Equirus Securities_Andhra Bank_Initiating Note_LONG_Target Price Rs 220_28 09 2010

8/4/2019 Equirus Securities_Andhra Bank_Initiating Note_LONG_Target Price Rs 220_28 09 2010

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September 28, 2010 Analyst: Vivek Jhunjhunwala [email protected] (+91-8128694104) Page 1 of 13

2010 Equirus All rights reserved

Andhra Bank Absolute : LONGRelative : OverweightInitiating Note Regular Coverage 33% upside in 12 months

Banking on the best Financial Services

Rating Information

Price (`) 164

Target Price (`) 220

Target Date 30th Sep11

Target Set On 28th Sep'10

Implied yrs of growth (ERE) 10

Fair Value (ERE) (`) 319

Fair Value (DDM) (`) 249

In Benchmark BSE Banks

Model Portfolio Position

Stock Information

Equity Cap (` Mn) 4,850

Face Value (`) 10

Free Float (%) 58.60%Market Cap (` Mn) 78,570

52 Wk H/L (`) 170/94

Avg Daily Volume (Mn) 18

Avg Daily Value (` Mn) 231

Bloomberg Code ANDB IN Equity

Ownership Recent 3M % 12M %

Promoters 52% 52% 52%

DII 19% 18% 19%

FII 14% 15% 13%

Public 15% 15% 16%

Price % 1M% 3M% 12M%

Absolute 1% 21% 60%

Vs Industry -13% -2% 10%

Allahabad Bank 5% 40% 96%

Corporation Bk 11% 30% 73%

Consolidated Quarterly EPS forecast

`/Share 1Q 2Q 3Q 4Q

EPS (10A) 5.4 5.7 5.7 5.0

EPS (11E) 6.6 6.6 6.6 6.6

We see a 33% upside in Andhra Bank (ANBK) over next 12 months and initiate

coverage recommending LONG. At our target price of`220, ANBK will trade at 1.7x

September 2011 BV, against current TTM P/B of 1.7x, and at Sep11 TTM P/E of 7.8xversus current TTM P/E of 7.21. We believe that ANBK commands valuations at 1.7x

trailing book value (` 127)and 7.8x TTM EPS (` 28) for the following reasons:

Best in class RoA of ~1.39% translating to an impressive 26% RoE Best in class NIM of 3.21% to improve to 3.4% in FY11. Q1FY11 NIM -3.72% Best in class Asset Quality with 1% Gross NPA and .3% Net NPA Margins protected in an increasing interest rate environment with ~30% CASA

Indian PSU banks currently trade at average P/B ratio of 1.54x with average RoE at

21.4% and average Gross NPA at 2%. Average NIM for Indian PSU banks stands at 2.7%

Industry high RoE with industry best NPAs should command premium: ANBKs

FY10 RoE stands at 26% with current NPA of 1% and Net NPA of .3%. Given suchimpressive RoE and NPA numbers, we believe the bank is undervalued at 1.3x 1-year

forward book value. ANBK has a 5 year loan CAGR of 26%. The banks cost-to-income

ratio is down to 42% with 20% CAGR in business per employee and profit per

employee over FY07-10. We expect asset quality to remain strong with Gross NPA at

1% and our expectations are in line with the management.

Historical NIM at average of 3.15% provides comfort in an increasing interest-rate

environment: ANBK has maintained its NIM between 3.4% and 2.86% over the last 4

years with Q1FY11 NIM at 3.72%. We expect NIM for FY11E to be 3.4% which is in line

with management expectation. NIM and RoA for ANBK are among the top three

Public Sector banks, with PNB and Indian Bank being the other two.

7% Current Account deposit and 22.6% Savings account deposit will allow NIMs to

remain stable in an increasing interest rate scenario: With CASA at 29.6%, we

forecast that an increase in interest rates will have minimal impact on NIM.ANBK has

shed high cost deposits and has launched a CASA campaign to improve CASA share

Key risks to business are an unexpected hike in interest rates leading to slower

credit growth and higher NPAs. With restructured accounts at 5.3% of assets, there

could be additional NPAs resulting from these loans. Any significant political

upheaval in Andhra Pradesh may also affect business for the bank.

Consolidated Financials

` Mn YE Mar FY10A FY11E FY12E FY13ENII 21,958 29,462 35,268 42,639

Operating 5,255 5,912 6,563 7,219

Employee 8,241 10,302 12,568 15,082

Other 9,646 9,164 10,080 11,290

Provisions 3,741 4,677 5,705 6,846

PAT 10,466 12,752 14,865 17,763

Total Equity 44,268 54,105 65,753 80,191

Gross Debt 8,59,564 10,68,38

12,98,08

15,52,8

Cash, other 1,11,677 1,37,869 1,67,403 2,01,67

` Per Share FY10A FY11E FY12E FY13EEarnings 21.7 26.3 30.5 36.8

Book Value 91 112 136 165

Dividends 5.0 5.0 5.5 6.0

FCFEPS 127.5 60.1 67.3 77.7

P/E (x) 7.5 6.2 5.3 4.4

P/B (x) 1.8 1.5 1.2 1.0

ROE (%) 25.88% 25.96% 24.64% 24.45%

Prov.& W/O 0.83% 0.81% 0.80% 0.77%

NIM (%) 3.21% 3.40% 3.30% 3.30%

RoA (%) 1.35% 1.38% 1.38% 1.38%

Andhra Bank leads the pack with best in class numbers (FY10)


