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ANDHRA BANK
and lower turnaround time in credit origination will result into better efficiency and 130
120
improve cost structure. The bank has successfully implemented Core Banking Solutions 110
(CBS) on entire branch network, which resulted in 344bps decline in Cost to Income ratio in 100
FY10 and going forward we expect it to eventually settle at around 39-40% which is a 90
Jul-10
Oct-09
Dec-09
Jan-10
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Nov-09
Mar-10
May-10
Sep-10
Sustainable ROE, Core operations to drive RoE expansion
Andhra Bank’s RoAE and ROAA in FY10 stood at 26.0% and 1.3% respectively, against an Andhra BSE SENSEX
average 20.7% during FY06-10, which is one of the best in the industry. Even core RoAE has
been quite robust at 18.8% during FY06-10. We expect bank to maintain 24-25% RoAE over Share Holding pattern (%)
FY11-13E. We expect 22.7% CAGR in core earnings over FY10-13E despite factoring in lower Particulars Sep-10 Mar-10 Chg
treasury gains and higher provisioning costs.
Promoters 51.6 51.6 0.0
View & recommendation
Andhra Bank has outperformed the Sensex by ~ 3.2x in last one year driven by strong core Institutions 16.9 18.7 -1.9
profit growth, healthy asset quality, improving margins and impressive returns. We expect FII 16.8 12.9 3.9
the bank will continue to maintain growth momentum on the back of 23% CAGR growth in Public/Others 14.8 16.9 -2.1
loans, increased thrust on high yielding assets. The bank is well capitalized for the next
Total 100.0 100.0
three years and we believe strong internal accruals and headroom for Tier I & II will support
future growth. We initiate coverage on the bank with BUY rating with a price target of ` Source: BSE
208, an upside of 22%.
` in crores Analysts :
Deepak Tiwari
Particulars FY09 FY10 FY11E FY12E FY13E deepak.tiwari@krchoksey.com
Net Interest Income 1,627 2,195 2,730 3,436 4,212 ℡ 91-22-6696 5555
Pre-provisioning Profit 1,305 1,851 2,125 2,683 3,226
Net Profit 653 1,046 1,175 1,403 1,643 Manish Ostwal
EPS 13 22 24 29 34 manish.ostwal@krchoksey.com
ABV 74 89 101 117 134 ℡ 91-22-6696 5555
ROAE 18.9% 26.0% 24.6% 25.2% 25.3%
P/E 12.6 7.9 7.0 5.9 5.0 www.krchoksey.com
P/ABV 2.3 1.9 1.7 1.5 1.3
℡ 91-22-6696 5555
Source: Bank, KRChoksey Research
¬ 91-22-6691 9569
Table of Contents
INVESTMENT RATIONALES
PEER COMPARISION 19
• Financial analysis 20
• Sensitivity analysis 23
• Quarterly expectations 24
COMPANY OVERVIEW 27
FINANCIALS 28
INVESTMENT RATIONALES
Loan book of the bank will continue to grow 3-5% ahead of the system
30%
26%
14%
10%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
35%
29%
30% 27%
26%
23% 24% 24%
25% 23%
rd
Almost 2/3 loans are based
20%
on floating rates and ~86%
15%
loans are secured loans.
10%
5%
0%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Advance Growth
60%
50%
15%
40%
12%
8% 6% 12%
Corporate loans dominate 30% 12%
0%
FY05 FY06 FY07 FY08 FY09 FY10
Large Industries M SM E
Currently, the total sanctioned loans amount to ` ~18,000 crore mostly from infrastructure space
(power sector in particular). The total exposure to power sector has increased to ~21% in Q1FY11
from 14% in Q4FY10. About 50% of the loans to power sector are given to State Electricity
About ` 18,000 crore loans Boards, Power Financing companies and other PSUs engaged in T&D businesses and remaining
are sanctioned mostly to the loans are given for Greenfield projects. These sanctioned loans are of mixed nature- short term
infrastructure sector. as well as long term with average duration of ~3 years. We expect drawdown to pick up in
H2FY11.
