KEY HIGHLIGHTS Andhra Bank s net profit growth surged 16.7% to Rs1.

59bn in line with our estimates on the back consistent business growth and higher yields. However, Net interest income was subdued which rose 1.8% YoY to Rs3.7bn. Advances and deposit growth has been comfortable at 22.4% and 21.6% to Rs313bn and Rs439bn respectively. CASA has improved sequentially by 200bps to 34%. z Modest NII growth Net interest income registered subdued increase of 1.8% to Rs3.7bn due to rise in interest expense. Interest on advances has grown by 41% to Rs8.2bn whereas interest expense grew at higher pace of 59% to Rs7.15bn. z Marginal NIM expansion Due to sequential surge in low cost deposits by 200 bps, strong growth in advances and rising yields, Andhra bank reported expansion in NIM by 4 bps sequentially. z Net profit surges Net profit has exhibited a growth of 16.7% YoY to Rs1.59bn. In absolute terms Gross NPA increased in the current quarter which was maintained at NNPA levels due to higher provisioning taking the provision coverage ratio to 86.16% (73.05%). VALUATION AND RECOMMENDATION Andhra Bank has lowest NPA in the industry and we believe, that with its superior asset quality in the industry and lower delinquencies, the

bank should command an earnings multiple of 8x, notwithstanding moderation in earnings growth in the near term. We value the stock at a fair PABV of 1.6x and a sustainable RoE of 18.29% (CoE-14%; g-7%). As the price target represents 22% upside from the CMP, we recommend the stock as a BUY with a price target of Rs124 with an investment perspective of 12 months. STOCK PRICE PERFORMANCE Analyst - Chandana Jha I chandanaj@pinc.co.in I Tel: +91-022-66186398 04 February 2008 KEY FINANCIALS (STANDALONE) Jun-07 Sep-07 Dec-07 2006 2007 2008E 2009E 2010E Rs mn Quarter Ended Yr Ended (March) Op Income 4,746 4,826 5,178 15,610 18,644 20,575 24,308 28,292 YoY Gr.(%) 13.1 5.0 4.3 (14.3) 19.4 10.4 18.1 16.4 Op Profit 2,234 2,322 2,833 7,030 9,312 10,569 13,005 15,995 Op Marg.(%) 20.3 19.6 23.4 22.9 24.8 22.4 23.5 25.3 Net Profit 1,411 1,512 1,590 4,855 5,379 5,644 6,660 7,572 Eq. Capital 4,850 4,850 4,850 4,850 4,850 4,850 4,850 4,850 K E Y R AT I O S 2006 2007 2008E 2009E 2010E Yr Ended (March) Dil. EPS (Rs) 10.0 11.1 11.6 13.7 15.6 Adj. BV (Rs) 60.8 66.2 70.7 73.0 82.2 ROAA (%) 1.32 1.22 1.09 1.10 1.06 ROANW (%) 20.5 17.8 17.0 18.0 18.3

P/E (X) 9.6 8.7 8.2 7.0 6.1 P/ABV (X) 1.58 1.45 1.36 1.32 1.17 0 40 80 120 160 Feb-07 May -07 Jul-07 Oct-07 Jan-08 Andhra Bank BSE (Rebased)2 Advances growth coupled with CASA improvement led to NIM expansion... Superior asset quality and low delinquencies to provide an edge over peers... PERFORMANCE OVERVIEW Interest on advances jumped by 41% to Rs8.16bn on the back of strong growth in advances. Credit offtake has been consistent at over 20% and currently it stands at Rs313bn. Increase in interest on investments was 18% YoY at Rs2.6bn which remained flat sequentially. Interest expenses surged at 59% YoY to Rs7.1bn, due to rising deposit costs. Growth in deposits has been in line with the credit growth at 21.6% to Rs439bn. Inspite of surge in interest expenses, NIM expanded marginally by 4 bps to 3.15% due to rising low cost deposits and higher yields in Q3FY08. Hence, Andhra Bank reported a modest growth of 1.8% YoY in net interest income to Rs3.7bn in Q3FY08

