFY2012, we recommend Neutral on

the stock.

Exhibit 11: Key assumptions

Particulars (%)Earlier estimates

Revised estimatesFY2012 FY2013 FY2012 FY2013

Credit growth 15.0 17.0 13.0 17.0

Deposit growth 21.0 17.0 19.0 17.0

CASA ratio 27.7 27.4 28.2 27.8

NIMs 3.0 2.7 3.3 3.0

Other income growth (0.2) 14.1 (6.4) 13.9

Growth in staff expenses 7.0 13.0 6.0 13.0

Growth in other expenses 14.0 15.0 14.0 15.0

Slippages 1.6 1.8 2.4 2.4

Coverage Ratio 81.0 74.0 70.0 70.0

Source: Angel Research




November 14, 2011 6

Exhibit 12: Change in estimates

Particulars (` cr)

FY2012 FY2013

Earlierestimates

Revisedestimates

Var. (%)Earlier

estimatesRevised

estimatesVar. (%)

NII 3,522 3,800 7.9 3,717 4,115 10.7

Non-interest income 895 840 (6.2) 1,021 956 (6.3)

Operating income 4,417 4,640 5.0 4,738 5,072 7.0

Operating expenses 1,866 1,855 (0.6) 2,123 2,110 (0.6)

Pre-prov. profit 2,551 2,784 9.1 2,615 2,962 13.2

Provisions & cont. 754 869 15.2 775 1,123 44.9

PBT 1,797 1,915 6.6 1,840 1,839 (0.1)

Prov. for taxes 539 575 6.6 597 597 (0.1)

PAT 1,258 1,341 6.6 1,243 1,242 (0.1)

Source: Angel Research

Exhibit 13: P/ABV band


0

20

40

60

80

10 0

12 0

14 0

16 0

18 0

20 0

A p r - 0 2

N o v - 0

2

J u n - 0

3

J a n - 0

4

A u g - 0

4

M a r - 0 5

O c t - 0 5

M a y - 0

6

D e c - 0

6

J u l - 0 7

F e b - 0

8

S e p - 0

8

A p r - 0 9

N o v - 0

9

J u n - 1

0

J a n - 1

1

A u g - 1

1

M a r - 1 2

Price (`) 0.6x 0.8x 1x 1.2x 1.4x




November 14, 2011 7

Exhibit 14: Recommendation summary

Company Reco.CMP

(`)Tgt.

price (`)Upside

(%)FY2013EP/ABV (x)

FY2013ETgt P/ABV (x)

FY2013EP/E (x)

FY11-12EEPS CAGR (%)

FY2013ERoA (%)

FY2013ERoE (%)

AxisBk Buy 1,049 1,41434.8 1.7 2.3 9.2 17.7 1.5 20.0

FedBk Accumulate 390 444 13.8 1.1 1.2 8.0 19.5 1.2 14.0

HDFCBk Accumulate 471 497 5.5 3.2 3.4 16.4 30.5 1.7 20.9

ICICIBk* Buy 821 1,114 35.6 1.5 2.0 12.1 23.3 1.4 15.4

SIB Accumulate 23 24 6.5 1.1 1.2 6.6 15.6 1.0 18.2

YesBk Buy 294 355 21.0 1.9 2.3 9.7 19.9 1.3 20.8

AllBk Neutral 165 -- 0.8 - 4.4 12.2 1.0 18.4

AndhBk Neutral 109 - - 0.7 - 4.9 (1.0) 0.9 15.6

BOB Buy 778 918 18.0 1.1 1.3 5.5 14.2 1.2 20.7

BOI Neutral 333 - - 1.0 - 5.7 13.4 0.7 16.9

BOM Accumulate 48 55 15.0 0.6 0.7 4.1 38.1 0.6 16.5

CanBk Accumulate 457 523 14.4 0.9 1.0 5.3 (3.0) 0.9 17.2CentBk Neutral 96 - - 0.7 - 4.9 (16.1) 0.5 13.9

