Hold Andhra Bank; target of Rs 151: KRChoksey

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Hold Andhra Bank; target of Rs 151: KRChoksey

KRChoksey has maintained hold rating on Andhra Bank with a target price of Rs 151 in its July 18 2011 research report.

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KRChoksey has maintained hold rating on Andhra Bank with a target price of Rs 151 in its July 18 2011 research report.

"Andhra Bank, during Q4FY11 net interest margin contracted by 22bps q-o-q to 3.69% due to sharper increase in cost of deposits in Q4FY11. Cost of deposit increased by 82bps q-o-q to 6.48% against 64bps increase in blended yield. The margin for FY11 improved to 3.80% from 3.21% in FY10. In Q1FY12 we expect net interest income to grow by 17% y-o-y to Rs 858 crore notwithstanding unfavorable base and ~5bps margin compression. The bank has been swift in passing on rise in cost of funds in order to protect its margin. However, we are factoring in 40bps compression in the margins in FY12."

"Though non- interest income growth was quite robust in Q4FY11 growing by 11% y-o-y and 50% q-o-q to Rs 299 cr, driven by strong growth in core fee income. Treasury gain stood at Rs 65 crore against Rs 53 crore a year ago. However, non-interest income will be subdued due to lower core fee income due to slowdown in credit off take, lower recoveries and treasury gains in Q1FY12. We expect fee income to grow modestly at ~15% CAGR over FY11-FY13E. In Q4FY11, total operating expenses was contained at Rs 449 crore, growing 12.8% y-o-y. Unlike other PSU banks, the bank has been aggressively providing for pension and gratuity liabilities as a result, cost to income ratio declined by 433bps y-o-y to 39%. The bank has provided for Rs 213 crore during FY11 on account of amortized portion of additional pension & gratuity liabilities and fully charged pension liability of Rs 53 crore for separated/retired employees. We expect cost to income ratio to peg at ~41% in Q1FY12 and FY12."

"We expect lower credit cost due to stable asset quality will drive strong earnings growth momentum in Q1FY12, despite unfavorable base effect last year on the back of core performance. In Q4FY11, loan loss provisioning increased to Rs 203 crore against Rs 152 crore in Q3FY11 and Rs 169 crore a year ago. Stepped up provisions for standard assets and restructured assets amounting to Rs 70 crore further dented the profitability. Gross NPA increased by 14% sequentially to Rs 996 crore in absolute terms and 5bps q-o-q in percentage terms to 1.38% versus 0.86% a year ago. The coverage ratio further improved by 352bps q-o-q to 84%. We have factored in 1.25% slippages in FY12 & FY13. The bank is well capitalized with 14.4% CAR and 9.7% tier- I capital. During the quarter, the government of India infused capital of Rs 1,098 crore through preferential equity placement; as a result tier- I capital improved by 262bps q-o-q (incl. current year profit) and the government holding increased sharply to 58% from 51.6%."

"The bank has underperformed the BSE Bankex in the last three months however it has outperformed its peers in the PSU basket including some of the large cap banks. We expect the bank to report a post tax profit of Rs 310 crore in Q1FY12 despite slacking quarter in terms of credit demand and margin compression. We expect earnings to grow by 13.5% over FY11-13 even after factoring in 40bps margin compression and higher credit cost. Currently stock is trading attractively at 1.1x P/ABV on FY12e book and 0.9x P/ABV on FY13e book. The stock may underperform in near term due to higher than expected slippages. We maintain HOLD rating with target price of 151 (earlier TP Rs 171)," says KRChoksey research report.

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