Andhra Bank NEUTRAL. Performance Highlights CMP. `96 Target Price - 2QFY2013 Result Update Banking. Investment Period -

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1 2QFY2013 Result Update Banking November 16, 2012 Andhra Bank Performance Highlights Particulars (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) NII (4.8) 951 (6.0) Preprov. profit (9.4) 687 (7.1) PAT (10.3) Andhra Bank posted a weak operating performance, with a 7.1% yoy decline in its operating profit. However, the bank was able to report a marginal net profit growth of 3.0%, aided by lower provisioning expenses (PCR declined by 723bp qoq). Slippages continued to remain elevated for the bank, which coupled with lower recoveries/upgrades, resulted in persistent asset quality stress. NIMs decline sequentially; Asset quality faces persistent stress: The bank witnessed a healthy growth in its business during 2QFY2013, with advances and deposits registering a growth of 15.9% and 15.0% yoy, respectively. The healthy advances growth was largely aided by strong growth in agri book and robust growth in SME and Corporate book. CASA deposits grew at 14.0% yoy. The CASA ratio declined by 78bp qoq to 25.9%. Reported NIMs were lower by 20bp qoq to 3.1% on account of an 8bp qoq decline in yield on advances and 29bp sequentially higher costs of deposits. The bank witnessed a robust growth of 37.6% yoy on the noninterest income (excluding treasury) front, which was largely aided by strong growth of 30.8% yoy in fee income and higher recoveries. On the asset quality front, the bank continued to see stress, with both gross and net NPA levels increasing sequentially by 27.8% and 41.6%, respectively. Slippages came in at `771cr, though lower compared to `833cr in 1QFY2013, but remained elevated considering slippages of `853cr in entire 2HFY2012. `530cr of the incremental slippages came out of 3 chunky accounts belonging to pharmaceuticals, hotels and gems & jewelry sector. The management however exuded confidence in upgrading two of these three accounts in the coming quarter. Recoveries/upgrades came in lower at `113cr compared to `142cr in 1QFY2013 and `551cr in 4QFY2012. PCR dipped by a substantial 723bp qoq to 53.2%. The bank also restructured advances worth `451cr, which largely came from infrastructure, iron & steel and textiles sectors. As of 2QFY2013, the total outstanding restructured book stands at `9,077cr (10.6% of total advances). The management has guided for advances worth ~`1,200cr to be in the restructuring pipeline for 2HFY2013, which includes an advance of ~`450cr to Tamil Nadu SEB. Outlook and valuation: At the CMP, the stock is trading at 0.7x FY2014E ABV compared to its eightyear range of x oneyear forward ABV with a median of 1.1x. Considering the bank s relatively higher risk exposure, particularly to the power, iron & steel and textiles sectors, and taking into account that peers of the bank are also trading at similar valuations with similar or better asset quality outlook, we remain Neutral on the stock. Key financials (standalone) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E NII 3,221 3,759 3,805 4,415 % chg Net profit 1,267 1,345 1,204 1,220 % chg (10.5) 1.3 NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) NEUTRAL CMP `96 Target Price Investment Period Stock Info Please refer to important disclosures at the end of this report 1 Sector Banking Market Cap (` cr) 5,383 Beta Week High / Low 139/79 Avg. Daily Volume 75,815 Face Value (`) 10 BSE Sensex 17,558 Nifty 5,320 Reuters Code Bloomberg Code Shareholding Pattern (%) ADBK.BO ANDB@IN Promoters 58.0 MF / Banks / Indian Fls 15.2 FII / NRIs / OCBs 13.4 Indian Public / Others 13.5 Abs. (%) 3m 1yr 3yr Sensex Andhra Bank (8.1) (28.7) 13.8 Vaibhav Agrawal Ext: 6808 vaibhav.agrawal@angelbroking.com Sourabh Taparia Ext: 6872 sourabh.taparia@angelbroking.com