CorpBk Buy 408 498 21.9 0.7 0.8 4.2 1.5 0.8 16.6

DenaBk Neutral 72 - - 0.5 - 3.4 7.5 0.8 16.4

IDBI# Accumulate 105 115 10.3 0.7 0.8 4.9 12.3 0.7 14.0

IndBk Accumulate 213 227 6.4 0.8 0.9 4.8 7.4 1.3 19.4

IOB Accumulate 100 107 7.7 0.6 0.7 4.0 20.0 0.6 15.9

J&KBk Neutral 818 - - 0.9 - 5.1 12.0 1.3 17.8

OBC Neutral 292 - - 0.7 - 5.1 5.1 0.8 14.1

PNB Buy 939 1,106 17.8 1.1 1.3 5.6 9.9 1.1 20.6

SBI* Buy 1,753 2,194 25.2 1.4 1.7 7.5 33.9 0.9 20.0

SynBk Buy 105 123 17.5 0.7 0.8 4.6 11.8 0.7 16.3

UcoBk Neutral 66 - - 0.8 - 3.9 15.9 0.7 16.7

UnionBk Accumulate 222 245 10.3 0.8 0.9 5.1 5.2 0.8 17.0

UtdBk Buy 64 75 16.9 0.5 0.6 3.8 12.5 0.6 13.9

VijBk Neutral 56 - - 0.7 - 6.0 3.6 0.4 11.7

Source: Company, Angel Research; Note: *Target multiples=SOTP Target Price/ABV ( including subsidiaries); # without adjusting for SASF




November 14, 2011 8

Income statement

Y/E March (` cr) FY07 FY08 FY09 FY10 FY11 FY12E FY13E

NII 1,418 1,340 1,627 2,195 3,221 3,800 4,115

- YoY growth (%) 21.3 (5.5) 21.5 34.9 46.8 18.0 8.3Other income 522 626 765 965 897 840 956

- YoY growth (%) 12.5 19.9 22.2 26.0 (7.0) (6.4) 13.9

Operating income 1,940 1,966 2,392 3,159 4,118 4,640 5,072

- YoY growth (%) 18.8 1.3 21.7 32.1 30.3 12.7 9.3

Operating expenses 933 909 1,104 1,350 1,705 1,855 2,110

- YoY growth (%) 8.8 (2.6) 21.5 22.2 26.3 8.8 13.7

Pre-prov. profit 1,007 1,057 1,288 1,810 2,413 2,784 2,962

- YoY growth (%) 29.8 5.0 21.9 40.5 33.3 15.4 6.4

Prov. & cont. 222 139 390 374 646 869 1,123

- YoY growth (%) 1.8 (37.2) 179.9 (4.1) 72.8 34.5 29.2

PBT 785 918 898 1,436 1,767 1,915 1,839

- YoY growth (%) 40.8 16.9 (2.1) 59.9 23.1 8.4 (4.0)

Prov. for taxation 247 342 245 390 500 575 597

- as a % of PBT 31.5 37.3 27.3 27.2 28.3 30.0 32.4

PAT 538 576 653 1,046 1,267 1,341 1,242

- YoY growth (%) 10.8 7.0 13.5 60.1 21.2 5.8 (7.3)

Balance sheet

Y/E March (` cr) FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Share Capital 485 485 485 485 560 560 560

