Company Review: Andhra Bank

The net interest income (NII) for Q1FY09 came in at Rs346.3 crore, largely flat despite a healthy growth in the advances (23% y-o-y), as the reported margins contracted by 71 basis points to 2.76%.

The non-interest income dipped 9.7% to Rs118.7 crore on the back of a treasury loss of Rs1 crore during the quarter.

The operating expenses were largely stable at Rs259.7 crore during the quarter. The expenses were contained primarily due to a 2.9% decline in staff expenses, while other operating expenses grew by 11.9% y-o-y.

Notably the provisions witnessed a significant (over ten-fold) jump and stood at Rs122.7 crore. The spike was primarily due to a significant (Rs86 crore) marked-to-market (MTM) loss on the bank’s investment book.

The asset quality of the bank remained healthy with an improvement on absolute and relative basis. The gross non-performing asset (GNPA) in percentage terms came in at 1.15%, down 37 basis points yoy, while the net non-performing asset (NNPA) in percentage terms was down 10 basis points to 0.10%.

The growth in the advances though lower as compared to the industry growth, was at healthy 23% yoy, while the deposits registered a growth of 20.6% yoy.

Valuation

We are lowering our earnings estimate for FY2009 by 16.4% to account for higher than expected MTM losses on the investment portfolio.

Further, we are raising our cost of equity assumptions to factor in the higher 10-year G-sec yields.

At the current market price the stock trades at 5x 2009E earnings per share (EPS), 2.6x 2009E pre-provisioning profit (PPP) and 0.8x 2009E book value (BV). We maintain our BUY recommendation with a revised price target of Rs90.

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