35% 3.3%
34%
33% 3.2%
Notwithstanding decline in
32%
CASA ratio, margins have
31%
been maintained at above 3.1%
3.0%. 30%
29%
28% 3.0%
27%
26% 2.9%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
CASA NIM
Taking signal from the RBI, the bank raised base rate and BPLR by 25 bps and 75 bps respectively
to pass on increase in cost of funds since Q1FY11
With base rate coming into force from July 1, 2010, continued thrust on retail credit, the
management is confident of maintaining NIM of 3.2% in FY11. Since AAA rated corporate loans
amount to ` 1,290 crore constituting 2.28% of the total advances, there will not be much
pressure on the margins on account of large corporate clients resorting to commercial papers.
Moreover, since bank has swiftly raised its lending rates it will help arrest the margin pressure
arising as a result of re-pricing effect.
We believe that margin will remain stable with positive bias as re-pricing of assets offset
increase in cost of funds along with shift of asset mix in favour of SME and retail.
0.00%
Allahabad
Andhra
Dena
Central
Uco
Canara
Indian Bk
OBC
Vijaya
Corporation
Bank
Source: Bank, KRChoksey Research
5.00%
4.00%
Andhra Bank enjoys one of
the best risk adjusted 3.00%
spreads in the industry.
2.00%
1.00%
0.00%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
The following table shows the deposits and credit profiles of the bank as on March 31, 2010. It is
evident that ~87% of the advances were extended at more than the base rate of the bank (8.5%)
while 39% of the loans were given at more than the BPLR of 12%. Further, one third of the term
deposits were raised at 6% or below 6%. Close to 87% term deposits were raised at the interest
rate ranging in between 3-9% which helped the bank maintain excellent margin of 3.21% during
FY10.
Sub 5.0%-6.0%
Sub 3.0%-4.0% 3,089 7.7%
685 1.2%
4.0%-5.0% 1,799 4.5%
6.0%-8.0%
5,835 10.4% 5.0%-6.0% 7,631 19.0%
8.0% -9.0% 6.0%-7.0% 13,006 32.3%
3,222 5.8%
7.0%-8.0% 7,421 18.4%
9.0%-10.0%
8,422 15.1% 8.0%-9.0% 1,876 4.7%
10.0%-12.0%
15,971 28.5%
9.0%-10.0% 2,298 5.7%
10.0%-12.0% 3,077 7.6%
>12.0% (BPLR)
21,822 39.0% Above 12.0% 37 0.1%
Source: Bank, KRChoksey Research
However, we carried out this analysis for several banks and found out a wide mismatch in the
maturity profile of assets and liabilities. We believe this can be attributed to the fact that the
smart depositors are wary of unattractive and negative real interest rates on bank deposits
thanks to volatile inflationary expectations. Thus, we deduce that bank’s margin also depends a
lot on the ability of the bank to pass on the rise in the cost of funds which Andhra Bank has
demonstrated.
-5,000
-5,252
-6,986
-10,000
-11,366
-15,000
-14,664
-20,000
-25,000
-27,058
-30,000
FY06 FY07 FY08 FY09 FY10
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
-7.00%
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11
Liquidity Position*
Note: Ratio of cum. Gap as % to cum. Outflow up to 1 year period; liquidity position as on last
reporting Friday of the Quarter end.
20.0%
15.0%
10.0%
5.0%
0.0%
Andhra Allahabad Corporation Indian Central Uco
Bank
100% 40.0%
90% 35.0%
80%
30.0%
70%
60% 25.0%
50% 20.0%
40% 15.0%
30%
10.0%
20%
10% 5.0%
0% 0.0%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Re-pricing of advances would lead to improvement in the margins as almost 2/3rd loans are
based on floating rates.