2 Exhibit 1: 2QFY2013 performance (standalone) Particulars (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) FY2012 FY2011 % chg Interest earned 3,198 3, , ,320 5, on Advances / Bills 2,551 2, , ,071 4, on investments , on balance with RBI & others on others Interest Expended 2,304 2, , ,487 3, Net Interest Income (4.8) 951 (6.0) 1,832 1,862 (1.6) Other income (6.9) Other income excl. treasury CEB Treasury Income 5 25 (78.4) 22 (76.0) (63.3) Recoveries from writ.off acc (63.8) Others Operating income 1,113 1,174 (5.2) 1,129 (1.4) 2,287 2, Operating expenses Employee expenses Other Opex Preprovision Profit (9.4) 687 (7.1) 1,342 1,386 (3.2) Provisions & Contingencies (32.5) 261 (46.5) (20.9) Provisions for NPAs (22.9) 221 (45.1) (17.6) Provisions for Investments (14) 13 3 (1) 5 Other Provisions (9.8) 37 (12.2) (28.1) PBT Provision for Tax PAT (10.3) (1.9) Effective Tax Rate (%) bp bp bp Exhibit 2: 2QFY2013 Actual vs Angel estimates Particulars (` cr) Actual Estimates Var. (%) Net interest income (8.0) Noninterest income Operating income 1,113 1,180 (5.6) Operating expenses (3.0) Preprov. profit (7.5) Provisions & cont (49.0) PBT Prov. for taxes PAT November 16,

3 Exhibit 3: 2QFY2013 performance (standalone) Particulars (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) Balance sheet Advances (` cr) 85,299 86,612 (1.5) 73, Deposits (` cr) 108, , , CredittoDeposit Ratio (%) (191)bp bp Current deposits (` cr) 5,937 6,269 (5.3) 5, Saving deposits (` cr) 22,219 22,485 (1.2) 19, CASA deposits (` cr) 28,156 28,754 (2.1) 24, CASA ratio (%) (78)bp 26.1 (23)bp CAR (%) (29)bp 13.1 (68)bp Tier 1 CAR (%) (21)bp 8.8 (30)bp Profitability Ratios (%) Cost of deposits bp bp Yield on advances (8)bp 12.5 (45)bp Yield on investments bp bp Yield on funds bp 10.1 (10)bp Cost of funds bp bp Reported NIM (20)bp 3.8 (69)bp Costtoincome ratio bp bp Asset quality Gross NPAs (` cr) 3,014 2, , Gross NPAs (%) bp bp Net NPAs (` cr) 1,831 1, , Net NPAs (%) bp bp Provision Coverage Ratio (%) (723)bp 61.7 (854)bp Slippage ratio (%) (29)bp 6.1 (244)bp Loan loss provision to avg assets (%) (12)bp 0.8 (42)bp Business growth healthy; NIM declines by 20bp sequentially The bank witnessed a healthy growth in its business during 2QFY2013, with advances and deposits registering a growth of 15.9% and 15.0% yoy, respectively. The healthy advances growth was largely aided by strong growth of 26.2% in agri book and robust growth of 16.7% and 15.2% yoy in the SME and Corporate book respectively. Growth in the retail loan book for the bank remained moderate at 6.0% yoy. On the liabilities front, savings deposits registered a healthy growth of 14.8% yoy, while growth in current deposits was moderate at 11.2% yoy. Consequently, overall CASA deposits grew at 14.0% yoy. The CASA ratio dipped by 23bp yoy and 78bp qoq to 25.9%. Reported NIMs for the bank dipped by 20bp qoq to 3.1% on account of 8bp qoq decline in yield on advances and 29bp sequentially higher cost of deposits. Yield on advances declined by 8bp qoq, on account of interest reversal of ~`60cr and base rate reduction. Cost of deposits was higher by 29bp qoq, partly on account of lower CASA ratio. Yield on investments for the bank grew by 8bp qoq to 8.0%. November 16,

4 Exhibit 4: Business growth healthy Exhibit 5: CASA ratio declines sequentially Adv. yoy chg (%) Dep. yoy chg (%) CDR (%, RHS) CASA ratio CASA yoy growth (%, RHS) Exhibit 6: 29bp qoq higher Cost of deposits, led to... Exhibit 7:...20bp sequential fall in reported NIM (%) (%) Strong growth in fee income and higher recoveries, lead to robust growth in noninterest income During 2QFY2013, the bank witnessed a robust growth of 37.6% yoy in noninterest income (excluding treasury), which was largely aided by strong growth of 30.8% yoy in fee income and higher recoveries. Growth in CEB income was moderate at 14.2% yoy, however a strong performance by forex and other income streams resulted in a strong growth of 30.8% yoy in the overall fee income. Recoveries came in higher during the quarter at `16cr compared to `4cr in 2QFY2012. The treasury income was lower at `5cr compared to `22cr in 2QFY2012 on account of a high base (investments in liquid MFs liquidated post the RBI limit of 10% of NW). Overall, the noninterest income witnessed a strong growth of 23.4% yoy, during 2QFY2013. Elevated slippages coupled with lower recoveries/upgrades resulted in persistent asset quality stress During 2QFY2013, the asset quality for the bank continued to see stress, with both gross and net NPA levels increasing sequentially by 27.8% and 41.6%, respectively. Consequently gross and net NPA ratios were higher by 76bp and 64bp qoq respectively to 3.5% and 2.2%. Slippages came in at `771cr, which November 16,

