Andhra Bank reported a disappointing 1QFY2014 results with a 6.9% year-on-year decline in net interest income. While non-interest income doubled year-on-year due to strong treasury gains, overall operating profit grew only 6.1% year-on-year. Asset quality pressures continued as gross and net NPAs increased sequentially. Higher provisions led to a 36.1% decline in net profit. The bank saw healthy loan and deposit growth of 16% each, but its net interest margins declined 34 basis points sequentially to 2.7% due to falling yield on advances.
Andhra Bank reported a disappointing 1QFY2014 results with a 6.9% year-on-year decline in net interest income. While non-interest income doubled year-on-year due to strong treasury gains, overall operating profit grew only 6.1% year-on-year. Asset quality pressures continued as gross and net NPAs increased sequentially. Higher provisions led to a 36.1% decline in net profit. The bank saw healthy loan and deposit growth of 16% each, but its net interest margins declined 34 basis points sequentially to 2.7% due to falling yield on advances.
Andhra Bank reported a disappointing 1QFY2014 results with a 6.9% year-on-year decline in net interest income. While non-interest income doubled year-on-year due to strong treasury gains, overall operating profit grew only 6.1% year-on-year. Asset quality pressures continued as gross and net NPAs increased sequentially. Higher provisions led to a 36.1% decline in net profit. The bank saw healthy loan and deposit growth of 16% each, but its net interest margins declined 34 basis points sequentially to 2.7% due to falling yield on advances.
Andhra Bank reported a disappointing 1QFY2014 results with a 6.9% year-on-year decline in net interest income. While non-interest income doubled year-on-year due to strong treasury gains, overall operating profit grew only 6.1% year-on-year. Asset quality pressures continued as gross and net NPAs increased sequentially. Higher provisions led to a 36.1% decline in net profit. The bank saw healthy loan and deposit growth of 16% each, but its net interest margins declined 34 basis points sequentially to 2.7% due to falling yield on advances.
NEUTRAL CMP Target Price Investment Period Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Banking 3,285 1.2 130/55 154,296 10 18,789 5,566 ADBK.BO ANDB@IN
`59 -
Source: Company, Angel Research
Andhra Bank reported a disappointing operating performance for the quarter, with NII de-growth of 6.9% yoy. Boosted by treasury gains of `286cr compared to `25cr in 1QFY2013, the non-interest income for the bank almost doubled on a yoy basis. Overall the operating profit grew at a subdued pace of 6.1% yoy. On the asset quality front, stress continued as Gross and Net NPA levels increased sequentially by 27.8% and 33.3% respectively. Consequently, the provisioning for the bank increased by 86.3% yoy, thereby resulting in earnings de-growth of 36.1% yoy. NIM declines sequentially; Asset quality faces persistent stress: During 1QFY2014, the bank witnessed a healthy growth in its business, as advances and deposits grew by 16.0% and 16.8% yoy, respectively. Healthy advance growth was largely aided by strong growth in agri and SME book, which grew by 34.2% and 28.4% yoy respectively. CASA ratio declined by 267bp yoy and 163bp qoq to 24.0%. Reported NIM dipped by 34bp qoq to 2.7%, on account of 65bp sequential fall in yield on advances, which more than offset the 18bp qoq decline in cost of deposits. Non-interest income (excluding treasury) de-grew by 14.0% yoy, which was largely due to 4.5% yoy de-growth in CEB income and weak performance on the recoveries front. The bank continued to witness asset quality pressures, as slippages came in at `1,180cr (annualized slippage ratio of 4.5%) as compared to `889cr (slippage rate of 4.3%) in 4QFY2013. Recoveries/upgrades came in lower during the quarter at `103cr compared to `349cr in 4QFY2013. The PCR dipped substantially by 455bp sequentially to 45.0%, amongst the lowest in the industry. During the quarter, the bank also restructured advances worth `650cr, thereby taking its total restructured book to `9,846cr (9.8% of total advances). The Management has guided for advances