Andhra Bank NEUTRAL. Performance Highlights CMP. `110 Target Price - 4QFY2012 Result Update Banking. Investment Period -

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1 4QFY2012 Result Update Banking May 9, 2012 Andhra Bank Performance Highlights Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy) NII (7.1) Preprov. profit (13.9) 712 (7.1) PAT For 4QFY2012, Andhra Bank posted a moderate set of numbers with net profit increasing by 8.6% yoy (up 12.0% qoq) to `340cr, which were higher than our estimates due to lower effective tax rate than estimated by us. We recommend a Neutral rating on the stock. Assetquality pressures moderate but still above normal levels: For FY2012, the bank s business growth remained at moderate levels, with advances growing by 17.1% yoy (5.6% qoq during 4QFY2012) and deposits growing by 14.9% yoy (7.3% qoq during 4QFY2012). Current account deposit accretion picked up during 4QFY2012 with a growth of 15.1% qoq (down 11.0% yoy), while savings accounts growth was also reasonable healthy at 4.1% qoq up 10.0% yoy). The bank s yield on advances declined by 43bp qoq on account of interest rate reversals amounting to `7580cr. The bank s cost of deposits also increased by 35bp qoq on account of sequential dip in CASA ratio and higher cost of borrowings on bulk deposits during the quarter. Consequently, the reported NIMs of the bank declined by 47bp during 4QFY2012. The bank s asset quality improved during 4QFY2012, with gross and net NPA levels declining by 4.6% and 19.9% qoq. The bank s provision coverage ratio also improved sequentially by 574bp to 71.1%. The slippage levels were higher on a qoq basis (slippage ratio of 2.6% compared to 2.1% in 3QFY2012), however continued momentum in recoveries (`551cr during 4QFY2012) led to lower gross NPA levels. Outlook and valuation: At the CMP, the stock is trading at 0.7x FY2014E ABV compared to its fiveyear range of 0.7x 1.4x oneyear forward ABV with a median of 1.1x. Considering the bank s relatively higher risk exposures, particularly to the power sector (more than 16% of the loan book) and that peers of the bank are also trading at similar valuations with similar or better asset quality outlook, we remain Neutral on the stock. NEUTRAL CMP `110 Target Price Investment Period Stock Info Sector Banking Market Cap (` cr) 6,133 Beta Week High / Low 148/79 Avg. Daily Volume 71,318 Face Value (`) 10 BSE Sensex 16,480 Nifty 4,975 Reuters Code ADBK.BO Bloomberg Code ANDB@IN Shareholding Pattern (%) Promoters 58.0 MF / Banks / Indian Fls 15.4 FII / NRIs / OCBs 13.3 Indian Public / Others 13.4 Abs. (%) 3m 1yr 3yr Sensex (7.6) (11.1) 38.8 Andhra Bank (5.1) (22.1) 76.5 Key financials Y/E March (` cr) FY2011 FY2012E FY2013E FY2014E NII 3,221 3,759 4,245 4,808 Vaibhav Agrawal % chg Ext: 6808 Net profit 1,267 1,345 1,256 1,436 vaibhav.agrawal@angelbroking.com % chg NIM (%) Varun Varma EPS (`) Ext: 6847 P/E (x) varun.varma@angelbroking.com P/ABV (x) RoA (%) Sourabh Taparia Ext: 6872 RoE (%) sourabh.taparia@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 4QFY2012 performance Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy) Interest earned 2,999 2, , on Advances / Bills 2,430 2,391 1, on investments on balance with RBI & others (30.1) on others NA 30 NA Interest Expended 2,085 1, , Net Interest Income (7.1) Other income (2.3) 299 (23.1) Other income excl. treasury (5.6) 234 (1) Fee Income (1.9) Treasury Income (64.5) Recoveries from writ.off acc Forex 6 31 (81.5) 34 (83.2) Operating income 1,144 1,219 (6.2) 1,161 (1.4) Operating expenses Employee expenses Other Opex (1.5) Preprovision Profit (13.9) 712 (7.1) Provisions & Contingencies (21.2) 303 (19.5) Provisions for NPAs (48.6) Provisions for Investments NA Other Provisions (59.1) PBT (8.9) Provision for Tax (49.9) 96 (19.2) PAT Effective Tax Rate (%) (1523)bp 23.5 (489)bp Exhibit 2: 4QFY2012 Actual vs. Angel estimates Particulars (` cr) Actual Estimates Var. (%) Net interest income 914 1,016 (10.1) Noninterest income (13.6) Operating income 1,144 1,282 (10.8) Operating expenses (3.4) Preprov. profit (15.5) Provisions & cont (5.2) PBT (20.6) Prov. for taxes (60.6) PAT May 9,

