8 November 2012 2QFY13 Results Update | Sector: Financials

Andhra Bank
BSE SENSEX S&P CNX

18,902 Bloomberg Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel.Perf.(%) M.Cap. (INR b) M.Cap. (USD b)

5,760 ANDB IN 559.6 139/79 -4/-18/-18 59.9 1.1

CMP: INR107

TP: INR135

Buy

Andhra Bank (ANDB) posted PAT of INR3.3b for 2QFY13. NII was INR8.9b, 8% lower than our estimate of INR9.7b. Despite this, PAT was in-line due to (1) lower opex (5% below estimate), and (2) lower provisions (INR1.4b v/s our estimate of INR2.5b; the bank compromised on PCR, which declined 590bp QoQ to 39%). Gross slippages increased from INR8.3b in 1QFY13 to INR9.2b (annualized slippage ratio of 4.9%). Of the overall slippages, 55%+ came from three accounts in the large corporate segment, of which one large account was of INR3.6b. Net addition to restructured loans was INR4.7b (55bp of overall loans). The outstanding restructured loan portfolio stood at INR90.8b (10.5% of overall loans; borrower-wise). NIM declined 20bp QoQ to 3.1%. While yield on funds increased 4bp QoQ to 10%, cost of funds was up 24bp QoQ to 7.2% which impacted margins. Fee income was muted YoY. Other highlights: (1) Loans grew 16% YoY (flat QoQ) and (2) CASA ratio declined ~80bp QoQ to 25.9% Valuation and view: While we downgrade our earnings estimate for FY13 by 6% to factor in lower margins and higher tax rate, ANDB would be a beneficiary of falling bulk deposit rates which would provide cushion to earnings. Concerns over asset quality remain, but at valuations of 0.6x FY14E BV, and dividend yield of ~5%, we believe most negatives are priced in. Buy.

* *

*2QFY13 numbers are on borrower-wise classification; prior to 2QFY13 it was on facility-wise disclosure

Sohail Halai (Sohail.Halai@motilaloswal.com); + 91 22 3982 5430 Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); + 91 22 3982 5415
Investors are advised to refer through disclosures made at the end of the Research Report.

Andhra Bank

Quarterly performance: Lower opex and provisions led to in-line PAT; NIM and asset quality disappoints; (INR m)
Y/E March Net Interest Income % Change (Y-o-Y) Other Income Net Income Operating Expenses Operating Profit % Change (Y-o-Y) Other Provisions Profit before Tax Tax Provisions Net Profit % Change (Y-o-Y) 2QFY13A 8,938 -6.0 2,195 11,132 4,751 6,381 -7.1 1,395 4,986 1,730 3,256 3.0 2QFY13E Var. (%) 9,737 -8 2.4 2,256 -3 11,993 -7 5,003 -5 6,990 -9 1.8 2,502 -44 4,488 1,279 3,209 1.5 11 35 1 Comments NIM disappoints and muted business growth Muted fee income growth

Asset Quality disappoints; PCR(cal) at 39.3% as compared to 45% a quarter ago

Lower than expected NII compensated by lower provisions Source: Company, MOSL

Asset quality deteriorates QoQ, led by stress in large corporate segment

Asset quality deteriorated, with GNPA increasing 28% QoQ to INR30.1b. Slippages were higher than expected at INR9.2b (annualized slippage ratio of 4.9%) v/s INR8.3b in 1QFY13 and INR11.6b in 2QFY12. Over 55% of the fresh slippages came from three accounts in the large corporate segment, of which one large account was of INR3.6b. Apart from these, slippages were broadbased and in line with the historical trend of INR4b-5b. ANDB has not yet recognized one media account of INR2b as NPA, as it has been receiving interest as scheduled till the end of September 2012. However, there is high probability of this account getting recognized as an NPA in 3QFY13. The impact of this could be neutralized to some extent by upgradation of some large accounts that management is expecting in 2HFY13. Recoveries and upgradations increased to INR2.6b from INR1.4b in 1QFY13. Writeoffs during the quarter were negligible. In percentage terms, GNPA and NNPA increased to 3.5% and 2.2%, respectively v/s 2.7% and 1.5% a quarter ago. PCR (including technical write-offs) declined to 53.2% as against 60.4% in 1QFY13.

Management guides restructuring of INR12b in 2HFY13

During the quarter, ANDB restructured loans of INR4.7b (0.55% of overall loans). As a result, its outstanding restructured loan portfolio stands at INR90.8b (10.5% of overall loans; borrower-wise). Facility-wise restructured loan portfolio would have been INR72.2b (8.3% of overall loans). The management has guided for further restructuring of INR12b in 2HFY13, which includes expected restructuring of TNSEB (~INR4.9b).