worth ~`3,300cr to be in the restructuring pipeline for 1QFY2014, which includes an advance of ~`2,000cr to AP SEB, `385cr to a private sector power player, and `135cr to a steel player. Outlook and valuation: We believe that the asset quality pressures for the banking sector are unlikely to abate as quickly as was expected earlier, considering the recent macro developments amidst an overall weak macro environment. Moreover, the banks relatively high risk exposures, particularly to sectors like power, iron and steel and textile, create risk of higher deterioration in asset quality over the next few quarters, in our view. Hence, we recommend Neutral rating on the stock. Key financials (standalone) Y/E March (` cr) NII % chg Net profit % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) FY2012 3,759 16.7 1,345 6.1 3.3 24.0 2.5 0.5 1.2 19.2 FY2013 3,757 (0.1) 1,289 (4.1) 2.8 23.0 2.6 0.5 1.0 16.2 FY2014E 3,686 (1.9) 687 (46.7) 2.4 12.3 4.9 0.5 0.4 7.9 FY2015E 4,250 15.3 930 35.4 2.5 16.6 3.6 0.4 0.5 10.0
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 58.0 12.4 13.6 16.1
Source: Company, Angel Research; Note: CMP as of August 8, 2013
Please refer to important disclosures at the end of this report
Andhra Bank | 1QFY2014 Result Update
Exhibit 1: 1QFY2014 performance (standalone)
Particulars (` cr) Interest earned - on Advances / Bills - on investments - on balance with RBI & others - on others Interest Expended Net Interest Income Other income Other income excl. treasury - CEB - Treasury Income - Recoveries from writ.-off acc - Others Operating income Operating expenses - Employee expenses - Other Opex Pre-provision Profit Provisions & Contingencies - Provisions for NPAs - Provisions for Investments - Other Provisions PBT Provision for Tax PAT Effective Tax Rate (%) Source: Company, Angel Research
Particulars (` cr) Net interest income Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT Source: Company, Angel Research
Particulars (` cr) Balance sheet Advances (` cr) Deposits (` cr) Credit-to-Deposit Ratio (%) Current deposits (` cr) Saving deposits (` cr) CASA deposits (` cr) CASA ratio (%) CAR (%) Tier 1 CAR (%) Profitability Ratios (%) Cost of deposits Yield on advances Yield on investments Yield on funds Cost of funds Reported NIM Cost-to-income ratio Asset quality Gross NPAs (` cr) Gross NPAs (%) Net NPAs (` cr) Net NPAs (%) Provision Coverage Ratio (%) Slippage ratio (%) Loan loss prov. to avg assets (%) Source: Company, Angel Research
Business growth healthy; NIM declines by 34bp sequentially
During 1QFY2014, the bank witnessed a healthy growth in business, with advances and deposits registering a growth of 16.0% and 16.8% yoy, respectively. The healthy growth in advance was largely aided by strong growth in Agri and SME book, which grew by 34.2% and 28.4% yoy, respectively. Growth in retail loan book also remained strong at 26.5% yoy. On the liabilities front, savings deposits registered a moderate growth of 7.5% yoy, while current deposits de-grew by 3.5% yoy. Consequently, overall CASA deposits grew at a subdued 5.1% yoy; hence the CASA ratio dipped by 267bp yoy and 163bp qoq to 24.0%. The reported NIM for the bank dipped by 34bp qoq to 2.7%, on account of a 65bp sequential fall in yield on advances, which more than offset the 18bp qoq decline in costs of deposits. Yield on advances declined by 65bp qoq, on account of interest reversal of `97cr and full effect of base rate reduction in February, 2013 felt during the quarter. Yield on investments for the bank declined by 37bp qoq to 7.6%.
De-growth in CEB income and lower recoveries, but strong treasury aid robust growth in non-interest income During 1QFY2014, the non-interest income (excluding treasury) de-grew by 14.0% yoy to `182cr, which was largely due to 4.5% yoy de-growth in CEB income to `62cr and weak performance on recoveries front. Recoveries came in lower during the quarter at `12cr compared to `44cr in 1QFY2013. Income from exchange transactions grew at a moderate pace of 9.5% to `28cr. Treasury gains for the bank came in much higher at `286cr compared to `25cr in 1QFY2013, thereby aiding the overall non-interest income to almost double on a yoy basis to `468cr.
