Buy Andhra Bank; target of Rs 118: SPA Securities
SPA Securities is bullish on Andhra Bank and has recommended buy rating on the stock with a target of Rs 118 in its November 18, 2015 research report.
November 19, 2015 / 11:50 AM IST
SPA Securities’ research report on Andhra Bank
Andhra Bank reported strong core operating performance with its net interest income (NII) growing by ~18% YoY on back of ~14% increase in advances and 20bps improvement in NIM. Slippage at INR 11.9bn was higher sequentially (INR 7.65bn in Q1FY16) but was similar to its last 10 quarters average of ~INR 12bn. Due to higher recovery and write-off, GNPA/NNPA declined YoY by 28/91bps and QoQ by 04/04bps to 5.71%/2.95%. PCR improved sequentially to 63% from 61.33%. We maintain our BUY rating on the stock with revised target price of INR 118 (due to book value dilution post capital infusion), based on 1x FY17E ABV.Outlook & Valuation
Highlight of the quarter was strong operating performance driven by ~18% YoY growth in NII on back of ~14% increase in advances and 20bps improvement in NIM. While Andhra Bank has cut the base rate by 25bps in October 2015, which would negatively impact NIM from Q3FY16 onwards, we believe that the impact will be limited due to improvement in the liability profile and paring down of excess SLR investment. In last six quarters, its CASA has improved by ~350bps to >27% from low of 23.5% in Q1FY15. Andhra Bank is targeting to improve its CASA ratio to its 2001-2010 average of ~32%. Similarly, it has consciously brought down its SLR investment to 25.5% in Q2FY16 from 29.3%/28.2% in Q1FY16/Q2FY15. Together these measures should improve the NIM by ~20bps limiting 25bps cut in base rate. We expect Andhra Bank to continue with its strong core operating performance led by above industry credit growth and stable NIM. Despite higher stressed assets of ~13.5%, we are confident that the bank would be able to improve its asset quality as issues faced by power and infrastructure sector, which constitutes ~10 & 16% of loan book and ~55% of its restructured assets, are being sorted out and many companies are reviving operations as evident from low slippages in restructured accounts. We maintain our BUY rating on the stock with revised target price of INR 118 (due to book value dilution post capital infusion), based on 1x FY17E ABV.
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