3 Exhibit 3: 4QFY2012 performance Particulars 4QFY12 3QFY12 %chg (qoq) 4QFY11 %chg (yoy) Balance sheet Advances (` cr) 83,642 79, , Deposits (` cr) 105,851 98, , CredittoDeposit Ratio (%) (121)bp bp Current deposits (` cr) 6,369 5, ,160 (11.0) Saving deposits (` cr) 21,578 20, , CASA deposits (` cr) 27,947 26, , CASA ratio (%) (21)bp 29.1 (266)bp CAR (%) bp 14.4 (120)bp Tier 1 CAR (%) bp 9.7 (65)bp Profitability Ratios (%) Cost of deposits bp bp Yield on advances (43)bp 1 73bp Yield on investments bp bp Yield on funds (36)bp bp Cost of funds bp bp Reported NIM (47)bp 3.7 (35)bp Costtoincome ratio bp bp Asset quality Gross NPAs (` cr) 1,798 1,884 (4.6) Gross NPAs (%) (26)bp bp Net NPAs (` cr) (19.9) Net NPAs (%) (30)bp bp Provision Coverage Ratio (%) bp 83.9 (1281)bp Slippage ratio (%) bp bp NPA to avg. assets (%) bp 0.8 (44)bp NIMs decline on interest rate reversals For FY2012, the bank s business growth remained at moderate levels, with advances growing by 17.1% yoy (5.6% qoq during 4QFY2012) and deposits growing by 14.9% yoy (7.3% qoq during 4QFY2012). Current account deposit accretion picked up during 4QFY2012 with a growth of 15.1% qoq (down 11.0% yoy), while savings accounts growth was also reasonable healthy at 4.1% qoq up 10.0% yoy). However due to a relatively higher sequential increase in deposits, the CASA ratio marginally declined by 21bp during 4QFY2012. The bank plans to open ~200 branches in the northern and eastern part of the country during FY2013. We have factored in a loan growth of 14.5% in FY2013 and 16.0% in FY2014. May 9,

4 Exhibit 4: Advances growth strong for 4QFY2012 Exhibit 5: CASA ratio moderate for Andhra Bank (5.0) Adv. qoq chg (%) Dep. qoq chg (%) CDR (%, RHS) (1.4) (2.8) CASA ratio CASA yoy growth (%, RHS) The bank s yield on advances declined by 43bp qoq on account of interest rate reversals amounting to `7580cr. The bank s cost of deposits also increased by 35bp qoq on account of sequential dip in CASA ratio and higher cost of borrowings on bulk deposits during the quarter. Consequently, the reported NIMs of the bank declined by 47bp during 4QFY2012. Exhibit 6: YoA lower on interest reversals Exhibit 7: NIM declines by 3.3% Higher recoveries offset fresh slippages during 4QFY2012 The bank s asset quality improved during 4QFY2012, with gross and net NPA levels declining by 4.6% and 19.9% qoq. The bank s provision coverage ratio also improved sequentially by 574bp to 71.1%. The slippage levels were higher on a qoq basis (slippage ratio of 2.6% compared to 2.1% in 3QFY2012), however continued momentum in recoveries (`551cr during 4QFY2012) led to lower gross NPA levels. The bank s restructuring book jumped by 62.0% qoq to `5,959cr (`2,280cr restructured during 4QFY2012) primarily on account of restructuring of SEBs (`1,200cr) and Air India (`600cr). The bank expects some amount of restructuring from construction related industries going ahead. May 9,

5 Exhibit 8: NPA ratios above normal levels Exhibit 9: Trend in slippage ratios Gross NPAs (%) Net NPAs (%) PCR (%, RHS) Slippages (%) Credit cost (%, RHS) ; Note: PCR including tech. writeoffs Exhibit 10: Costtoincome ratio higher in 4QFY2012 Exhibit 11: Opex trends Costtoincome ratio (%) Opex to average assets (%, RHS) Staff expenses (`cr) QoQ growth (%, RHS) (8.3) (10.0) Investment concerns Moderate fee income; low CASA During FY , fee income for the bank reported a CAGR of only 9.6% compared to advances posting a CAGR of 24.6%. Infact, the bank registered a negative growth in fee income during FY2012, which has led to proportion of fee income to overall assets declining from 0.8% in FY2011 to 0.6% as of FY2012. On the CASA front, the bank s market share has fallen by 35bp over FY2005 1HFY2012; and at 26.4%, the bank s CASA ratio is on the lower end compared to peers. Riskadjusted yields expected to fall The bank has one of the highest yields in the industry (12.8% as of 3QFY2012 and 12.3% as of 4QFY2012 after accounting for interest reversals), also reflected in its relatively strong NIM of 3.3% (as of 4QFY2012). This can be partly attributed to the bank s high concentration in the hinterland of its home state. That said, it is difficult for the bank to remain insulated from competition on the lending side and, as a result, we expect a decline in the bank s riskadjusted yields and overall profitability over the medium term. May 9,