Margin decline led by increase in cost of funds; fee income growth muted
NIM declined 20bp QoQ to 3.1%, led by higher cost of funds. While yield on funds increased 4bp QoQ to 10%, cost of funds was up 24bp QoQ to 7.2%. Non-interest income for the quarter was INR2.2b (up 23% YoY, but down 7% QoQ), largely in line with our estimate. However, fee income was muted YoY (up 5% QoQ) at INR1.5b. Treasury gains were INR296m v/s INR246m in 1QFY13 and INR222m in 2QFY12. Recoveries from written-off accounts declined to INR150m from INR439m in 1QFY13.

8 November 2012

Andhra Bank

Other highlights
Business growth was flat sequentially. On a YoY basis, loans grew 16% to INR853b and deposits increased 15% to INR1.1t. CASA grew 14% YoY but declined 2% QoQ to INR282b. CASA ratio declined ~80bp QoQ to 25.9%.

Valuation and view

Increased stress in the large corporate segment in the last two quarters has led to disappointment on asset quality. We expect slippage ratio to increase to 4%/3.5% in FY13/FY14 (from 1.8% in FY12). Further, high exposure to the infrastructure sector could lead to increase in restructured loans portfolio, which is a concern. We model in credit cost of 0.7%/0.8% (as the bank compromised on PCR in 1HFY13) over FY13/14 v/s 0.6% in FY12. While we downgrade our earnings estimate for FY13 by 6% to factor lower margins and higher tax rate, ANDB would be a beneficiary of falling bulk deposit rate which would provide cushion to earnings. We expect NII CAGR of 8% over FY12-14; however, provisioning expense is likely to grow 4% on a higher base of FY12, which would translate into PAT CAGR of 6%. We expect RoA of ~1% and RoE of ~16.5%. Concerns over asset quality remain, but at valuations of 0.6x FY14E BV, and a dividend yield of ~5%, we believe most negatives are priced in. Maintain Buy.
We downgrade our earnings estimate to factor lower NIMs and higher tax rate (INR b)
Old Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Margins (%) Credit Cost (%) RoA (%) RoE (%) FY13 40.0 9.8 49.8 20.5 29.2 9.8 19.4 5.4 14.0 3.2 0.7 1.0 17.5 FY14 45.6 10.6 56.2 23.4 32.7 11.0 21.7 6.1 15.7 3.2 0.8 1.0 17.2 FY13 37.4 9.8 47.2 19.9 27.2 8.5 18.8 5.6 13.1 3.0 0.7 1.0 16.5 Revised FY14 44.2 10.7 55.0 22.8 32.2 10.7 21.5 6.5 15.1 3.0 0.8 1.0 16.7 Change (%) FY13 FY14 -6.4 -2.9 -0.5 1.4 -5.2 -2.1 -2.9 -2.9 -6.8 -1.6 -13.5 -2.8 -3.4 -1.0 3.5 6.1 -6.1 -3.7

Source: MOSL

ANDB: One year forward P/E

ANDB: One year forward P/BV

8 November 2012

Andhra Bank

Quarterly trends
Business growth muted QoQ CASA ratio declines QoQ (%)

The management intends to focus on selective lending and on reducing the proportion of bulk deposits; has guided loan growth of 16% .

Sequentially, CASA growth moderated in 2QFY13, led by moderation in both SA (-1% QoQ; +15% YoY) and CA deposits (-5% QoQ; +11% YoY).

NIM declines QoQ led by higher cost of funds (%)

Fee income disappoints

While yield on funds increased 4bp QoQ to 10%, cost of funds was up 24bp QoQ to 7.2% (on re-pricing of low cost retail deposits), which led to margin compression.

Fee income to average assets declined to 0.46% in 2QFY13 as compared to 0.9% in FY06 and 0.6% in FY12.

Slippages increase QoQ led by large corporate (INR b)

Asset quality deteriorates QoQ

Over 55% of the fresh slippages came from three accounts in the large corporate segment, of which one large account was of INR3.6b.

In absolute terms, GNPA and NNPA increased 28% QoQ and 42% QoQ, respectively.