5 though were lower compared to `833cr in 1QFY2013, but remained elevated considering slippages of `853cr in entire 2HFY2012. The annualized slippage ratio came in at 3.7% compared to 4.0% in 1QFY2013. `530cr of the incremental slippages came out of 3 chunky accounts belonging to pharmaceuticals, hotels and gems & jewelry sector. The management however exuded confidence in upgrading two of these three accounts in the coming quarter. Recoveries/upgrades came in lower during the quarter at `113cr compared to `142cr in 1QFY2013 and `551cr in 4QFY2012. The management was not able to recover a chunky advance amounting to ~`200cr, which it had guided for. The PCR dipped on a sequential basis by a substantial 723bp to 53.2%. The management plans to increase the PCR level to 60% by FY2013. During the quarter, the bank also restructured advances worth `451cr compared to restructuring of `751 in 1QFY2013, which largely came from infrastructure, iron & steel and textiles sectors. As of 2QFY2013, the bank s total outstanding restructured book stands at `9,077cr (10.6% of total advances). The management has guided for advances worth ~`1,200cr to be in the restructuring pipeline for 2HFY2013, which includes an advance of ~`450cr to Tamil Nadu SEB. Exhibit 8: Asset quality face persistent pressures Exhibit 9: Slippages remained at elevated levels Gross NPAs (%) Net NPAs (%) PCR (%, RHS) Slippages (%) Credit cost (%, RHS) ; Note: PCR including tech. writeoffs Exhibit 10: Costtoincome ratio higher in 2QFY2013 Exhibit 11: Employee expenses trend Costtoincome ratio (%) Opex to average assets (%, RHS) Staff expenses (`cr) QoQ growth (%, RHS) (7.2) (5.0) (10.0) November 16,

6 Investment concerns Moderate fee income; low CASA During FY , the fee income for the bank reported a CAGR of only 9.6% compared to advances posting a CAGR of 24.6%. In fact, the bank registered a negative growth in fee income during FY2012, which has led to the proportion of fee income to overall assets declining from 0.8% in FY2011 to 0.6% as of FY2012. On the CASA front, the bank s market share has fallen by 26bp over FY2005 FY2012; and at 25.9%, the bank s CASA ratio is on the lower end compared to peers. Riskadjusted yields expected to fall The bank has one of the highest yields in the industry (12.3% in 4QFY2012, 12.1% in 1QFY2013 and 12.0% in 2QFY2013 after accounting for interest reversals), also reflected in its relatively strong NIM of 3.1% (as of 2QFY2013). This can be partly attributed to the bank s high concentration in the hinterland of its home state. That said, it is difficult for the bank to remain insulated from competition on the lending side and, as a result, we expect a decline in the bank s riskadjusted yields and overall profitability over the medium term. Also, in the current environment, the bank s provisioning expenses are likely to increase at a faster rate, given the high yield on advances and relatively high exposure to riskier sectors. Outlook and valuation The bank s asset quality, which until 1QFY2012 was significantly better than its peers, deteriorated substantially during 2QFY2012 on account of switchover to system based NPA recognition. Although higher recoveries in 2HFY2012 have led to reduction in gross NPA levels (compared to 1HFY2012), deterioration in asset quality was witnessed again in 1HFY2013, partly on account of chunky corporate slippages. The NPA ratios for the bank hence still remain significantly above the levels the bank used to enjoy preswitchover to system based NPA recognition. Also, relatively high risk exposures, particularly to the power, iron and steel and textile sectors, create risk of higher deterioration in asset quality for the bank in the coming quarters in our view. At the CMP, the stock is trading at 0.7x FY2014E ABV compared to its eightyear range of 0.8x 1.4x oneyear forward ABV. Considering that the bank s peers are also trading at comparable valuations with similar or better asset quality outlook, we remain Neutral on the stock. November 16,