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ANDHRA BANK Absolute LONG Relative Overweight 30% Upside in 12 months


Company Snapshot

How we differ from Consensus

Equirus Consensus % Diff Comment

EPSFY11E 26.3 24.57 7% We expect advances and deposits to

grow by 25% and 22% for FY11 and FY12

respectively. We have factored in a 0%

and 12% increase in Other Income for

FY11 and FY12 respectively. Our NIM

expectations are 3.4% and 3.3%

respectively for FY11 and FY12

FY12E 30.6 28.77 6%

Pre-Tax

Profit

FY11E 18,218 16550 10%

FY12E 21,235 19220 10%

PATFY11E 12,752 11957 7%

FY12E 14,865 13893 7%

Our Key Investment arguments:

ANBK is undervalued at 1.7x trailing P/B and 1.3x 1 year forward P/B: At 26% RoEin FY10 and 3 year historical average RoE at 21% we believe the stock should trade at

1.7x book value of 127 per share. Best in class asset quality with ~1% NPA, >80%

provision cover, cost-to-income ratio of 42%, and 26.2% 5 year CAGR in advances

further justify the investment decision.

7% Current Account deposit and 22.6% Savings account deposit will lead to stableNIM of 3.3-3.4% in an increasing interest rate scenario: With 29.6% low cost

deposits, we expect minimal impact on NIM. 5 year NIM averages 3.15%.

Credit growth estimates are ~1.6x that of GDP growth: With 11-14% Nominal GDPgrowth we estimate 18-22% growth in credit. Over FY10-13E we expect ANBK to

increase its advances book at a CAGR of 22% and Net Interest Income at a CAGR of

24.7%. We expect ANBKs credit advances to grow at CAGR of 22% over FY10-13E

Risk to Our View

Since ~52% ofANBKs business comes from Andhra Pradesh, we could see increase inNPA if the political situation vastly deteriorates due to the Telangana issue.

However, business from Andhra Pradesh has remained stable through the Telangana

issue with overall advances for ANBK growing at a CAGR of 28% over FY08-10.

If the overall credit demand goes down, ANBKs growth will also suffer. However,the consensus on Indias GDP growth varies between 11-14% which should translate

to ~18-22% growth in credit. Crisils credit growth estimates are at 20-22%.

Sensitivity to Key Variables Bps change % Impact on FY11E EPS

NIM +10 -5%

Cost-to-Income +100 -3%

ERE Valuations & AssumptionsRf Ke Term. Growth RoE at end of high growth period

8% 14% 3% 23.1%

FY11E FY12E FY13-15E FY16-20E FY20-25E

NII Growth 34.2% 19.7% 16.0% 8.6% -

NIM (%) 3.40% 3.30% 3.23% 3.20% -

Dividend Payout 22.25% 20.99% 23.52% 55.46% -

RoE 25.9% 24.8% 23.5% 22.9% -

Years of strong growth 1 2 5 10 -

Valuation as on date (`) 232 248 264 279 -

Valuation as of 30th Sep'11 265 283 302 319 -

Based on Excess Return to Equity valuation, assuming 10 years of high growth, we arrive

at a fair value of`279 and a target price for 30th Sep11 of` 319

Company Description:

Andhra Bank (ANBK) is an Indian bank with nearly 52% of the business from the state of

Andhra Pradesh. The bank has 1560 branches and 14,256 employees with advances

exceeding 571 bn and deposits exceeding 743 bn and CASA deposit ratio of 29.57%. ANBK

has had a history of relatively lower NPAs with Gross NPA ~1%, against industry average of~2%. ANBK also has relatively higher RoE at ~26% against an industry average of 21%.

Company CMP Market CapEPS P/E BPS P/B RoE Div Yield

FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY10 FY11E FY12E FY10 FY11E

Andhra Bank 162 78,570 21.7 26 .3 30.6 7.5 6.2 5.3 91.3 1.45 25.90% 25.90% 24.80% 3.09% 3.09%

Allahabad Bank 230 1,01,530 27.8 31.46 39.8 8.3 7 .3 5.8 53.9 1.43 20.90% 21.00% 21.00% 2.50% 2.50%

Corporation Bk 693 99,410 82.5 87.7 107.3 8.4 7.9 6.5 215.1 1.52 18.30% 19.60% 19.60% 2.20% 2.20%


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Investment Rationale

Best in class RoE and asset quality deserve premium

We analyzed 20 banks on the basis of FY10 RoE and our analysis reveals that ANBK has

one of the highest RoE in the sector but the P/B ratio for the bank does not reflect thehigh RoE and is trading at a discount on a Price-to-Book to RoE metric. (Exhibit 1)

We expect the bank to maintain its RoE at 25% over the next three years on the back of

25% CAGR in net interest income and sustained cost-to-income ratio of ~42%.

