Andhra Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs117
Current market price: Rs91
Andhra Bank reported its Q3FY2008 results with the net profit going up by 16.7% year on year (yoy) and 5.2% quarter on quarter (qoq). The year-on-year (y-o-y) growth was driven by higher other income (up 29.3%) and lower staff expenses (down by 17.8%). The core performance was better than that of last quarter (Q2FY2008) with the net interest margin (NIM) improving slightly due to a slim reduction in the cost of deposits.
The bank's advances grew 22.7% yoy and 2.7% qoq with the net interest income (NII) going up by 1.8% yoy and 7.4% qoq. Our calculations suggest that the bank's NIM improved by 10 basis points qoq mainly due to the increase in the yield on advances (7 basis points) and a reduction in the cost of deposits (10 basis points). An increase of 290 basis points qoq in the low-cost savings account and current account (CASA) deposit base helped matters.
The non-interest income grew by 11.1% yoy to Rs147.7 crore due to a 258.7% jump in the treasury income, while the core fee income showed a decline of 3.7% yoy. The fall in the core fee income is a cause for concern though the management expects this to improve going forward with an increase in the income from distribution of third party products.
The operating expenses fell by a moderate 2.6% yoy helped by a 17.8% fall in employee costs, which is in contrast to other public sector unit (PSU) banks. The main reason for the fall in the employee costs is the bank's decision to adjust the transitional liability on account of AS-15 (amounting to about Rs375 crore) against the reserves. Upto Q2FY2008 the bank used to make an adhoc provision for this liability.
This coupled with a 4.3% y-o-y growth in the net total income resulted in a moderate growth of 10.5% yoy in pre-provisioning profits. Provisions were lower at Rs 27.8 crore due largely to a write back of investment depreciation (Rs15 crore) and lower standard asset provision.
Andhra Bank's business grew quite strongly with the advances up by 22.4% yoy. The deposits mirrored the advances growth going up by 21.6% yoy. The deposits were down 1.2% qoq, which is an indication of the bank giving up some of the high-cost deposits.
Despite the strong growth in the advances, the asset quality continued to remain among the best in the industry with the gross non-performing assets (GNPA) at 1.35% and the net non-performing assets (NNPA) at 0.16%.
As these quarterly results indicate, the pressure on margins is easing and the situation should improve going forward. The capital adequacy levels are comfortable at 12.03% with the Tier-I capital adequacy ratio (CAR) at around 8-9%, which is not a constraint on growth. The asset quality continues to remain among the best in the industry. At the current market price of Rs91, the stock is quoting at 6.3x its FY2009E earnings per share (EPS), 3.4x pre-provision profits (PPP) and 1.1x book value (BV). The stock is available at attractive valuations given its low price to book multiple compared with its peers. We maintain our Buy call on the stock with a price target of Rs117.
The bank's advances grew 22.7% yoy and 2.7% qoq with the net interest income (NII) going up by 1.8% yoy and 7.4% qoq. Our calculations suggest that the bank's NIM improved by 10 basis points qoq mainly due to the increase in the yield on advances (7 basis points) and a reduction in the cost of deposits (10 basis points). An increase of 290 basis points qoq in the low-cost savings account and current account (CASA) deposit base helped matters.
The non-interest income grew by 11.1% yoy to Rs147.7 crore due to a 258.7% jump in the treasury income, while the core fee income showed a decline of 3.7% yoy. The fall in the core fee income is a cause for concern though the management expects this to improve going forward with an increase in the income from distribution of third party products.
The operating expenses fell by a moderate 2.6% yoy helped by a 17.8% fall in employee costs, which is in contrast to other public sector unit (PSU) banks. The main reason for the fall in the employee costs is the bank's decision to adjust the transitional liability on account of AS-15 (amounting to about Rs375 crore) against the reserves. Upto Q2FY2008 the bank used to make an adhoc provision for this liability.
This coupled with a 4.3% y-o-y growth in the net total income resulted in a moderate growth of 10.5% yoy in pre-provisioning profits. Provisions were lower at Rs 27.8 crore due largely to a write back of investment depreciation (Rs15 crore) and lower standard asset provision.
Andhra Bank's business grew quite strongly with the advances up by 22.4% yoy. The deposits mirrored the advances growth going up by 21.6% yoy. The deposits were down 1.2% qoq, which is an indication of the bank giving up some of the high-cost deposits.
Despite the strong growth in the advances, the asset quality continued to remain among the best in the industry with the gross non-performing assets (GNPA) at 1.35% and the net non-performing assets (NNPA) at 0.16%.
As these quarterly results indicate, the pressure on margins is easing and the situation should improve going forward. The capital adequacy levels are comfortable at 12.03% with the Tier-I capital adequacy ratio (CAR) at around 8-9%, which is not a constraint on growth. The asset quality continues to remain among the best in the industry. At the current market price of Rs91, the stock is quoting at 6.3x its FY2009E earnings per share (EPS), 3.4x pre-provision profits (PPP) and 1.1x book value (BV). The stock is available at attractive valuations given its low price to book multiple compared with its peers. We maintain our Buy call on the stock with a price target of Rs117.
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