Andhra Bank. CMP: INR77 TP: INR120 (+56%) Buy. Strong core performance; Positive asset quality guidance by management

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1 BSE SENSEX S&P CNX 27,396 8,286 Bloomberg ANDB IN Equity Shares (m) M.Cap. (INR b) / (USD b) 46.2/ Week Range (INR) 110 / 61 1, 6, 12 Rel. Per (%) -2/-1/-7 Avg Val/Vol /4755 Free float (%) 39.0 Financials & Valuation (INR Billion) Y/E MAR 2016E 2017E 2018E NII OP NP NIM (%) EPS (INR) EPS Gr. (%) BV/Sh. (INR) ABV/Sh.(INR) ROE (%) ROA (%) D. Payout(%) Valuations P/E(X) P/BV (X) P/ABV (X) Div. Yield (%) April QFY15 Results Update Sector: Financials Andhra Bank CMP: INR77 TP: INR120 (+56%) Buy Strong core performance; Positive asset quality guidance by management Andhra Bank s (ANDB) 4QFY15 PAT was at INR1.9b (2x YoY on a lower base), driven by healthy NIM (3.5%, 12 quarter high), strong loan growth (+17% YoY) and lower credit costs (1.6% vs. 2.5% in 4QFY14). Slippages during the quarter declined to a 4 quarter low of INR7.7b vs. INR9b in 3QFY15. Agriculture GNPA declined 20% QoQ to INR10.6b led by strong recoveries (INR3b+ in 4Q) in AP/Telangana. Management is confident of recovering another INR5-6b over the next couple of quarters (Agri NPA target of 3% by 2QFY16 vs. 5.2% currently and 7.2% in 1QFY15). Bank continued to report healthy NIM (3.5%, +5bp QoQ) led by interest write-back on Agriculture NPA recoveries (INR300m) from AP/Telangana. Management guided that the margins would remain at similar levels over the next few quarters. Other highlights: (1) fees grew 21% QoQ (only 2% YoY on higher base) led by strong traction in processing fees (INR1,132m) led by pickup in growth in 4QFY15, (2) PCR, including technical write-offs, improved 580bp QoQ to 59%, (3) Bank restructured INR31.3b in 4Q vs INR22.9b in 9M and (4) CASA ratio improved 151bp QoQ to 27.4% (growth of 21% YoY and 15% QoQ). (5) CET 1 at 7.5%. Bank to raise Tier I bonds in 1Q; equity raising unlikely in near term Valuation and view: Declining trend in slippages and zero restructuring pipeline were the key positives. Over FY13-14, ANDB's earnings were severely hit due to rising NPAs and further impacted in 1QFY15 due to a spike in Agriculture NPAs. With clarity emerging on the farm loan waiver scheme and management s focus on recoveries, we believe earnings would improve gradually going forward (INR5b+ of interest write-back and upgrade/recoveries of INR5-6b Agri related NPAs). We expect RoA/RoE to improve to 0.7%/14% by FY17E led by normalized tax rate and healthy margins. Maintain Buy with a TP of INR120 (0.6x FY17E BV). Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Vallabh Kulkarni (Vallabh.Kulkarni@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Slippages declined to a four quarter low of INR7.7b Loan growth (+17% YoY) was mainly driven by SME (+21% YoY and +14% QoQ) and retail segment (+20% YoY and +7% QoQ) Buy with a target price of INR120 (0.6x FY17E BV) Strong Agri NPA recoveries aid GNPA; Positive outlook by management GNPA declined 68bp QoQ at 5.3% led by lower slippages and strong recoveries in AP/Telangana farm NPA portfolio. Reported PCR increased 580bp QoQ to 59% in 4QFY15 resulting in NNPA declining 77bp to 2.9% vs 3.7% in the previous quarter. Slippages during the quarter declined to a 4 quarter low of INR7.7b vs. INR9b in 3QFY15. As per the management, slippage run rate would remain near these levels over the next couple of quarters and subside further as the economic growth picks up. Agriculture GNPA declined 20% QoQ to INR10.6b led by strong recoveries (INR3b+ in 4Q) in AP/Telangana. Management is confident of recovering another INR5-6b over the next couple of quarter (Agri NPA target of 3% by 2QFY16 vs. 5.2% currently and 7.2% in 1QFY15). Fresh restructuring increased sharply during the quarter (INR31.3b vs INR22.9b in 9M one major account from Power sector). OSRL stood at INR 144b (11.1% of loans). Management stated that, unlike a few other banks who have reported results thus far, the restructured pipeline is Nil. Other highlights Loans grew 17% YoY (+6% QoQ), while deposits grew at 9% YoY and QoQ each. CD ratio declined to 81.3% in 4QFY15 vs. 83.6% in 3QFY15. Loan growth was mainly driven by SME (+21% YoY and +14% QoQ) and Retail segment (+20% YoY and +7% QoQ). Within, retail segment growth was mainly driven by Housing loans (+36% YoY and 14% QoQ) which is 50% of total retail book. Non Agriculture gold loan book declined 11% QoQ (formed 16% of the bank s total retail book). CASA deposits growth was at a twenty quarter high at 21% YoY to INR424b (CASA ratio of 27.4% - improvement of 151bp QoQ and 255bp YoY). SA/CA deposits increased by 13%/23% QoQ and 18%/30% YoY. Valuation and view Declining trend in slippages and zero restructuring pipeline were the key positives. Over FY13-14, ANDB's earnings were severely hit due to rising NPAs and further impacted in 1QFY15 due to a spike in Agriculture NPAs. With clarity emerging on the farm loan waiver scheme and management s focus on recoveries, we believe earnings would improve gradually going forward (INR5b+ of interest write-back and upgrade/recoveries of INR5-6b Agri related NPAs). We expect RoA/RoE to improve to 0.7%/14% by FY17E led by normalized tax rate and healthy margins. Maintain Buy with a TP of INR120 (0.6x FY17E BV). 28 April