ANBKs asset quality is amongst the best in its peer group (Exhibit 1). On an absolute

scale the Net NPAs for ANBK have remained below .3% over FY05-10. Currently Gross NPA

stands at 1% with Net NPA at .3%. The company has restructured advances amounting to `

30364.5 Mn. 29 accounts pertaining to the textile industry amounting to ` 5640 Mn have

been restructured and the bank does not foresee a slippage of these accounts into NPA

with pick-up in exports to the Europe and the US. Standard assets under restructured

assets amount to`

29370 Mn

With the RBIs 70% Provision Coverage Ratio (PCR) norm, ANBK has a relative advantage

as a few other banks will continue to provide higher provisions leading to suppressed

earnings. ANBKs PCR stands at 86% which is above RBIs requirement and coupled with

its extremely low Gross NPAs, we expect an advantage in PAT, compared to its peers.

Exhibit 1: Relative NIM, CASA and Asset Quality of select Indian banks, FY10

Bank

NIM

(%)

CASA

(%)

Provision

Cover (%)

Net

NPA %

Gross

NPA (%)

Restructured

Asset(%)

Allahabad Bank 2.8 34.2 76.2 0.4 1.5 4.7

Andhra Bank 3.2 29.6 92.8 0.3 1.0 5.3

Canara Bank 2.7 29.0 42.3 1.0 1.5 3.4

Corporation Bank 2.7 24.1 77.0 0.4 1.1 2.7

Punjab National Bank 3.3 40.9 89.0 0.7 1.8 6.6

State Bank of India 2.7 40.3 62.4 1.7 3.1 2.5

AVERAGE 2.9 33.2 73.3 0.8 1.7 4.2

ANBK Ahead of Avg. by (%) 11% -10% 27% 60% 40% -26%

Source: Company, Equirus Estimates

Growth in business certain with visible credit growth

We expect ANBK to grow better than the countrys credit growth on the back of 45-50%

growth in retail segment. We believe that the country can sustain a credit growth to the

tune of 18-22% over FY11-13E on the back of Nominal GDP growth in the range of 11-14%.

We arrive at a credit growth multiple of 1.6x Nominal GDP given the trend in credit andGDP growth over the past decade. (Exhibit 2)

Exhibit 2: Credit Growth v/s Nominal GDP Growth for India

Source: RBI, Equirus Estimates

ANBK has exhibited better than industry growth with advances growing at 29% and 27%

during FY09 and FY10 respectively. (Exhibit 3) The high growth however has not come at

the cost of fall in asset quality with Gross NPA maintained at ~1% and Net NPA at ~.3%.

Retail credit currently stands at ` 88220 Mn and the bank expects retail credit to grow by

45-50% in FY11 on the back of healthy demand from home and gold loan segment. ANBK

looks to focus on gold loans which yield 14.75% and the gold loan portfolio for ANBK has

grown at 64.4% in the 12 month period from Q1FY10 to Q1FY11. We expect Andhra Bank

to utilize its 1000+ branches in Andhra Pradesh and strong presence in other southern


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states in India to meet the 45-50% growth target for retail credit. Together with gold

loans, we also expect Education Loans and Home Loans to continue to grow with

increasing purchasing ability and positive sentiments for the retail customer.

Exhibit 3: 5 year growth in Advances and Deposits

Source: Company

30% CASA deposit with a 3.15% average NIM over FY07-10provide confidence in Net Interest Income Growth

Over FY07-10, RBI has varied its repo-rate between 4.75% and 9.00% and this has resulted

in varying interest rates over this period. However, ANBK has maintained its NIM

averaging at 3.15% over this period with the NIM dropping below 3% only in FY08. For

Q1FY11 the company had an NIM of 3.72% and we expect it to sustain at ~3.4% for FY11.

With rapid growth in non-CASA deposit, the CASA percentage has shrunk to 29.6% from

36.1% in FY05. However, the bank has initiated a CASA campaign to improve this share

and reduce its cost of deposits. The Current Account percentage has been maintained at

7% with Savings Account at 22.6%. (Exhibit 4)

The bank has shed and re-priced a significant portion of its high-cost deposits which has

significantly reduced the Cost of deposits (CoD) to 5.49% for Q1FY11 from 6.77% in

Q1FY10. Yield on advances on the other hand has only marginally declined from 11.20% in

Q1FY10 to 10.89% in Q1FY11. We expect the bank to continue to re-price its assets faster

than its liabilities in an increasing interest rate environment.

Exhibit 4: Historical CASA, NIM and Cost-to-Income for ANBK

FY07 FY08 FY09 FY10

CASA 34.5% 33.6% 31.4% 29.4%

NIM 3.40% 2.86% 3.03% 3.21%

Cost-to-Income 50.0% 47.2% 46.2% 42.7%


13.25% CAR with impending capital infusion gives enough roomfor growth in business

At 13.25% CAR without including Q1FY11 profit of` 3200 Mn, the bank is well capitalized

and well positioned to increase its deposits and advances. The bank has suggested that it

has head-room available to accommodate close to Rs. 40,710 Mn of capital in its current

structure. With Retained Earnings amounting to ` 9932 Mn for FY11 the Tier-I capital is

also expected to remain at ~8%, including the respective quarters profit.

ANBK plans to open 122 branches with 50 branches outside Andhra Pradesh. This should

result in significant increase in both advances and deposits, with the added possibility of

increasing CASA share as per the banks plans.