The delinquencies were contained at 71bps during FY10 however we believe Gross NPA is likely
to rise to 1.5% by FY12E. We have factored in 1.0% slippages over FY11-13E as a result the credit
cost would also go up to 76bps by FY13E from currently 54 bps. Further, Bank has been
maintaining high provisioning coverage ratio of 90% plus which provides cushion to its earnings in
troubled times. Its PCR pegged at 85.9% during Q1FY11.
2.4%
2.4%
2.5%
2.0%
1.5%
1.5%
1.5%
1.1%
1.1%
1.0%
0.8%
0.8%
1.0%
Gross NPA in the industry
0.4%
0.4%
0.3%
0.0%
Andhra Allahabad Corporation Indian Central Bank Uco
8.0% 7.6%
IOB
Corporation
Allahabad
Uco
Central
Andhra
Bank
20.0%
0.0%
Andhra Allahabad Corporation Indian Central Uco
Bank
5.0%
4.0%
4.0%
3.0%
Fresh slippages during FY10
1.7%
pegged at 0.7% which is 2.0%
1.3%
lowest in the PSU space. 0.7% 0.8%
0.9% 1.0%
1.0%
0.0%
Indian
IOB
Corporation
Allahabad
Uco
Central
Andhra
Bank
Source: Bank, KRChoksey Research
Restructured assets of the bank stood at ` 3,036 crore which is equivalent to 5.31% of the
advances in Q1FY11 which was lower than some leading PSU banks such as PNB (6.6%) and BOI
(6.0%). However only 5.0% of the restructured assets have turned into NPA against 22.1% in case
of BOI, 11.5% for SBI, 9.0% for BOB and 8.0% for PNB. We factor in further 5.0% slippages from
Exposure to the aviation restructured assets book and still we believe bank will be able to generate a 22.7% CAGR in core
sector amounts to `~ 640 profits over FY11-13E.
crore. Bank has taken several steps to monitor restructured accounts such as creating special cells at
all the controlling offices. Zonal managers personally monitor all the restructured accounts
while high value accounts of ` 50lacs and above are monitored from the Head Office. Moreover,
progress on this account is reviewed in fortnightly video conference with all zonal offices.
Exhibit-16: Restructured Book (Q1FY11)
10.0%
7.7%
8.0%
6.6%
6.0%
6.0% 5.3%
4.8%
4.3% 4.3%
4.0%
2.5%
2.0%
SBI
BOI
Corporation
Allahabad
Central
PNB
Andhra
Bank
20.0%
16.0%
11.5%
12.0%
7.8% 8.0%
8.0% 6.2%
5.0% 5.2%
4.0% 2.9%
0.0%
Indian
SBI
BOI
Allahabad
Corporation
Central
PNB
Andhra
Bank
increase to 1.5% going Gross NPA 368 488 841 1,283 1,831
forward, as a result credit Net NPA 79 96 231 321 525
cost will also go up to 75bps Gross NPA as % of Advances 0.83% 0.87% 1.22% 1.50% 1.73%
from 54bps currently. Net NPA as % of Advances 0.18% 0.17% 0.33% 0.37% 0.49%
Credit Costs 0.39% 0.54% 0.61% 0.75% 0.76%
Source: Bank, KRChoksey Research
The Cost to Income Ratio of the bank is comfortable at 46% (Q1FY11). Going forward we expect
C/I Ratio to improve as operating leverage kicks in. C/I Ratio is higher in comparison to peers
such as Corporation Bank (35.6%) and Allahabad Bank (38.7%) but bank has provided for the
liabilities on account of gratuity/second option unlike Corporation Bank. Moreover bank has
successfully implemented CBS and computerization across its entire branch network which
Cost to income is expected
ensures better productivity and results in rationalization of its operating costs. Going forward,
to moderate to 39-40% going
we expect it to eventually settle at around 39-40% which is a healthy ratio in the industry.
forward as operating
leverage will kick in. Bank has already provided for ` 17.5 crore on account of Second Pension Options, under which
~6,000 employees fall, during Q1FY11 assuming total liability of ` 350 crore. However we believe
bank will get to amortize such liability over 20 quarters mitigating any immediate pressure on
the bottom lines. During Q1FY11, the bank also provided for the gratuity amounting to ` 30 crore
unlike some leading banks such as BoB, BoI and Corporation Bank.
