>ANDHRA BANK: Higher provisions on investment depreciation and NPV losses on restructured loan book dent bottom-line

Core & operating income in-line with our estimates; higher provisioning impacts bottomline


We reiterate our positive stance on the stock; improvement in GNPA and provision coverage levels provides comfort. Lesser than estimated bottom-line was mainly due to NPV losses on a telecom restructured loan book


■ In Q3 FY12, Andhra Bank’s net interest income (NII) grew 17% YoY to ` 9.8bn — in line with our estimates. Margin remained stable at 3.81% in Q3 FY12 on sequential basis. Net profit de-grew 8.4% YoY to ` 3bn as against our estimates of ` 3.7bn and consensus estimate of ` 3.1bn.


■ The deviation at net profit level was primarily on account of higher provisioning on restructured loan book NPV losses and Investment depreciation (` 190mn as against ` 1mn in Q3 FY11).


■ There was 5.2% decline in gross NPAs on sequential basis; a key positive surprise in the result. Further, lower NPL provisioning (` 395mn as against ` 1.5bn in Q3 FY11) resulted in decline in credit cost to 22bps in Q3 FY12 as against 130bps in Q2 FY12 and 104bps in Q3 FY11). PCR increased to 66.4% as against 61.7% in Q2 FY12.


■ The quarterly result was broadly in line on core income level, with a positive surprise on GNPL front — sequential decline in GNPL and stable margins improved overall performance. The asset quality (particularly on restructuring front) will be a key parameter to watch out for going ahead. We reduce our earnings estimates by 3% and 2% for FY12 and FY13 respectively. We cut the target prices by 9% to ` 135 at 1x adjusted book value (ABV) FY13 and maintain our Buy rating.




► Better business growth: In Q3 FY12, Andhra Bank’s total business grew 20.4% YoY to ` 1.8tn. Deposits and advances grew 20.2% and 20.7% to ` 987bn and `792bn respectively. Credit-deposit ratio increased to 80.2% from 78.9% in Q2 FY12 and 79.9% in Q3 FY11. On the deposits side, CASA share declined to 26.6% from 28.7% in Q3 FY11; however, rose from 26.1% in Q2 FY12. The loan book grew primarily due to 20.6% YoY growth in SME and 23.8% YoY in corporate sectors.


We expect business to grow 17.4% CAGR in FY11-13 on the back of credit book and deposit growth of 17.1% and 17.7% CAGR respectively in FY11-13. Stable margins: In Q3 FY12, Andhra Bank remained stable at 3.81% on sequential basis. Rise in yield on advances (31 bps) and yield on investment (7 bps) on QoQ basis as against only 13 bps QoQ rise in cost of deposits curtailed decline in margins. Going forward, we believe margins will decline on the back of re-pricing of deposits at higher rates. We expect Andhra Bank’s margins to rose by 5bps and fell by 20bps to 3.4% and 3.2% (on yearly average basis) in FY12 and FY13 respectively.


► Higher other income & contained operating expenses aided operating income: The banks reported traction in other income with 18.4% YoY and 32% QoQ jump to ` 2.4bn. The growth was led primarily by 97% YoY jump in forex income to ` 308mn and 65% YoY growth in treasury income to ` 163mn. However, fee income was flat at ` 695mn.


On operating expenses front, the bank was able to manage it efficiently, leading to a marginal 9.6% YoY growth to Rs 4.5bn. Its cost-income ratio came down to 37% from 39.7% in Q3 FY11 and 39.2% in Q2 FY12. Hence, it reported 22.5% jump in operating jump to ` 7.7bn.


► Higher provisioning affects bottom-line: In Q3 FY12, the bank’s NPL provisioning declined by 74% to ` 395mn compared to ` 1.5bn in Q3 FY11 and ` 2.2bn in Q2 FY12. In Q3 FY12, bank’s credit cost declined to 22 bps as against 104bps in Q3 FY11 and 130bps in Q2 FY12. Higher than expected provisioning of ` 2.5bn for standard assets as against Rs 315mn in Q3 FY11 and ` 190mn as against ` 1mn in Q3 FY11 on account of investment depreciation losses led to deviation on bottomline level.


► Asset quality improved on sequential basis; uncertainty remains in future: During the quarter, the bank’s gross NPA declined 5.2% QoQ to ` 18.8bn. Gross NPA ratio sequentially decline by 29bps YoY to 2.38% while net NPA ratio fell by 27 basis points to 1.21%. Provision coverage ratio rose to 66.7% from 61.7% in Q2 FY12 resulting in decline in net NPA ratio.


As on end-Q3 FY12, the bank’s outstanding balance in restructured loans was at ` 36.8bn; of which, majority came from major industries (telecom, textile and iron & steel) and MSME sector. On sequential basis, gross slippage ratio came down to 2.11% from 6.46% in Q2 FY12. Overall, the bank’s asset quality improved on sequential basis. In FY12, we expect bank’s gross slippage ratio to increase to 2.6%. We expect credit cost to slightly decrease to 0.68% in FY12 from 0.73% in FY11.


► View & valuation
The quarterly result was broadly in line on core income level, with a positive surprise on GNPL front. Sequential decline in GNPL and stable margins improved overall performance. The asset quality (particularly on restructuring front) will be a key parameter to watch out for going ahead. We reduce our earnings estimates by 3% and 2% for FY12 and FY13 respectively. We cut the target prices by 9% to ` 135 at 1x adjusted book value (ABV) FY13 and maintain our Buy rating.


To read the full report: ANDHRA BANK
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