Andhra Bank (Q2 FY13)

Andhra Bank’s loan book ended sequentially flat in Q2 FY13 against our expectation of 3% growth. Healthy growth in Agricultural portfolio (6.8% qoq), followed by Retail (2.4% qoq) and MSME (2% qoq), was offset by 2.7% sequential decline in Corporate lending. Deposits grew by 0.9% qoq led by 2% qoq growth in Term deposits. CASA ratio declined by 78bps to 25.9% owing to 5.3% and 1.2% decline in Current and Saving Deposits respectively. We expect 15% growth in both advances and deposits in FY13.

NIM fell by 20bps to 3.13% in Q2 FY13, led by base rate cut of 25bps in May’2012, re-pricing of deposits worth Rs30bn at higher rate and incremental stressed assets. We expect NIM to remain under pressure on account of ongoing stress in asset quality.

Asset quality deteriorated significantly with GNPA and NNPA growing by 27.8% and 41.6% sequentially. Resultantly, GNPA (80bps qoq) and NNPA (60bps qoq) ratio rose to 3.5% and 2.2% as on Sept’2012. Delinquency ratio stood at 3.6% in Q2 FY13. During the quarter, two large accounts pertaining to Pharma (Rs3.8bn) and Cement (Rs700mn) slipped into NPA. One account of Rs2bn has already slipped into NPA in Q3 FY13. Outstanding restructured advances stood at 10.5% of total advances. Management expects another restructuring of Rs12bn in the coming quarters. Less-than-commensurate NPA provisions resulted in steep decline in PCR, from 60.4% in Q1 FY13 to 53.2% in Q2 FY13. Asset quality is likely to remain under pressure in the near term, especially in corporate segment, given the challenges faced by the economy.

Core fee income was muted registering just 7% yoy growth. Cost/Income ratio shot up by 260bps qoq to 42.6%, owing to de-growth in total income (5.2% qoq). Bank added 22 branches during the quarter, taking the total number to 1738.

Sharp deterioration in asset quality, compression in margin, significant drop in PCR, weak core fee income growth and the resulting multi-quarter low RoA, enforce us to downgrade our earnings estimate for FY13/FY14 by 15.4%/18.4%. With persisting pressure on asset quality, we do not foresee any material upside in the stock. Thereby, assign Market Performer rating with target price of Rs104.