Growth in retail credit expected at 45-50% for FY11E

Retail credit currently stands at 88220 Mn and the bank expects retail credit to grow by

45-50% in FY11 on the back of healthy demand from home loan and gold loan segment.ANBK looks to focus on gold loans which yield 14.75% and the gold loan portfolio for ANBK

has grown at 64.4% in the 12 month period from Q1FY10 to Q1FY11 (Exhibit 5). Currently

retail home loan stands at ` 37270 Mn and non-agricultural gold loan contributes ` 13990

Mn towards a total retail credit of` 88220 Mn or about 16% of total advances.

Going forward, we expect Andhra Bank to continue to expand its gold loan franchise on

the back of 1000+ branches in Andhra Pradesh and strong presence in other southern

states of India. Given that 40% of Indias gold is believed to be in Southern India we see

the branch network as an advantage over other banks. Education loans are expected to


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do well on the account of more students pursuing specialized education in India and

abroad, whereas gold loans are expected to continue to grow on the back of increasing

share of organized players as compared to the unorganized players.

Exhibit 5: ANBK Retail Credit (all figures in ` Mn)

Loan FY10 Q1FY10 Q1FY11 Growth (Q111 / Q110)Housing Loans (Direct Finance) 34,820 23,730 37,270 57.06%

Non Agriculture Gold Loans 13,830 8,510 13,990 64.39%

Education Loans 16,470 14,890 16,520 10.95%

Other retail Credit 24,080 17,390 20,440 17.54%

Total 89,200 64,520 88,220 36.73%


Gold loan Andhra Bank has entered the gold loan market which will beprocessed through 1100 branches. Gold loan disbursal through ANBK to the

companys existing customers will also come at low incremental costs. As per

ANBK, high yields and low risk in this category has made them increasingly focuson gold loans. South India, where the bank has a strong presence, has 40% of

Indias gold which suggests strong growth potential in this category.

Housing loans have grown by 57% in Q1FY11 over Q1FY10. Given that the retailsector has higher yields for ANBK and the bank expects to grow retail credit at

50% in FY11, we expect yields from retail credit to increase profitability.

Other Income for ANBK grew by 26% in FY10 over FY11. We expect other incomegrowth to be commensurate with overall business growth. We have factored in

conservative growth in other income at 7% CAGR over FY10-13E to factor impact

on treasury income with change in bond rate yields.

Exhibit 6: ANBK Capital coverage projections (all figures in ` Mn)Key Parameters FY11E FY12E FY13E FY14E FY15E

Book Value 54,183 65,927 80,286 95,036 1,10,767

Assets 9,62,808 11,74,625 14,09,550 16,20,983 18,15,501


Forecast: Key Assumptions & Sensitivity

Andhra Banks NIM for FY10 stood at 3.21% and for Q1FY11 the NIM was 3.72%.The last 5 years average NIM has been 3.15%, and that the lowest NIMs was

2.86%% during FY08. We expect NIM for ANBK to be as below (Exhibit 7)

Exhibit 7: NIM expectation

Parameter FY10 FY11 FY12 FY13 FY14Net Interest Margin (NIM) 3.21% 3.40% 3.30% 3.30% 3.2%


Exhibit 8: Sensitivity for EPS on change in borrowing cost

Sensitivity to Key Variables Bps change Impact on FY11E EPS

Decrease in NIM +10 -5%


ANBKs advances CAGR over FY06-FY10 has been 26.2% and we expect 25%, 22%,and 20% growth in advances over FY11E, FY12E and FY13E respectively. This is in

tune with the expected credit growth estimates for the country we could see

better credit growth with a peaceful resolution to the Telangana issue.

We expect ANBK to continue to improve its cost-to-income ratio in line with thehistorical performance of ANBK and of other public sector banks. This

improvement is expected as business per branch and business per employee

improves due to higher scale of operations

Exhibit 9: Earnings at risk for ANBK

Change in interest rate Re-pricing up to 1 year (` Mn)

0.25% 200.7

0.50% 401.5

0.75% 602.2

1.00% 802.9

Source: Company Annual report, FY10


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Investment Risk & Concerns

We perceive the following system-wide changes to adversely affect ANBKs earnings and

business growth

Restructured loans, currently at 5.3%, could lead to higher NPAs in the comingyears. The bank has 29 large accounts amounting to ` 5640 Mn in the textile sectorand significant exposure in infrastructure (` 2270 Mn), power, iron and steel,

commercial estate. The company is confident of recovery in the textile accounts on

pick-up in exports to Europe and the US.

Sustained downturn in the economy will lead to reduced credit demand and lowerbusiness growth. In the absence of any significant negative events impacting the

Indian economy, we expect Indias credit growth to be between 18 -22% over the

next 5 years (FY11-FY15) with the countrys GDP expected to grow in the range of

11-14% in the same period. Any changes to the above estimates could hurt credit

growth as well as repayment of advances.

Any major political upheaval in Andhra Pradesh could lead to some slowdown inlending since ~52% of ANBKs business comes from Andhra Pradesh.

Significant interest rate fluctuations may lead to volatility in treasury income. Thecurrent investment break-up stands as below which indicates that the treasury

income should be lower for this year and we have factored in a 0% growth in other

income for FY11E over FY10.