3 Exhibit 1: We upgrade our FY16/17 estimates to factor in higher NIM INR B Old Estimates New Estimates % Change FY16E FY17E FY16E FY17E FY18E FY16E FY17E Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Margins (%) Credit Cost (%) RoA (%) RoE (%) Exhibit 2: One year forward P/BV Exhibit 3: One year forward P/E 28 April

4 Exhibit 4: DuPont Analysis: Gradual improvement in profitability led by decline in credit costs and tax rate (%) Y/E MARCH FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net Interest Income Fee income Fee to core Income Core Income Operating Expenses Cost to Core Income Employee cost Emp. to total exp (%) Others Core Operating Profit Trading and others Operating Profit Provisions NPA Others PBT Tax Tax Rate RoA Leverage (x) RoE April

5 Story in charts Exhibit 5: Loan growth driven by MSME and Retail segments Exhibit 6: Bank utilized other funding avenues in 4Q 32 Loans (INR b) YoY Gr. (%) Deposits (INR b) YoY Growth (%) QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY ,026 1,076 1,117 1,118 1,188 1, ,059 1,077 1,086 1,124 1,238 1,258 1,293 1,317 1,418 1,475 1,451 1,421 1,550 Exhibit 7: Margin improvement (%) led by interest write-back Exhibit 8: GNPA ratio declined led by higher recoveries GNPA (%) NNPA (%) PCR (reported %) QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY Exhibit 9: Gross slippages at 4 quarter low (INRb) 21.6 Exhibit 10: Credit cost remained stable QoQ (%) QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 28 April