Reserves & Surplus 2,671 2,764 3,162 3,925 5,933 6,948 7,865

Deposits 41,454 49,437 59,390 77,688 92,156 109,666 128,309

- Growth (%) 22.2 19.3 20.1 30.8 18.6 19.0 17.0

Borrowings 734 591 1,311 2,832 4,620 5,475 6,391

Tier 2 Capital 480 1,115 2,040 3,020 3,020 3,413 3,993

Other Liab. & Prov. 1,717 2,201 2,081 2,392 2,612 2,997 3,526

Total Liabilities 47,541 56,592 68,469 90,342 108,901 129,058 150,643

Cash Balances 2,949 4,902 4,853 6,699 7,184 7,128 8,340

Bank Balances 1,075 793 434 4,469 3,275 3,226 3,766

Investments 14,301 14,898 16,911 20,881 24,204 34,672 40,242

Advances 27,889 34,238 44,139 56,114 71,435 80,722

- Growth (%) 26.2 22.8 28.9 27.1 27.3 13.0 17.0

Fixed Assets 192 219 335 356 317 365 413

Other Assets 1,135 1,542 1,796 1,825 2,485 2,945 3,437

Total Assets 47,541 56,592 68,469 90,342 108,901 129,058 150,643

- Growth (%) 16.9 19.0 21.0 31.9 20.5 18.5 16.7




November 14, 2011 9

Ratio analysis

Y/E March FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Profitability ratios (%)

NIMs 3.3 2.7 2.7 2.8 3.3 3.3 3.0Cost to Income Ratio 48.1 46.2 46.2 42.7 41.4 40.0 41.6

RoA 1.2 1.1 1.0 1.3 1.3 1.1 0.9

RoE 17.8 18.0 18.9 26.0 23.2 19.2 15.6

B/S ratios (%)

CASA Ratio 34.5 33.6 31.4 29.4 29.1 28.2 27.8

Credit/Deposit Ratio 67.3 69.3 74.3 72.2 77.5 73.6 73.6

CAR 11.3 11.6 12.2 12.9 13.3 12.9 12.5

- Tier I 10.0 8.5 8.0 7.6 9.0 8.7 8.4

Asset Quality (%)

Gross NPAs 1.4 1.1 0.8 0.9 1.4 3.0 4.1

Net NPAs 0.2 0.2 0.2 0.2 0.4 1.2 1.4

Slippages 1.1 0.7 0.6 0.9 1.4 2.4 2.4

Loan Loss Prov. /Avg. Assets 0.2 0.2 0.3 0.4 0.5 0.6 0.7

Provision Coverage 88.1 85.6 78.5 80.4 72.5 70.0 70.0

Per Share Data (`)EPS 11.1 11.9 13.5 21.6 22.6 24.0 22.2

ABVPS (75% cover.) 65.1 67.0 75.2 90.9 116.0 131.4 146.5

DPS 3.8 4.0 4.5 5.0 5.5 5.0 5.0

Valuation Ratios

PER (x) 9.9 9.2 8.1 5.1 4.8 4.6 4.9

P/ABVPS (x) 1.7 1.6 1.5 1.2 0.9 0.8 0.7

Dividend Yield 3.5 3.7 4.1 4.6 5.0 4.6 4.6

DuPont Analysis

NII 3.2 2.6 2.6 2.8 3.2 3.2 2.9

(-) Prov. Exp. 0.5 0.3 0.6 0.5 0.6 0.7 0.8

Adj. NII 2.7 2.3 2.0 2.3 2.6 2.5 2.1

Treasury 0.1 0.2 0.4 0.4 0.1 0.0 0.0

Int. Sens. Inc. 2.8 2.5 2.3 2.7 2.7 2.5 2.2

Other Inc. 1.1 1.0 0.9 0.8 0.8 0.7 0.6

Op. Inc. 3.9 3.5 3.2 3.5 3.5 3.2 2.8

Opex 2.1 1.7 1.8 1.7 1.7 1.6 1.5PBT 1.8 1.8 1.4 1.8 1.8 1.6 1.3

Taxes 0.6 0.7 0.4 0.5 0.5 0.5 0.4

RoA 1.2 1.1 1.0 1.3 1.3 1.1 0.9

Leverage 14.6 16.3 18.1 19.7 18.3 17.0 17.6

RoE 17.8 18.0 18.9 26.0 23.2 19.2 15.6




November 14, 2011 10

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Andhra Bank

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

AndhraBank-2QFY2012RU-141111

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