7 Exhibit 12: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2013 FY2014 FY2013 FY2014 Credit growth Deposit growth CASA ratio NIMs Other income growth Growth in staff expenses Growth in other expenses Slippages Coverage Ratio Source: Angel Research Exhibit 13: Change in estimates FY2013 Particulars (` cr) Earlier Revised estimates estimates Var. (%) Earlier estimates FY2014 Revised estimates Var. (%) NII 4,003 3,805 (5.0) 4,612 4,415 (4.3) Noninterest income ,021 1,016 (0.5) Operating income 4,929 4,731 (4.0) 5,633 5,431 (3.6) Operating expenses 2,040 1,994 (2.3) 2,306 2,254 (2.3) Preprov. profit 2,888 2,736 (5.3) 3,327 3,178 (4.5) Provisions & cont. 1,095 1,017 (7.2) 1,366 1, PBT 1,793 1,720 (4.1) 1,961 1,806 (7.9) Prov. for taxes (0.4) PAT 1,327 1,204 (9.3) 1,373 1,220 (11.1) Source: Angel Research Exhibit 14: P/ABV band 240 Price (`) 0.6x 0.8x 1x 1.2x 1.4x Apr02 Nov02 Jun03 Jan04 Aug04 Mar05 Oct05 May06 Dec06 Jul07 Feb08 Sep08 Apr09 Nov09 Jun10 Jan11 Aug11 Mar12 Oct12 November 16,

8 Exhibit 15: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2013E P/ABV (x) FY2013E Tgt. P/ABV (x) FY2013E P/E (x) FY1112E EPS CAGR (%) FY2013E RoA (%) FY2013E RoE (%) AxisBk Buy 1,226 1, FedBk Accumulate HDFCBk Neutral ICICIBk* Buy 1,027 1, SIB Accumulate YesBk Buy AllBk Accumulate (5.6) AndhBk Neutral (4.8) BOB Accumulate BOI Accumulate BOM Neutral CanBk Neutral CentBk Neutral CorpBk Accumulate (3.4) DenaBk Accumulate IDBI# Neutral IndBk Accumulate IOB Neutral J&KBk Neutral 1, OBC Accumulate PNB Accumulate SBI* Buy 2,108 2, SynBk Accumulate UcoBk Neutral UnionBk Accumulate UtdBk Accumulate VijBk Neutral ; Note: *Target multiples=sotp Target Price/ABV (including subsidiaries); # without adjusting for SASF Company Background Andhra Bank is a midsized PSU bank, with a balance sheet size of ~`1.3lakh cr. The bank has a network of over 1,730 branches, mainly concentrated in the southern region (~twothird of total branches in the parent state of Andhra Pradesh). November 16,

9 Income statement (standalone) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E FY14E NII 1,340 1,627 2,195 3,221 3,759 3,805 4,415 YoY growth (%) (5.5) Other income ,016 YoY growth (%) (7.0) (4.1) Operating income 1,966 2,392 3,159 4,118 4,619 4,731 5,431 YoY growth (%) Operating expenses 909 1,104 1,350 1,705 1,804 1,994 2,254 YoY growth (%) (2.6) Preprov. profit 1,057 1,288 1,810 2,413 2,815 2,736 3,178 YoY growth (%) (2.8) 16.1 Prov. & cont ,017 1,372 YoY growth (%) (37.2) (4.1) PBT ,436 1,767 1,824 1,720 1,806 YoY growth (%) 16.9 (2.1) (5.7) 5.0 Prov. for taxation as a % of PBT PAT ,046 1,267 1,345 1,204 1,220 YoY growth (%) (10.5) 1.3 Balance sheet (standalone) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E FY14E Share Capital Reserves & Surplus 2,764 3,162 3,925 5,933 6,920 7,831 8,758 Deposits 49,437 59,390 77,688 92, , , ,554 Growth (%) Borrowings 591 1,311 2,832 4,620 5,221 5,879 6,729 Tier 2 Capital 1,115 2,040 3,020 3,020 3,020 2,945 2,871 Other Liab. & Prov. 2,201 2,081 2,392 2,612 3,393 3,894 4,598 Total Liabilities 56,592 68,469 90, , , , ,070 Cash Balances 4,902 4,853 6,699 7,184 5,564 5,383 5,502 Bank Balances ,469 3,275 3,082 2,814 3,221 Investments 14,898 16,911 20,881 24,204 29,629 35,422 42,584 Advances 34,238 44,139 56,114 71,435 83,642 93, ,857 Growth (%) Fixed Assets Other Assets 1,542 1,796 1,825 2,485 2,745 3,092 3,539 Total Assets 56,592 68,469 90, , , , ,070 Growth (%) November 16,

10 Ratio analysis (standalone) Y/E March FY08 FY09 FY10 FY11 FY12E FY13E FY14E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov. /Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis NII () Prov. Exp Adj. NII Treasury Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Leverage RoE November 16,

11 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Andhra Bank 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (5 to 5%) Reduce (5% to 15%) Sell (< 15%) November 16,