6 Exhibit 11: Quarterly Snapshot FY14 FY15 Variation (%) Cumulative Numbers INR m 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY FY14 FY15 YoY Gr (%) Profit and Loss Net Interest Income 8,739 10,454 8,683 9,498 8,035 11,042 12,591 13, ,373 45, Other Income 4,677 2,256 3,029 3,366 3,947 2,775 3,903 4, ,328 14, Trading profits 2, ,139 1, ,008 3,665-9 Recoveries , Forex , Others (Ex non core) 1,412 1,501 1,944 2,497 1,942 1,828 2,243 2, ,353 8, Total Income 13,416 12,710 11,712 12,864 11,982 13,817 16,494 18, ,702 60, Operating Expenses 5,954 6,282 6,496 4,368 5,720 6,357 7,262 8, ,100 27, Employee 3,852 4,011 4,149 1,817 3,395 3,732 4,628 5, ,829 16, Others 2,103 2,271 2,347 2,550 2,325 2,625 2,634 2, ,271 10, Operating Profits 7,462 6,428 5,216 8,497 6,263 7,460 9,232 10, ,602 32, Provisions 3,849 5,022 4,280 7,114 4,143 4,915 5,415 6, ,265 20,802 3 PBT 3,613 1, ,382 2,120 2,545 3,817 3, ,337 12, Taxes 1, ,050 1,100 1,800 1, ,982 5, PAT 2, ,070 1,445 2,017 1, ,356 6, Asset Quality GNPA 47,484 51,872 56,925 58,576 68,272 68,843 71,181 68, ,671 68, NNPA 32,117 34,774 36,534 33,425 43,215 43,158 42,642 36, ,772 36, GNPA (%) NNPA (%) PCR (Reported, %) Slippages 11,817 7,232 6,933 5,053 21,601 9,801 9,046 7, Slippage Ratio Ratios (%) Fees to Total Income Cost to Core Income Tax Rate CASA (Reported) Loan/Deposit Margins (%) Yield on loans Yield On Investments Cost of deposits Margins Balance Sheet (INR B) Loans 1,004 1,007 1,047 1,102 1,142 1,149 1,188 1, ,102 1, Deposits 1,258 1,293 1,317 1,418 1,475 1,451 1,421 1, ,418 1,550 9 CASA Deposits Break up of Loans Agriculture Adv SME Credit Retail Loans Other loans April

7 Exhibit 12: Valuation metrics Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) (INR) (USDb) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 ICICIBC* Buy HDFCB Buy 1, AXSB Buy KMB* Neutral 1, YES Buy IIB Buy DCBB Buy FB Buy JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Buy BOI Neutral BOB Neutral UNBK Buy INBK Buy CRPBK Neutral ANDB Buy IDBI Neutral DBNK Neutral Public Aggregate HDFC* Buy 1, LICHF Buy IHFL Buy IDFC Buy RECL Buy POWF Buy SHTF Buy MMFS Buy BAF Buy 3, ,137 1, NBFC Aggregate *Multiples adj. for value of key ventures/investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries # Div Yield based on FY14 declared dividend; UR: Under Review Source: Company, MOSL 28 April