6 Outlook and valuation The bank s asset quality, which until 1QFY2012 was significantly better than its peers, deteriorated substantially during 2QFY2012 on account of switchover to system based NPA recognition. Although higher recoveries amounting to `1,034cr in 2HFY2012 have led to reduction in gross NPA levels (compared to 1HFY2012), the NPA ratios still remain significantly above the levels the bank used to enjoy till 1QFY2012. Also, relatively high risk exposures, particularly the power sector (more than 16% of the loan book), create risk of higher deterioration in asset quality for the bank in the coming quarters in our view. At the CMP, the stock is trading at 0.7x FY2014E ABV compared to its fiveyear range of 0.7x 1.4x oneyear forward ABV. Considering, the bank s peers are also trading at comparable valuations with similar or better asset quality outlook, we remain Neutral on the stock. May 9,

7 Exhibit 12: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2013 FY2014 FY2013 FY2014 Credit growth Deposit growth CASA ratio NIMs Other income growth Growth in staff expenses Growth in other expenses Slippages Coverage Ratio Source: Angel Research Exhibit 13: Change in estimates FY2013 Particulars (` cr) Earlier Revised estimates estimates Var. (%) Earlier estimates FY2014 Revised estimates Var. (%) NII 4,350 4,245 (2.4) 4,931 4,808 (2.5) Noninterest income (3.0) 1,067 1,035 (3.0) Operating income 5,284 5,151 (2.5) 5,998 5,843 (2.6) Operating expenses 2,094 2,075 (0.9) 2,408 2,386 (0.9) Preprov. profit 3,190 3,076 (3.6) 3,590 3,457 (3.7) Provisions & cont. 1,234 1,217 (1.4) 1,351 1,332 (1.4) PBT 1,956 1,859 (4.9) 2,238 2,125 (5.1) Prov. for taxes (4.9) (5.1) PAT 1,321 1,256 (4.9) 1,512 1,436 (5.1) Source: Angel Research Exhibit 14: P/ABV band 240 Price (`) 0.6x 0.8x 1x 1.2x 1.4x Apr02 Nov02 Jun03 Jan04 Aug04 Mar05 Oct05 May06 Dec06 Jul07 Feb08 Sep08 Apr09 Nov09 Jun10 Jan11 Aug11 Mar12 Oct12 May 9,

8 Exhibit 15: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2013E P/ABV (x) FY2013E Tgt P/ABV (x) FY2013E P/E (x) FY1112E EPS CAGR (%) FY2013E RoA (%) FY2013E RoE (%) AxisBk Buy 963 1, FedBk Neutral HDFCBk Accumulate ICICIBk* Buy 822 1, SIB Neutral YesBk Buy AllBk Accumulate AndhBk Neutral BOB Buy BOI Buy BOM Buy CanBk Buy CentBk Neutral CorpBk Buy DenaBk Buy IDBI# Buy IndBk Buy IOB Buy J&KBk Accumulate OBC Buy PNB Buy 768 1, SBI* Buy 1,888 2, SynBk Buy UcoBk Neutral UnionBk Buy UtdBk Buy VijBk Neutral ; Note: *Target multiples=sotp Target Price/ABV (including subsidiaries); # without adjusting for SASF May 9,

9 Income statement Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E FY14E NII 1,340 1,627 2,195 3,221 3,759 4,245 4,808 YoY growth (%) (5.5) Other income ,035 YoY growth (%) (7.0) (4.1) Operating income 1,966 2,392 3,159 4,118 4,619 5,151 5,843 YoY growth (%) Operating expenses 909 1,104 1,350 1,705 1,804 2,075 2,386 YoY growth (%) (2.6) Preprov. profit 1,057 1,288 1,810 2,413 2,815 3,076 3,457 YoY growth (%) Prov. & cont ,217 1,332 YoY growth (%) (37.2) (4.1) PBT ,436 1,767 1,824 1,859 2,125 YoY growth (%) 16.9 (2.1) Prov. for taxation as a % of PBT PAT ,046 1,267 1,345 1,256 1,436 YoY growth (%) (6.6) 14.3 Balance sheet Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E FY14E Share Capital Reserves & Surplus 2,764 3,162 3,925 5,933 6,920 7,851 8,929 Deposits 49,437 59,390 77,688 92, , , ,387 Growth (%) Borrowings 591 1,311 2,832 4,620 5,301 6,226 7,317 Tier 2 Capital 1,115 2,040 3,020 3,020 2,939 3,366 3,904 Other Liab. & Prov. 2,201 2,081 2,392 2,612 3,393 3,858 4,377 Total Liabilities 56,592 68,469 90, , , , ,473 Cash Balances 4,902 4,853 6,699 7,184 5,564 4,996 5,895 Bank Balances ,469 3,275 3,082 3,619 4,253 Investments 14,898 16,911 20,881 24,204 29,629 38,810 47,049 Advances 34,238 44,139 56,114 71,435 83,642 95, ,093 Growth (%) Fixed Assets Other Assets 1,542 1,796 1,825 2,485 2,745 3,224 3,789 Total Assets 56,592 68,469 90, , , , ,473 Growth (%) May 9,

10 Ratio analysis Y/E March FY08 FY09 FY10 FY11 FY12E FY13E FY14E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov. /Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis NII () Prov. Exp Adj. NII Treasury Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Leverage RoE May 9,

11 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. 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 Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (5 to 5%) Reduce (5% to 15%) Sell (< 15%) May 9,