Bank has recruited 2,607 employees in the last three years ended on March 2010 against 400
employees who retired during the same period. 179 employees have retired till August 2010.
About 23% officers (who form 58.9% of the total employee strength of 14,256) are going to retire
in next five years.
80.0
67.1 67.1
Branch productivity and
60.0 52.8
profitability is likely to
improve going forward. 40.0 29.6 30.9
20.0
0.0
Indian
IOB
Allahabad
Corporation
Uco
Central
Andhra
Bank
Business per branch
16,000
13,501 13,589
14,000
12,000
10,000 8,594 8,563 8,303
7,768 7,478
8,000
6,000
4,000
2,000
0 Indian
IOB
Allahabad
Uco
Corporation
Central
Andhra
Bank
Source: Bank, KRChoksey Research
0%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Fee Income
Bank has a joint venture in life insurance with BoB and Legal & General Plc of UK which
commenced its business from January 2010. We expect bancassurance business will boost the
fee based income of the bank however any meaningful impact would reflect only after FY12
when bancassurance business will pick up. However, we have modeled in 14.2% CAGR in fee
based income over FY10-13.
We have factored in lower Treasury gains have been a key contributor to ROE of the bank, however, we believe going
forward core earnings will drive the ROE expansion and thus we have modeled lower treasury
MTM loss provisioning- 1.2%
gains- 80bps of the SLR investment book as trading profits in FY11 and 70bps and 60bps in FY12
on profit before taxes over
and FY13 respectively against an average of 140bps in FY08-10. From the following table we can
FY11-13 observe that the contribution of treasury income to the profit before taxes has declined
significantly.
Andhra Bank to maintain 23%+ growth in assets without further equity capital infusion
Expected retained earnings - FY11-13 2,592
Assumed leverage (x) 20
Internal accruals may help Potential incremental Asset base 51,831
the asset book to grow by FY10 Asset size 90,431
57% over FY11-13E. Internal Accruals driven growth potential 57%
Source: Bank, KRChoksey Research
Treasury & other Income/Total avg assets 0.50% 0.52% 0.28% 0.27% 0.22%
Bond Yields
10%
9%
8%
7%
6%
5%
4%
3%
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
10 yr Bond
PEER COMPARISION
Andhra Allahabad Corporation Indian Central Bank Uco IOB
CAGR FY05-10
26.2% 27.6% 27.8% 27.6% 31.0% 24.4% 25.7%
Loan Growth
FY10
FY10 Loan
27.1% 21.8% 30.3% 20.8% 23.3% 19.9% 5.5%
growth
Profit per
67.1 52.8 101.5 88.6 29.6 67.1 30.9
branch (` lakh)
Business per
branch (` 8,594 7,768 13,501 8,563 7,478 13,589 8,303
Lakh)
Slippages 0.7% 1.7% 0.8% 0.9% 1.0% 1.3% 4.0%
Impaired
assets/ on 45.5% 44.3% 33.9% 51.5% 68.5% 49.0% 94.9%
networth
Impaired
assets/ 3.6% 3.6% 3.1% 5.8% 3.7% 2.8% 7.6%
advances
Opex/AA 1.7% 1.5% 1.1% 1.9% 1.4% 1.3% 2.0%
Employee/AA 1.0% 0.9% 0.6% 1.3% 0.9% 0.8% 1.4%
Retirement
benefits/Emplo 19.9% 14.4% 18.8% 29.3% 13.1% 33.9% 27.9%
yee costs
5 year average
1.2% 1.2% 1.2% 1.5% 0.5% 0.5% 1.2%
RoA
5 year average
20.7% 23.1% 17.7% 24.2% 15.0% 17.2% 24.4%
RoE
5 year average
18.8% 17.1% 14.0% 24.3% 14.4% 16.3% 18.6%
Core ROE
1. Higher than expected slippages from restructured assets: Though we have factored in
5.0% further slippages from the restructured books and 1% fresh slippages over FY11-
13E, any further delinquencies would have an adverse impact on the profitability of the
bank.