8 Financials and valuations Income Statement (INR Million) Y/E March E 2017E 2018E Interest Income 82, , , , , , , ,976 Interest Expense 50,703 75,794 91, , , , , ,027 Net Interest Income 32,210 37,593 37,570 37,373 45,380 55,273 62,418 73,949 Change (%) Non Interest Income 8,970 8,599 10,474 13,328 14,998 16,719 18,420 20,352 Net Income 41,179 46,193 48,044 50,702 60,379 71,992 80,838 94,301 Change (%) Operating Expenses 17,049 18,042 20,372 23,100 27,394 32,270 37,412 42,706 Pre Provision Profits 24,131 28,150 27,672 27,602 32,984 39,721 43,426 51,595 Change (%) Provisions (excl tax) 6,460 9,907 9,962 20,265 20,802 21,021 20,313 23,169 PBT 17,671 18,243 17,711 7,337 12,182 18,700 23,113 28,427 Tax 5,000 4,796 4,819 2,982 5,798 6,265 7,743 9,523 Tax Rate (%) PAT 12,671 13,447 12,891 4,355 6,384 12,436 15,370 18,904 Change (%) Pref. Dividend (Incl tax) Profits for Equity SH 12,671 13,447 12,891 4,355 6,384 12,436 15,370 18,904 Change (%) Equity Dividend (Incl tax) 3,577 3,577 3, ,405 3,622 4,477 5,506 Core PPP* 22,210 26,559 24,727 22,678 28,554 34,855 38,460 46,529 Change (%) *Core PPP is (NII+Fee income-opex) Balance Sheet (INR Million) Y/E March E 2017E 2018E Share Capital 5,596 5,596 5,596 5,896 6,029 6,029 6,029 6,029 Reserves & Surplus 59,328 69,198 78,816 81,478 94,612 96, , ,755 Net Worth 64,924 74,794 84,412 87, , , , ,784 Deposits 921,563 1,058,512 1,237,956 1,418,451 1,550,122 1,829,144 2,158,390 2,546,901 Change (%) Borrowings 76,397 82, , , , , , ,303 Other Liabilities & Prov. 26,123 33,931 29,428 35,733 47,868 56,235 65,312 73,847 Total Liabilities 1,089,007 1,249,642 1,462,989 1,673,409 1,851,704 2,129,035 2,495,246 2,918,834 Current Assets 104,590 86,456 64,059 94,406 76,638 97, , ,850 Investments 242, , , , , , , ,953 Change (%) Loans 714, , ,733 1,076,442 1,259,547 1,448,479 1,709,206 2,016,863 Change (%) Fixed Assets 3,175 3,026 3,035 4,339 12,636 6,533 7,843 9,153 Other Assets 24,849 27,454 35,839 44,656 37,889 41,677 50,013 60,015 Total Assets 1,089,007 1,249,642 1,462,989 1,673,409 1,851,704 2,129,035 2,495,246 2,918,834 Asset Quality (%) GNPA (INR M) 9,956 17,980 37,145 58,576 68,765 65,248 68,643 83,099 NNPA (INR M) 2,737 7,559 24,092 33,425 37,526 23,229 14,468 16,293 GNPA Ratio NNPA Ratio PCR (Excl Tech. write off) E: MOSL Estimates 28 April

9 Financials and valuations Ratios Y/E March E 2017E 2018E Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA Int. Expense/Int.Income Fee Income/Net Income Non Int. Inc./Net Income Efficiency Ratios (%) Cost/Income* Empl. Cost/Op. Exps Busi. per Empl. (INR m) NP per Empl. (INR lac) * ex treasury Asset-Liability Profile (%) Loans/Deposit Ratio CASA Ratio Investment/Deposit Ratio G-Sec/Investment Ratio CAR Tier Valuation Book Value (INR) Change (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Change (%) Price-Earnings (x) Dividend Per Share (INR) Dividend Yield (%) E: MOSL Estimates 28 April

10 Corporate profile Company description Andhra Bank, established in 1923, is a Hyderabad based mid-sized Public Sector Bank. The bank has a wide network of 2,507 branches and 2,232 ATMs with focus on Southern India. The bank also has two representative offices at New Jersey and Dubai. Government of India holds 61% stake in the bank. Exhibit 13: Sensex rebased Exhibit 14: Shareholding pattern (%) Mar-15 Dec-14 Mar-14 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 16: Top management Name Designation C VR Rajendran Chairman & Managing Director S. K. Kalra Executive Director S.V. Venkatasubramanian General Manager & CFO Exhibit 15: Top holders Holder Name % Holding LIC of India 6.0 LIC of India Money Plus Growth Fund 1.0 HDFC Standard Life Insurance Company Ltd 1.0 Exhibit 17: Directors Name C V R Rajendran K Thamaraiselvan Amit Goel Naina Sharma Pankaj Chaturvedi N Venkata Ramana Reddy K Raghuraman Name Nandlal L Sarda G R Sundaravadivel Satish Kumar Kalra K K Misra Anandrao Vishnu Patil E E Karthak Y Amarnath *Independent Exhibit 18: Auditors Name C R Sagdeo & Co Nag & Associates Patro & Co R Subramanian & Co Type Statutory Statutory Statutory Statutory Exhibit 19: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY April

11 N O T E S 28 April

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