Andhra Bank

Result Update
Operating performance inline; Slippages Rise

October 29, 2010

¾ NII growth ahead of estimates led by 27% growth in advances
Reco Previous Reco
and 17bps qoq expansion in NIMs. However net profit slightly
Buy Buy
below expectations
CMP Target Price
Rs176 Rs210 ¾ Lower employee expenses partially offset negative impact of
EPS change FY11E/12E (%) NA lower other income and higher provisioning
Target Price change (%) NA
¾ Asset quality deteriorated as GNPA and NNPA increased 33%
Nifty 5,988
19,941
and 75% sequentially. Provision cover fell to 61% (70% as per
Sensex
RBI norms) from 70% in Q1FY11
Price Performance
1M 3M 6M 12M
¾ Valuations attractive at 1.7x FY11E/1.3x FY12E ABV. We
(%)
Absolute 8 28 39 53 maintain our BUY rating with price target of Rs210
Rel. to Nifty 9 16 22 23
Source: Bloomberg NII growth ahead of estimates…
Relative Price Chart The bank’s NII grew by 52.2%yoy to Rs7.8bn in Q2FY11 ahead of our expectation
200 Rs % 40 driven 27%yoy growth in advances and 17bps expansion in NIM’s sequentially.
178 26

156 12
Yield analysis
134 -2 YoY QoQ
% Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
112 -16 (bps) (bps)
90 -30 Yield on advances* 10.9 10.5 10.2 10.6 10.6 -34 -3
Oct-09 Dec-09 Feb-10 Apr-10 May-10 Jul-10 Sep-10

Andhra Bank (LHS) Rel to Nifty (RHS) Yield on investments* 6.2 6.2 6.4 6.7 6.7 54 5
Source: Bloomberg Yield on assets* 8.7 8.4 8.1 8.4 8.6 -2 25
Cost of funds* 5.8 5.4 5.0 5.1 5.1 -65 8
Stock Details
Sector Banks NIM* 2.9 3.1 3.1 3.3 3.5 62 17
Bloomberg ANDB@IN Source: Company, Emkay Research Note:* Calculated on basis of average quarterly balances
Equity Capital (Rs mn) 4850
Face Value(Rs) 10 Balance sheet growth remains healthy and broad based
No of shares o/s (mn) 485 The balance sheet growth remained healthy with advances growing by 27% yoy to
52 Week H/L 190/95 Rs610bn driven by healthy growth across the segments. All the segments viz. SME,
Market Cap (Rs bn/USD mn) 86/1,932 Retail, Agri and corporate grew by a healthy 35%, 30%, 24%, and 25% respectively.
Daily Avg Volume (No of sh) 2003431
Advance Mix
Daily Avg Turnover (US$mn) 7.2
Rs bn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ (%)
Shareholding Pattern (%) Mid-corporate/SME 68 76 83 87 92 35.0 6.0
S’10 J’10 M’10
Agriculture 77 83 91 87 96 24.1 10.0
Promoters 51.6 51.6 51.6
Retail 71 79 89 88 92 29.2 5.0
FII/NRI 17.0 14.4 13.1
Others 256 276 298 309 329 28.5 6.6
Institutions 16.9 19.0 18.7
Total 482 514 561 571 610 26.6 6.8
Private Corp 2.3 2.5 3.0
Public 12.3 12.7 13.7 Source: Company, Emkay Research

Source: Capitaline
Valuation table

Kashyap Jhaveri Y/E March 31 Net Net EPS ABV RoA RoE PE P/ABV
kashyap.jhaveri@emkayglobal.com income profit (Rs) (Rs) (%) (%) (x) (x)
+91 22 6612 1249 FY2009 23,923 6,528 13.5 73.4 1.0 18.9 13.1 2.4
FY2010 31,594 10,455 21.6 89.0 1.3 26.0 8.2 2.0
Pradeep Agrawal FY2011E 35,246 12,396 25.6 111.6 1.3 25.0 6.9 1.6
pradeep.agrawal@emkayglobal.com
FY2012E 40,029 14,952 30.8 139.1 1.4 24.3 5.7 1.3
+91 22 6612 1340
Source: Company, Emkay Research