Exhibit 10: ANBK Investment Profile for Q1FY11 (` Mn)

Particulars Jun-09 Jun-10

Net Investment 178,646 219,701

Held to Maturity 142,456 192,048

Available for Sale 34,789 27,630

Held for Trading 1,401 23

SLR (%) 25.53 25.98

Source: ANBK Analyst Presentation, Q1FY11

Corporate Governance

Andhra Bank is an Indian bank with 51.5% government holding. The bank meets the

various requirements of the RBI with

Overall CAR of 13.2% with ~8% Tier-I capital PSL lending of ~42% as compared to the 40% requirement by the RBI

The auditors have not come across any issues in the financial statements for the bank and

the Balance Sheet, Profit and Loss Account and Cash Flow Statement comply with the

applicable accounting standards.

ANBK has seen a consistent decline in both Gross and Net NPA over the last 10 years.

(Exhibit 11) Today ANBK has one of the best NPA numbers across the PSU bank sector.

Exhibit 11: Movement in NPA over the years (`, Mn)

Description FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Net NPA to Net Adv (%) 2.45 1.79 0.93 0.28 0.24 0.17 0.15 0.18 0.17

Movement of NPAs (Gross)

Opening Balance 4701 5241 5807 6154 4409 4369 3970 3724 3681

Additions during the year 2086 2370 2946 1502 1533 2437 2015 1975 3999

Reductions during the year 1545 1804 2599 3247 1573 2836 2261 2018 2802

Closing balance 5241 5807 6154 4409 4369 3970 3724 3681 4879

Movement of Net NPAs

Opening Balance 2190 2372 2063 1201 490 525 473 537 792

Additions during the year 182 0 0 0 35 0 65 255 165

Reductions during the year 0 310 862 711 0 52 0 0 0

Closing balance 2372 2063 1201 490 525 473 537 792 957

Movement of Provisions

Opening Balance 2488 2842 3730 4933 3890 3810 3435 3287 2883

Provisions during the yr 1005 1843 2586 124 400 926 987 1722 3052

Writeoff/writeback of prov 651 955 1383 1167 480 1301 1184 2009 2017

Closing balance 2842 3730 4933 3890 3810 3435 3238 3000 3919

Source: Company


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Company Description

ANBK is an Indian PSU bank with the Government of India holding 51.5% stake in the

company. The banks Gross Deposits stood at 747,000 Mn at the end of Q1FY11 with

29.6% CASA deposits. The banks Gross Advances stood at Rs. 565,050 Mn at the end of

Q1FY11 and a break-up of this is presented below (Exhibit 12). ANBK is well capitalized at

13.25% CRAR as per BASEL-II guidelines.

Exhibit 12: Break up of credit to various segments for PSU banks, FY10

Gross Advances (Domestic Non Food) ANBK CORPBK PNB ALBK

Corporate Advances 51.9% 36.90% 39.68% 33.83%

MSME Advances 15.3% 10.30% 10.75% 12.20%

Retail Credit 15.4% 20.60% 10.40% 22.35%

Agricultural Advances 15.5% 10.40% 16.18% 16.17%

Other Sectors 1.8% 21.80% 22.98% 15.44%

Total 100.0% 100.0% 100.0% 100.0%Source: Respective Company Presentations, Equirus Estimates

Close to 52% of the banks business comes from the state of Andhra Pradesh where the

bank has 1019 branches out of a total 1560 branches. The bank employs 14256 employees

as of Q1FY11. ANBK has witnessed strong growth is MSME (47%) and Retail Credit (37%) in

Q1FY11 over Q1FY10 and expects to grow its retail book by 45-50% on the back of healthy

demand from gold loan and home loan segment. The bank also expects agriculture

advances to grow by 25% in FY11 and continues to focus on this sector as NPAs for this

segment are the lowest at just 0.28% of total advances.

ANBKs restructured accounts constitute 5.3% of its total assets with 60818 accounts

summing up to Rs.30364.5 Mn. Of these Rs.19370 Mn comes from 102 accounts pertaining

to corporate/major industries. There are 29 accounts pertaining to textiles (Rs.5640 Mn),

6 accounts pertaining to infrastructure (Rs. 2270 Mn) with power, iron and steel,

commercial real estate, and educational institutions forming the rest. The bank expects

textile exports to Europe and the US to pick up and does not foresee any slippage of

these accounts into NPA during the current financial year. Out of the total restructured

assets worth Rs. 30364.5 Mn, Rs. 29370 Mn are classified as standard assets.

Priority Sector Lending (PSL) for Indian banks is mandated at 40% and Andhra Bank meetsthis requirement with yields ranging from 7-13% for these loans. (Exhibit 14)

Exhibit 13: Break up of credit to various segments as part of PSL for ANBK (Rs. Mn)

Category Q1FY10 Q1FY11

Agriculture 9173 8875Small enterprises 5006 5346

Micro credit 397 390

Education loans 1648 1652

Housing loans 2789 2940

Total 19013 19203Source: Company

Exhibit 14: ANBK NIM and RoE movement v/s Repo Rate movement

Source: RBI, Company, Equirus Estimates


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The Telangana issue: If the Telangana issue were to disrupt life and business in Andhra

Pradesh going forward, there could be a rise in defaults coming from various segments as

well as decline in credit growth in the state. This will pose problems for ANBK as 50% of

its business comes from the state of Andhra Pradesh. We take comfort in the fact that

50% of Andhra Banks business comes from other states. Also the bank is growing its MSMEand Retail book aggressively since retail and MSME clients are unlikely to migrate to

other states we do not expect the credit demand from these segments to drop. For

corporate and mid-corporate advances the growth has been ~20% against overall credit

growth of 27% for the bank and we expect this demand to pick up after the resolution of

the Telangana issue.