2. Concentration risk: Though the bank is expanding its reach and opening new branches in
Northern and Eastern parts of India, over 65% branches are located in Andhra Pradesh,
thus there is a concentration risk.
3. Shorter tenure of the new CMD: A short tenure of the new CMD, who will retire in the
next one and half years, affects long term business strategies and plans.
Financial analysis
Advances
Advances grew by 26.2% CAGR over FY06-10 driven by strong growth in SME book that grew by
61.5% CAGR followed by loans to large industries segment that registered 35.6% CAGR.
Agriculture loans too posted 24.2% CAGR during the period. Housing loans grew two fold over
FY07-10 while education loan book clocked 22% CAGR during the same period. Bank has been
able to improve its market share.
35.0%
50,000
30.0%
40,000
25.0%
30,000 20.0%
15.0%
20,000
10.0%
10,000
5.0%
0 0.0%
FY05 FY06 FY07 FY08 FY09 FY10
Deposits
Deposits grew by 23% CAGR over FY06-10. Bank’s CASA base has not been improved as bank
continue to be dependent on high cost term deposits that clocked 26.2% CAGR against 21.6%
CAGR in current account deposits and 14.9% CAGR in savings deposits. The average CASA growth
pegged at 18.2% over FY06-10 while CASA ratio has continuously been declining from 36.3% in
FY06 to 29.4% in FY10. In the last three years the proportion of CA deposits in CASA deposits has
improved 290 bps whilst that of savings deposits has declined.
40,000 15.0%
30,000
10.0%
20,000
10,000 5.0%
0 0.0%
FY05 FY06 FY07 FY08 FY09 FY10
72.0%
68.0%
64.0%
60.0%
56.0%
FY05 FY06 FY07 FY08 FY09 FY10
3.40% 3.32%
3.20% 3.21%
3.20%
3.00% 3.03%
3.00%
2.80%
2.60%
FY05 FY06 FY07 FY08 FY09 FY10
NIM
46.0%
38.0%
30.0%
FY05 FY06 FY07 FY08 FY09 FY10
Asset quality
Andhra Bank has maintained its superlative asset quality and remained unscathed even during
the financial crisis. Bank has one of the lowest Gross NPA in the industry which has continuously
been declining from 2.52% in FY05 to 0.87% in FY10. The delinquencies were contained at 0.71%
during FY10 Further, Bank has been maintaining high provisioning coverage ratio of 90% plus
which provides cushion to its earnings in troubled times. Its PCR pegged at 85.9% during Q1FY11.
As a result of good asset quality, the credit cost too remained lower- declining to 0.54% from
1.88% in FY04.
2.50% 0.50%
2.00% 0.40%
1.50% 0.30%
1.00% 0.20%
0.50% 0.10%
0.00% 0.00%
FY05 FY06 FY07 FY08 FY09 FY10
Sensitivity analysis
A 2% change in advances growth from our base case of 23% advance growth in FY11, can impact
the EPS by 3.2% while on book value impact will be of 40bps. ROE may decline or improve by
72bps. On the other hand, a 10bps change in the margin or 20bps change in credit cost too can
have a material impact on earnings and return ratios.
Trading Profits 95 48 53 48 35
Andhra Bank is expected to report 24-25% ROAE over FY11-13E on the back of ~23.7% CAGR in
loan book driven by SME and retail assets while maintaining stable margins with positive bias.