Emkay Global Financial Services Ltd 1

 Andhra Bank Result Update

Key financials – Quarterly

Rs mn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ (%) YTD'11 YTD'10 YoY (%)
Net Interest Income 5,147 5,825 6,562 7,362 7,832 52.2 6.4 15,195 12,616 20.4
Other Income 2,332 2,243 2,688 2,082 1,912 -18.0 -8.2 3,994 4,848 -17.6
Fee Income 420 1,009 1,405 570 520 23.8 -8.8 1,090 2,616 -58.3
Net Income 7,478 8,068 9,249 9,444 9,744 30.3 3.2 19,188 17,464 9.9
Total Operating Expenses 2,950 3,250 3,981 4,341 4,099 38.9 -5.6 8,440 7,188 17.4
As % Of Net Income 39.5 40.3 43.0 46.0 42.1 44.0 41.2
Employee Expenses 1,715 1,973 2,439 2,871 2,601 51.7 -9.4 5,472 4,643 17.8
As % Of Net Income 22.9 24.5 26.4 30.4 26.7 28.5 26.6
Other Expenses 1,235 1,277 1,542 1,471 1,498 21.2 1.9 2,968 2,545 16.6
As % Of Net Income 16.5 15.8 16.7 15.6 15.4 15.5 14.6
Operating Profit 4,528 4,818 5,269 5,103 5,645 24.7 10.6 10,748 10,276 4.6
As % Of Net Income 60.5 59.7 57.0 54.0 57.9 56.0 58.8
Provisions 577 964 2,229 519 1,196 107.2 130.5 1,715 1,304 31.5
Prov for NPA 426 0 1,860 174 966 126.8 456.1 1,140 1,017 12.0
PBT 3,951 3,854 3,039 4,584 4,450 12.6 -2.9 9,034 8,972 0.7
Total Tax 1,210 1,100 640 1,380 1,420 17.4 2.9 2,800 2,917 -4.0
Adjusted PAT 2,741 2,754 2,399 3,204 3,030 10.5 -5.4 6,234 6,055 3.0
Extra Ordinary Items 0 0 0 0 0
Reported PAT 2,741 2,754 2,399 3,204 3,030 10.5 -5.4 6,234 6,055 3.0
Reported EPS 5.6 5.7 4.9 6.6 6.2 10.8 -5.4 12.9 12.5 3.1
Source: Company, Emkay Research

CASA mix improves despite strong growth

Despite strong growth in advances, the CASA mix improved by 82bps qoq to 30.4% driven
by 8% qoq growth in CASA deposits .

CASA Mix
Rs bn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ (%)
CASA 201 200 229 221 239 18.6 8.1
Term deposits 421 466 548 526 547 29.8 4.0
Total Deposits 623 665 777 747 786 26.2 5.2
CASA (%) 32.3 30.0 29.4 29.6 30.4 -194 82
Source: Company, Emkay Research

Lower trading gains hurt other income

The other income declined by 8.2%qoq to Rs1.9bn as the bank reported lower trading gains
during the quarter along with decline in fee income sequentially. The fee income declined
by 8.8%qoq, while trading gains stood lower at Rs176mn during the quarter.
Other Income
Rs mn Q2FY10 Q1FY11 Q2FY11 YoY (%) QoQ (%)
Fee/Commission income 420 570 520 23.8 -8.8
Trading gains/(losses) 950 480 176 -81.5 -63.3
Forex gains/(losses) 100 210 240 140.0 14.3
Others 862 822 976 13.2 18.7
Total 2,332 2,082 1,912 -18.0 -8.2
Source: Company, Emkay Research

Pension liability yet to be crystallized and provided

The bank has not yet started providing for second pension liability, hence its employee cost
declined by 9.4%qoq to Rs2.6bn.

Emkay Research 29 October 2010 2

 Andhra Bank Result Update

Higher provisioning hurts bottom-line

The bank did accelerated provisioning during the quarter to provide for higher slippages. As
a result the net profit growth was lower at just 10.5% to Rs3.0bn. However despite higher
provisioning the coverage ratio feel by 955bps to 61% in Q2FY11.

Provision break up
Rs mn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ (%)
On NPL 426 386 1,860 174 966 126.8 456.1
As % of advances 0.09 0.08 0.33 0.03 0.16
Investment Depreciation -58 -605 766 345 0 -100.0 -100.0
Others 209 1,184 -396 0 210 0.5
Total 577 965 2,229 519 1,196 107.2 130.5
Source: Company, Emkay Research

Asset quality deteriorates; Slippages rise

The bank asset quality deteriorates during the quarter as GNPA increased by 33%qoq,
while NNPA increased by a higher 76.3%qoq. Despite higher provisioning, significant rise in
NNPA indicates higher slippages during the quarter. However, we believe that the same
could be because of the agricultural NPAs. The provision cover declined to 61.1% (78.9%
including technical write off) from 70.7% in the preceding quarter.
Asset quality
Rs bn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ (%)
Gross NPA (Rs bn) 3,984 4,469 4,879 5,793 7,702 93.3 33.0
Net NPA (Rs bn) 752 879 957 1,698 2,994 298.1 76.3
Gross NPA (%) 0.8 0.9 0.9 1.0 1.3
Net NPA (%) 0.2 0.2 0.2 0.3 0.5
Net NPLs/Net worth (%) 1.7 1.9 2.2 3.6 5.9
Provision cover (%) 81.1 80.3 80.4 70.7 61.1
Source: Company, Emkay Research