8 November 2012

Andhra Bank

Quarterly Snapshot
FY12 1Q Profit and Loss (INR m) Net Interest Income 9,104 Other Income 2,170 Trading profits 594 Recoveries 45 Forex 185 Others (Ex non core) 1,347 Total Income 11,273 Operating Expenses 4,277 Employee 2,731 Others 1,546 Operating Profits 6,997 Provisions 1,770 NPA 1,171 Standard assets 330 MTM 260 Others 8 PBT 5,227 Taxes 1,370 PAT 3,857 Asset Quality GNPA 11,764 NNPA 3,374 GNPA (%) 1.6 NNPA (%) 0.5 PCR (Calculated, %) 71.3 PCR (Reported, %) 82.0 Slippages 2,466 Slippage Ratio 1.7 Ratios (%) Fees to Total Income 11.9 Cost to Core Income 40.9 Tax Rate 26.2 CASA (Reported) 27.8 Loan/Deposit 83.3 CAR 13.2 Tier I 8.8 Margins - Cal (%) Yield on loans 12.2 Yield On Investments 7.7 Cost of deposits 7.0 Margins 3.8 Balance Sheet (INR B) Loans 757 Deposits 909 CASA Deposits 253 of which Savings 197 Current 56 Break up of Loans Agriculture Adv 105 SME Credit 116 Retail Loans 109 Other loans 428 For %age change QoQ and YoY is bp 2Q 9,512 1,778 222 41 64 1,452 11,290 4,423 2,736 1,687 6,868 2,607 2,209 0 29 368 4,261 1,100 3,161 19,871 10,867 2.7 1.5 45.3 61.7 11,593 7.6 12.9 40.3 25.8 26.1 78.9 13.1 8.8 12.5 7.9 7.5 3.8 745 944 247 194 53 108 115 110 412 3Q 9,839 2,353 163 86 308 1,796 12,191 4,515 2,847 1,668 7,676 3,094 395 2,482 190 27 4,582 1,550 3,032 18,841 9,433 2.4 1.2 49.9 65.4 3,809 2.3 14.7 38.8 33.8 26.6 80.2 12.6 8.2 12.8 7.8 7.6 3.8 792 987 263 207 55 114 119 109 450 4Q 9,139 2,299 232 200 57 1,811 11,438 4,828 3,186 1,643 6,610 2,437 1,042 1,026 368 0 4,173 776 3,397 17,980 7,559 2.1 0.9 58.0 71.1 4,017 2.2 15.8 44.1 18.6 26.4 80.0 13.2 9.0 12.3 7.9 7.9 3.3 847 1,059 279 216 64 125 131 113 478 FY13 1Q 9,385 2,357 246 439 258 1,413 11,742 4,708 2,968 1,741 7,034 2,066 1,573 100 143 251 4,968 1,350 3,618 23,583 12,930 2.7 1.5 45.2 60.4 8,331 4.4 12.0 43.6 27.2 26.7 80.4 12.7 8.7 12.1 7.9 7.7 3.3 866 1,077 288 225 63 127 133 114 492 2Q Variation (%) Cumulative Numbers QoQ YoY 1HFY12 1HFY13 YoY Gr (%) -5 -7 20 -64 1 5 -5 1 0 2 -9 -32 -23 N.A. N.A. 29 0 28 -10 28 42 76 64 -592 -723 10 51 -6 23 34 288 N.A. 2 -1 7 9 6 -7 -46 -45 N.A. N.A. -12 17 57 3 52 68 81 68 -605 -854 -21 -269 12.4 40.6 26.0 12.6 44.6 30.9 18,616 3,948 815 86 248 2,799 22,564 8,699 5,467 3,233 13,865 4,376 3,380 330 290 377 9,488 2,470 7,018 18,322 4,552 543 599 519 2,892 22,874 9,459 5,937 3,522 13,415 3,460 2,786 100 1 574 9,955 3,080 6,875 -2 15 -33 N.A. 109 3 1 9 9 9 -3 -21 -18 -70 N.A. 52 5 25 -2

8,938 2,195 296 159 261 1,479 11,132 4,751 2,970 1,782 6,381 1,395 1,213 0 -142 323 4,986 1,730 3,256 30,138 18,306 3.5 2.2 39.3 53.2 9,150 4.9 13.3 45.6 34.7 25.9 79.6 12.4 8.5 12.0 8.0 8.0 3.1 865 1,086 282 222 59 136 135 116 478

-8 8 29 -20 0 1 -2 -1 -5 7 1 2 -3

-45 14 57 -69 16 15 14 15 11 26 17 6 16 Source: Company, MOSL

8 November 2012

Andhra Bank

Stock Info
EPS: MOSL forecast v/s consensus (INR)
MOSL Forecast 23.5 26.9 Consensus Forecast 24.6 28.3 Variation (%) -4.6 -5.0

1-year Sensex rebased

FY13 FY14

Shareholding pattern (%)

Sep-12 Promoter Domestic Inst Foreign Others 58.0 15.3 13.1 13.6 Jun-12 58.0 15.2 13.4 13.5 Sep-11 58.0 15.8 13.2 13.0

8 November 2012

Andhra Bank

Financials and Valuations

8 November 2012

Andhra Bank

Financials and Valuations

8 November 2012

Andhra Bank

N O T E S

8 November 2012

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered 4. Investment Banking relationship with company covered Andhra Bank No No No No

Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Any business interaction pursuant to this report will have to be executed within the provisions of this Chaperoning agreement. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com