The stock has outperformed the market benchmark 3x on the back of strong profit growth and
healthy asset quality in the last one year. We continue to believe the bank to report superior
returns with core earnings CAGR 22.8% driven by 23.7% CAGR loan and stable margins in the PSU
space. RoA and RoE are expected to remain healthy at ~ 1.1% and ~25% over FY10-FY13. At, `
170 the stock trades at 1.5x FY2012 book and 5.9x FY2012 earnings which provides sufficient
margin of safety with target price of `208, implying upside 22%.
Recommendation
Strong growth outlook, sustainable earnings, 20% plus core profit growth and superior asset
quality lead us to initiate on the bank with BUY rating with a target price of ` 208.
40%
20%
0%
-60%
-80%
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Exhibit-38: Price bands- PB & PE bands
300
2.4 x
250
1.9 x
200
150 1.4 x
100 0.9 x
50 0.4 x
0
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
350
300 11.0 x
250 9.0 x
200
7.0 x
150
5.0 x
100
50
0
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
COMPANY OVERVIEW
Andhra Bank, established in the year 1923, is a Hyderabad headquartered state owned bank with
an asset size of ` ~90,500 crore and network of 1,560 branches, 886 ATMs and 14,256 employees.
Over 65% of the branches are located in Andhra Pradesh only. The government ownership is at
the 51.6%. Bank is predominantly based in south Indian states and expanding its reach to
northern terrains in order to become a pan India player. Andhra Bank’s total business touched `
131,844 crore as on June 30, 2010, with deposits at ` 74,700 crore and advances of ` 57,144
crore. Its credit-deposit ratio stood at 76.5% in Q1FY2011. Bank has a joint venture in life
insurance with BoB and Legal & General Plc of UK which commenced its business from January
2010. The Bank holds 30% stake in this joint venture while BoB holds 44%. It is also planning to
form a banking joint venture with BoB and IOB in Malaysia for which it has got the necessary
approval from the RBI.
Andhra bank has a strong and experienced team of professionals having an average experience of
15%
35 years. Recently, Mr. R. Ramachnadran, who has long stints with Indian Bank and Syndicate
14% Bank, was appointed as new CMD of the bank by the government of India on September 1, 2010
52%
replacing Mr. RS Reddy. Mr. Ramachandran has wide overseas experience and also exposure to
19% areas of corporate credit, forex treasury and international banking. He took charge of all the
departments by rotation which will give him an edge in his new role. However he will have a
GoI DII tenure of about one and half years. A strong management team reinforces confidence in the
FIIs Others Bank’s ability to deliver high growth while keeping a tab on asset quality.
Branches mix
16%
17%
27% 5%
In FY09, out of total 6,698
branches in Andhra Pradesh, 7%
~23% branches belonged to
Andhra Bank.
28%
72%
28%
FINANCIALS
Exhibit-40: Income Statement Summary
Particulars FY09 FY10 FY11E FY12E FY13E
180
170
Our Rating Upside
160
150 Strong Buy More than 25%
140
130
120 Buy 15% - 25%
110
100
90 Hold 10% - 15%
80
Jul-10
Oct-09
Dec-09
Jan-10
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Nov-09
Mar-10
May-10
Sep-10
Andhra
Sell Less than 0%
Disclaimer:
This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a
security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to
satisfy themselves before making any investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the
authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same.
Further, KRC Research Reports only provide information updates and analysis. All opinion for buying and selling are available to
investors when they are registered clients of KRC Investment Advisory Services. As per SEBI requirements it is stated that, Kisan Ratilal
Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or
sale thereof while this report is in circulation.
Visit us at www.krchoksey.com
Registered Office:
1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai – 400 001.
Phone: 91-22-6633 5000; Fax: 91-22-6633 8060.
Branch Office:
ABHISHEK, 5th Floor, Link Road, Dalia Industrial Estate, Andheri (W), Mumbai – 400 058.
Phone: 91-22-6696 5555; Fax: 91-22-6691 9576.