As per a recent report released by the RBI, the profit per employee, return on advances

adjusted to Cost of Funds, Return on Assets, CRAR and Net NPA ratio are all better than

the group average for nationalized banks. The management expects NIM for the bank to

be above 3.5% for FY11E with Gross NPA expected to remain at ~1%.

The exposure to various sectors is as below (Exhibit 15). We do not see any discomfort

with the exposure portfolio. The exposure to real estate sector as on 31 st March 2010 is

Rs. 52874.7 Mn which has reduced from Rs. 56731.7 Mn for 31st March 2009.Exhibit 15: Exposure to various sectors as on 30th June 2010

Sector Actual Exposure Exposure as % of Advances

Power 117910 21%

Construction & Contractors 46740 8%

Housing Loans 37480 7%

Iron & Steel 35380 6%

Textiles 24620 4%

NBFC 23560 4%

Commercial Real Estate 22620 4%

Rice Mill 14940 3%

Engineering 14230 3%

Petroleum Products 11760 2%Source: ANBK Analyst Presentation, Q1FY11


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Valuation

Our methodology for valuing ANBK is the excess return to equity approach with the

following parameters:

Cost of Equity 14%: Given that ANBK is a government owned bank with theperformance linked closely to the overall credit demand growth in the country

and therefore the GDP of the country, we believe that ANBKs growth and

margins will be dependent on the overall economic performance of the country.

Strong Growth Period 5 years: We believe ANBK will demonstrate 19% CAGR inadvances over the next 5 years with a 19% CAGR in deposits over the same

period. Indias credit growth is expected to be 18-22% for FY11 and has averaged

1.6x GDP growth over FY07-10. We foresee an average Nominal GDP growth of

~12% to be very likely and therefore arrive at a 19% CAGR in credit demand.

Stable Growth Rate 3%: We believe ANBK will be able to sustain a perpetual 3%growth beyond FY15.

We arrive at a current fair value of` 279 and a 30th Sep 2011 target price of` 319 based

on our valuation method for the stock. However, we are assigning a P/B based target

price of` 220 for Sep11 which is a 30% discount to our ERE fair value. At the target level

the stock will trade at 1.7x September 2011 Book Value.

Exhibit 12: P/B, P/E, RoE, EPS Growth and Market Cap of Indian PSU banks

Bank Market CapP/B

(Trailing)

RoE

(FY10)

P/E

(Trailing)

EPS Growth

(FY10 / FY09)

Andhra Bank 79,855 1.7 26.0% 7.2 60%

Allahabad Bank 103,768 1.7 22.2% 8.3 57%

Oriental Bank 112,492 1.5 16.5% 9.2 27%

Corporation Bank 96,276 1.7 21.9% 7.7 31%

Punjab National Bank 406,393 2.3 26.6% 9.8 26%

State Bank of India 1,968,526 2.3 14.8% 16.8 0%


Exhibit 13: TTM P/E ratio v/s 2-year forward EPS growth

Exhibit 14: TTM P/B ratio v/s 2-year forward RoE


10/13



Consolidated Quarterly Earnings Forecast` in Mn 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E FY10 FY11E FY12E FY13E

Net Interest Income 4,414 5,147 5,825 6,562 7,362 7,366 7,366 7,366 8,817 8,817 8,817 8,817 21,958 29,462 35,268 42,639

Operating and Other Expenses 1,201 1,235 1,277 1,543 1,471 1,481 1,481 1,481 1,641 1,641 1,641 1,641 5,255 5,912 6,563 7,219

Employee Expenses 2,114 1,715 1,973 2,440 2,870 2,477 2,477 2,477 3,142 3,142 3,142 3,142 8,241 10,302 12,568 15,082

Pre-Provision Income 1,099 2,196 2,576 2,581 3,022 3,409 3,409 3,409 4,034 4,034 4,034 4,034 8,461 13,248 16,137 20,338

Provision & Write Off -32 578 964 2,229 520 1,386 1,386 1,386 1,426 1,426 1,426 1,426 3,741 4,677 5,705 6,846

Other Income 2,381 2,332 2,242 2,691 2,080 2,522 2,522 2,522 2,701 2,701 2,701 2,701 9,646 9,646 10,804 11,884

Profit Before Taxes 3,512 3,950 3,854 3,050 4,582 4,545 4,545 4,545 5,309 5,309 5,309 5,309 14,366 18,218 21,235 25,376

Tax 950 1,210 1,100 640 1,380 1,362 1,362 1,362 1,593 1,593 1,593 1,593 3,900 5,465 6,371 7,613

Reported PAT 2,562 2,740 2,754 2,410 3,202 3,183 3,183 3,183 3,716 3,716 3,716 3,716 10,466 12,752 14,865 17,763