Valuations and view

We find valuations attractive at 1.7x FY11E/1.3x FY12E ABV. We maintain our BUY rating
with price target of Rs210

Emkay Research 29 October 2010 3

 Andhra Bank Result Update

Key Financials

Income Statement (Rs. Mn) Balance Sheet (Rs. Mn)

(Year Ending Mar 31) FY09 FY10 FY11E FY12E (Year Ending Mar 31) FY09 FY10 FY11E FY12E
Net interest income 16,269 21,947 26,635 30,279 Liabilities
Other income 7,654 9,646 8,611 9,750 Equity 4,850 4,850 4,850 4,850
Net income 23,923 31,594 35,246 40,029 Reserves 31,620 39,250 50,248 63,235
Operating expenses 11,042 13,495 13,483 14,088 Net worth 36,470 44,100 55,098 68,085
Pre provision profit 12,880 18,098 21,763 25,941 Deposits 593,900 776,882 845,406 984,191
PPP excl treasury 10,673 14,851 20,663 24,841 Borrowings 54,322 83,326 93,673 105,229
Provisions 3,900 3,740 4,055 4,581 Total liabilities 684,692 904,308 994,177 1,157,505
Profit before tax 8,981 14,359 17,708 21,360 Assets
Tax 2,450 3,900 5,312 6,408 Cash and bank 52,875 111,677 76,539 89,104
Tax rate 27% 27% 30% 30% Investments 159,217 202,994 233,818 271,290
Profit after tax 6,531 10,459 12,396 14,952 Customer assets 451,287 566,951 663,209 776,096
Others 21,313 22,687 21,002 22,209
Total assets 684,692 904,308 994,177 1,157,505

Key Ratios (%) Valuations Table

(Year Ending Mar 31) FY09 FY10 FY11E FY12E (Year Ending Mar 31) FY09 FY10 FY11E FY12E
NIM 2.9 3.1 3.1 3.1 Net profit (Rs mn) 6,528 10,455 12,396 14,952
Non-II/avg assets 1.2 1.2 0.9 0.9 Shares in issue (mn) 485 485 485 485
Fee income/avg assets 0.3 0.3 0.3 0.3 EPS (Rs) 13.5 21.6 25.6 30.8
Opex/avg assets 1.8 1.7 1.4 1.3 PER (x) 13.8 8.6 7.3 6.0
Provisions/avg assets 0.4 0.6 0.6 0.6 FDEPS(Rs) 13.5 21.6 25.6 30.8
PBT/avg assets 1.3 1.6 1.8 1.8 FDPER (x) 13.8 8.6 7.3 6.0
Tax/avg assets 0.4 0.4 0.5 0.6 Book value (Rs) 75.2 90.9 113.6 140.4
RoA 1.0 1.3 1.3 1.4 P/BV (x) 2.5 2.0 1.6 1.3
RoAE 18.9 26.0 25.0 24.3 Adj book value (Rs) 73.4 89.0 111.6 139.1
GNPA (%) 0.8 0.9 1.1 1.2 P/ABV (x) 2.5 2.1 1.7 1.3
NNPA (%) 0.2 0.2 0.1 0.1 P/PPP (x) 7.0 5.0 4.1 3.5
Dividend yield (%) 2.4 2.7 3.2 3.8

Emkay Research 29 October 2010 4

 Andhra Bank Result Update

Recommendation History: Andhra Bank – ANDB IN

Date Reports Reco CMP Target

27/01/2010 Andhra Bank_Q3FY10_Result Update Accumulate 107 130

29/10/2009 Andhra Bank_Q2FY10_Result Update Accumulate 112 130

30/07/2009 Andhra Bank_Q1FY10_Result Update Accumulate 89 100

Recent Research Reports

Date Reports Reco CMP Target

28/10/2010 Bank of Baroda Q2FY11 Result Update Buy 1,011 1,160

28/10/2010 Punjab National Bank Q2FY11 Result Update Buy 1,310 1,500

27/10/2010 Union Bank of India Q2FY11 Result Update Hold 393 400

26/10/2010 United Bank of India Q2FY11 Result Update Hold 141 150

Emkay Global Financial Services Ltd.

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