Elevated slippages coupled with lower recoveries/upgrades resulted in persistent asset quality stress During 1QFY2014, the asset quality for the bank continued to see stress, as its gross and net NPA levels increased sequentially by 27.8% and 33.3%, respectively. Consequently, gross and net NPA ratios were higher by 102bp and 82bp qoq respectively to 4.7% and 3.3%. During the quarter, slippages came in at `1,180cr (annualized slippage ratio of 4.5%) as compared to `889cr (slippage ratio of 4.3%) in 4QFY2013. Almost `421cr of the slippages during the quarter came from its restructured book. Going ahead, the Management expects further slippages to come from restructured book. Recoveries/upgrades came in lower during the
August 12, 2013
Andhra Bank | 1QFY2014 Result Update
quarter at `103cr compared to `349cr in 4QFY2013. PCR dipped substantially by 455bp sequentially to 45.0%, amongst the lowest in the industry. During the quarter, the bank also restructured advances worth `650cr, thereby taking its total restructured book to `9,846cr (9.8% of total advances). The Management has guided for advances worth ~`3,300cr to be in the restructuring pipeline for 1QFY2014, which includes an advance of ~`2,000cr to AP SEB, `385cr to a private sector power player and `135cr to a steel player.
Opex to average assets (%, RHS) 1.7 1.6 1.8 1.7 1.6 1.5 1.4 1.3 500 400 300 200
22.2
25.0 20.0 15.0
1.5
1.5
1.5
5.1 0.1 (6.8) 1.0
10.0 5.0 -
297
297
312
381
385
38.0 36.0
100 -
(5.0) (10.0)
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
Source: Company, Angel Research
Source: Company, Angel Research
August 12, 2013
Andhra Bank | 1QFY2014 Result Update
Investment concerns Moderate fee income; low CASA During FY200712, fee income for the bank reported a CAGR of only 10.9% compared to advances posting a CAGR of 23.4%. Consequently, fee income as a proportion of overall assets for the bank has declined from 1.1% in FY2007 to 0.6% in FY2013. On the CASA front, the banks market share has fallen by 26bp over FY2005-FY2013; and at 24.0% as of 1QFY2014, the banks CASA ratio is on the lower end compared to peers.
Risk-adjusted yields continue trending lower
The bank had one of the highest yields in the industry (at 12.5% for FY2012), which also reflected in its relatively healthy NIM (at 3.7% for FY2012), which was partly attributed to the banks high concentration in the hinterland of its home state. We believed that it would be difficult for the bank to remain insulated from competition on the lending side and as a result, as expected, its yield on advances and margins declined to 12.0% and 3.2%, respectively in FY2013 and further came in lower at 11.2% and 2.7%, respectively for 1QFY2014. Moreover, the banks provisioning expenses as a proportion of average assets have also increased from 0.65% for FY2011 to 0.75% for FY2013 and 1QFY2014. Going forward, in the current environment, the banks provisioning expenses are likely to increase at a faster rate, given the high yield on advances and relatively high exposure to stressed sectors.
Outlook and valuation
We believe that the asset quality pressures for the banking sector are unlikely to abate as quickly as was expected earlier, considering the recent macro developments amidst an overall weak macro environment. Moreover, the banks relatively high risk exposures, particularly to sectors like power, iron and steel and textile, create risk of higher deterioration in asset quality over the next few quarters, in our view. Hence, we recommend Neutral rating on the stock.
August 12, 2013
Andhra Bank | 1QFY2014 Result Update
Exhibit 12: Key assumptions
Particulars (%) Credit growth Deposit growth CASA ratio NIMs Other income growth Growth in staff expenses Growth in other expenses Slippages Coverage Ratio Source: Angel Research
FY2014 Particulars (` cr) NII Non-interest income Operating income Operating expenses Pre-prov. profit Provisions & cont. PBT Prov. for taxes PAT Source: Angel Research
Source: Company, Angel Research; Note: *Target multiples=SOTP Target Price/ABV (including subsidiaries); # without adjusting for SASF
Company Background Andhra Bank is a mid-sized PSU bank, with a balance sheet size of ~`1.5lakh cr. The bank has a network of over 1,880 branches, mainly concentrated in the southern region (~two-third of total branches in the parent state of Andhra Pradesh).
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Andhra Bank No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
List of Key Financial Ratios: Formulas and Calculation Examples Defined for Different Types of Profitability Ratios and the Other Most Important Financial Ratios
List of Key Financial Ratios: Formulas and Calculation Examples Defined for Different Types of Profitability Ratios and the Other Most Important Financial Ratios