Extraordinary Income 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Adj. Net Profit 2,562 2,740 2,754 2,410 3,202 3,183 3,183 3,183 3,716 3,716 3,716 3,716 10,466 12,752 14,865 17,763

EPS (Rs) 5.4 5.7 5.7 5.0 6.6 6.6 6.6 6.6 7.7 7.7 7.7 7.7 21.7 26.3 30.6 36.6

Key Drivers

NIM 3.2% 3.2% 3.2% 3.2% 3.7% 3.4% 3.4% 3.4% 3.3% 3.3% 3.3% 3.3% 3.21% 3.40% 3.30% 3.30%

Cost to Income 42.7% 42.7% 42.7% 42.7% 41.5% 41.5% 41.5% 41.5% 41.5% 41.5% 41.5% 41.5% 42.7% 41.5% 41.5% 40.9%

CASA 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

Other Income/NII 53.9% 45.3% 38.5% 41.0% 28.3% 34.2% 34.2% 34.2% 30.6% 30.6% 30.6% 30.6% 43.9% 32.7% 30.6% 27.9%

Sequential Growth (%)

Net Interest Income 17% 13% 13% 12% 0% 0% 0% 20% 0% 0% 0%

Employee Expenses -19% 15% 24% 18% -14% 0% 0% 27% 0% 0% 0%

Other Income -2% -4% 20% -23% 21% 0% 0% 7% 0% 0% 0%

PBT 12% -2% -21% 50% -1% 0% 0% 17% 0% 0% 0%

EPS 5% 0% -13% 33% -1% 0% 0% 17% 0% 0% 0%

Yearly Growth (%)

Net Interest Income 67% 43% 26% 12% 20% 20% 20% 20% 34% 20% 21%

Employee Expenses 36% 44% 26% 2% 9% 27% 27% 27% 25% 22% 20%

Other Income -13% 8% 12% -6% 30% 7% 7% 7% 0% 12% 10%PBT 30% 15% 18% 49% 16% 17% 17% 17% 27% 17% 19%

EPS 23% 16% 16% 32% 16% 17% 17% 17% 21% 17% 19%

Margin (%)

NIM 3.2% 3.2% 3.2% 3.2% 3.7% 3.4% 3.4% 3.4% 3.3% 3.3% 3.3% 3.3% 3.2% 3.4% 3.3% 3.3%

Pre-Provision Income Margin 25% 43% 44% 39% 41% 46% 46% 46% 46% 46% 46% 46% 39% 45% 46% 48%

Provision and Write Off % -1% 11% 17% 34% 7% 19% 19% 19% 16% 16% 16% 16% 17% 16% 16% 16%

PAT 58% 53% 47% 37% 43% 43% 43% 43% 42% 42% 42% 42% 48% 43% 42% 42%


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Consolidated FinancialsP&L FY10 FY11E FY12E FY13E Balance Sheet FY10 FY11E FY12E FY13E Cash Flow FY10 FY11E FY12E FY13E

Net Interest Income 21,958 29,462 35,268 42,639 Equity Capital 4,850 4,850 4,850 4,850 Retained Income 7,629 9,915 11,744 14,359

Operating and Other 5,255 5,912 6,563 7,219 Reserve 39,418 49,333 61,077 75,436 Dividend Exp. 2,837 2,837 3,121 3,404

Employee Expenses 8,241 10,302 12,568 15,082 Networth 44,268 54,183 65,927 80,286 Cash Profit 10,466 12,752 14,865 17,763

Pre-Provision Income 8,461 13,248 16,137 20,338 Deposits 7,76,761 9,70,952 11,84,561 14,21,473 Change in WC -1,19,742 -1,40,284 -1,54,312 -1,71,146Provision & Write Off 3,741 4,677 5,705 6,846 Borrowing 58,524 73,156 89,250 1,07,100 Operating C/F -1,09,276 -1,27,531 -1,39,447 -1,53,383

Other Income 9,646 9,646 10,804 11,884 Total Liabilities 9,03,832 11,22,569 13,64,017 Capex -1,348 -200 -200 -200

Profit Before Taxes 14,366 18,218 21,235 25,376 Net Block 3,376 3,576 3,776 3,976 Change in Invest -52,478 -57,706 -63,979 -57,601

Tax 3,900 5,465 6,371 7,613 Advances 5,61,135 7,01,419 8,55,731 10,26,877 Investing C/F -52,478 -57,706 -63,979 -57,601

Reported PAT 10,466 12,752 14,865 17,763 Adv. Growth (%) 27% 25% 22% 20% Change in Loan 2,11,092 2,08,821 2,29,704 2,54,762

Extraordinary Income 0 0 0 0 Investment 2,09,111 2,61,389 3,18,894 3,82,673 Change in Eq Cap 0 0 0 0

Adj. Net Profit 10,466 12,752 14,865 17,763 Inv Growth (%) 23% 25% 22% 20% Financing C/F 2,08,295 2,05,984 2,26,583 2,51,358

EPS (Rs) 21.7 26.3 30.6 36.6 Provisions 3,741 4,677 5,705 6,846 Cash Generation 58,802 25,975 29,430 33,996

DPS (Rs) 5.0 5.0 5.5 6.0 Cash 1,11,677 1,37,652 1,67,082 2,01,078 RoE (%) 26% 26% 25% 24%

CEPS (Rs) 21.7 26.3 30.6 36.6 Total Assets 9,03,832 11,22,569 13,64,017 RoIC (%) 1% 1% 1% 1%

FCFEPS (Rs) 38.2 145.7 60.7 70.1 LDR 72% 72% 72% 72% Div Yield (%) 3.1% 3.1% 3.4% 3.7%

NII Growth 35% 34% 20% 21% BVPS 91 112 136 166 Div Payout (%) 27% 22% 21% 19%

PAT Growth (%) 60% 22% 17% 19% Asset/Equity 17.40 17.77 17.82 17.56 P/E 7.51 6.16 5.29 4.42

EPS Growth (%) 61% 21% 17% 19% BVPS Growth 20.95% 22.40% 21.67% 21.78% P/BV 1.77 1.45 1.19 0.98

Tax Rate (%) 27% 30% 30% 30% DPS 5.0 5.0 5.5 6.0

Dividend Gr. (%) 11% 0% 10% 9%

Deferred Secn Inc 0 0 0 0

TTM P/B (RHS) vs. 2 yr forward RoE (RHS) TTM P/E (RHS) vs. 2 yr forward EPS growth(RHS)


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Historical FinancialsP&L FY07 FY08 FY09 FY10 Balance Sheet FY07 FY08 FY09 FY10 Cash Flow FY07 FY08 FY09 FY10

Interest Inc 33,153 42,899 53,746 63,729 Equity Cap 4,850 4,850 4,850 4,850 PAT 5,378 5,797 6,538 10,466

Interest Exp 18,976 28,694 37,467 41,771 Reserve 26,740 27,742 31,749 39,418 Deposits Inc. 75,319 79,747 99,527 1,82,973

Net Int. Inc. 14,177 14,205 16,279 21,958 Net Worth 31,590 32,592 36,599 44,268 Borrowings Inc. -250 -1,430 27,607 25,012

Personnel Exp. 5,489 5,094 6,241 8,241 Deposits 4,14,514 4,94,262 5,93,789 7,76,761 Advances Inc. 57,885 63,493 99,009 1,19,742

Operating Exp 3,847 4,349 4,803 5,255 Debt 4,44,184 5,33,689 6,48,472 8,59,564 Investments Inc. 28,781 5,997 20,151 39,729

Pre. Prov. Inc. 4,842 4,761 5,235 8,461 Minority Int. 0 0 0 0 Operating C/F -5729.43 13800.75 -5277.99 55200.02

Provision 1,462 1,399 3,901 3,741 Total Liab. 4,75,774 5,66,281 6,85,072 9,03,832 Investing C/F -549.57 -882.02 -1972.56 -1218.11

Other Income 4,468 5,855 7,654 9,646 Cash & Bal. 40,242 56,943 52,875 1,11,677 Financing C/F -4873.28 3782.68 3182.41 4819.64

PBT 7,848 9,217 8,988 14,366 Advances 2,78,891 3,42,384 4,41,393 5,61,135 Cash & Equiv. 40241.75 56943.16 52875.01 111676.57

Tax 2,470 3,420 2,450 3,900 Investment 1,43,233 1,49,230 1,69,382 2,09,111 Cash Generation -11152.28 16701.41 -4068.14 58801.55

Net Income 5,378 5,797 6,538 10,466 Curr. Assets 3,19,132 3,99,327 4,94,268 6,72,812

Adj. Net Inc. 5,378 5,797 6,538 10,466 Total Assets 4,75,774 5,66,281 6,85,072 9,03,832

EPS (Rs) 11.09 12.07 13.48 21.67 CASA % 34.5 33.6 31.4 29.4 RoE (%) 20% 27% 30% 29%

DPS (Rs) 5.0 4.0 4.5 5.0 Div Payout (%) 34% 33% 33% 23%

CEPS (Rs) 50.21 12.07 13.48 21.67

FCFE (Rs) -0.29 -15.99 -1.00 38.21

Int. Inc. Growth - 29% 25% 19% Net D/E 7.09 8.3 8.6 6.4 P/E 14.61 13.42 12.02 7.48

NII Growth - 0% 15% 35% Net NPAs 0.17 0.15 0.18 0.17 P/BV 2.49 2.41 2.15 1.77

EPS Growth (%) - 9% 12% 61% Total CAR 11.33 11.61 13.22 13.93

PAT Growth - 8% 13% 60% Tier I 9.98 8.54 8.67 8.18

PATM (%) 16% 14% 12% 16% Tier II 1.35 3.07 4.55 5.75

Tax Rate (%) 31% 37% 27% 27%


13/13



Equirus Securities

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Rating & Coverage Definitions:

Absolute Rating LONG : >= 15% upside over investment horizon SHORT: >=5% downside over investment horizon NEUTRAL: Trading range of -4% to +14%Relative Rating

OVERWEIGHT: Likely to outperform the benchmark by at least5% over investment horizon

NEUTRAL: likely to perform in line with the benchmark UNDERWEIGHT: likely to underperform the benchmark by at

least 5% over investment horizon

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Target Period of minimum 3 months to maximum 12 months with

target date either on last day of September or March month for

any near.

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Equirus Securities_Andhra Bank_Initiating Note_LONG_Target Price Rs 220_28 09 2010