Other income exhibited a moderate acceleration of 11% to Rs1.47bn. However, fee based income was at Rs512mn registering a robust growth of 93% due to low base as well as increasing initiatives towards the same. The bank has been able to rein in the operating overhead and brought down its operating expenses by 2.6% to Rs2.29bn. Employee cost has significantly declined by 17.8% to Rs1.16bn on account of replacement due to retirement of employees. The same has brought down the cost-income ratio by 315bps YoY to 44.3%. However, higher taxes of Rs1bn restricted the net profit growth to 16.7% YoY at Rs1.59bn. Gross and Net NPAs stood at 1.35% (1.72%) & 0.16% (0.44%) respectively, reflecting superior asset quality of the bank in the industry. CRAR stood at 12.03%. INVESTMENT ARGUMENT Currently, Andhra Bank has wide distribution network of 1,343 branches and 592 ATMs, 3 being mobile ATMs. Andhra bank maintains its lead in the industry in NPA management with GNPA and NNPA being 1.35% and 0.16% respectively. We, however, estimate a marginal increase in the delinquencies during the next 3 years. The delinquencies as a percentage of previous year end advances have risen from 0.87% in FY06 to 1.1% during FY07. We have factored in delinquencies at ~1.5-1.75% during the next two fiscal, which is going to keep loan loss provisioning at ~ 0.3-0.5 of average assets during FY08-10. NPA trend of Andhra Bank (Rs mn) Source: PINC Research & Company Data 1.35 1.35 1.52 1.72 1.72 1.76 0.19 0.19 0.16

0.44 0.44 0.1 0 1,200 2,400 3,600 4,800 Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 0.0 0.5 1.0 1.5 2.0 Gros s NPAs N et N PAs % Gros s NPAs % N et N PAs NPA trend of Andhra Bank Source: PINC Research & Company Data 3.15 3.36 3.11 3.72 3.65 3.84 3.66 2.0 4.5 7.0 9.5 12.0

Q1FY07 Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Av erage Yield on adv ances Av erage Cost of deposits NIM Margin trend of Andhra Bank (%)3 We estimate 20% CAGR in credit offtake and marginal improvement in NIM over the enxt 3 years ... Company description Andhra Bank was established in 1923 in the southern state of Andhra Pradesh. The government diluted its 100% holding in the bank in February 2001. It has a network of 1328 branches and over 567 ATMs concentrated in south India.The growth in aggregate deposits and advances of the bank stood at 22% as of December 2007. The bank had consciously undertaken a conservative approach during FY06 and FY07 thereby growing its loan book by 26% during both of the fiscal. This cautious approach to loan growth reflected well on sustaining NIM at a high level and maintaining delinquencies at a level lower than most of the peers

Non Performing Asset ('NPA')

By : Narendra Sharma on 04 March 2011 Print this

Clause (o) of sub-section (1) of Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 has defined a non performing asset as follows: non-performing asset means an asset or account of a borrower, which has bee classified by a bank or financial institution as sub-standard, doubtful or loss asset, . It is evident from the aforesaid definition that any asset of a borrower has been knowingly (i.e. deliberately or with an express purpose in mind) incorporated by the legislature in the definition of non-performing asset and therefore, the term NPA can not be restricted to mean only an account of a borrower under all situation. DEFINITION OF ASSET
Some definitions of the term asset are given below for ready reference and consideration: (i) Encarta Dictionary (the online dictionary, North America) has defined the term asset to mean somebody or something that is useful and contributes to the success of something.

(ii) Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board {30, Cannon Street, London EC4M 6XH, England, website: http://www.iasb.org, hereinafter referred to as IASB}. The following is a quotation from the IFRS Framework: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise." ESSENTIAL CHARACTERISTICS OF AN ASSET - FUTURE ECONOMIC BENEFITS Future economic benefits are featured in the IASB definition of an asset. The IASB Framework (short for IASB Framework for the Preparation and Presentation of Financial Statements) explains that, The future economic benefit embodied in an asset is the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. Similarly, CON 6 (short for The FASB Concepts Statement No. 6,Elements of Financial Statements) states that one of the three essential characteristics of an asset is that .it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows. Future economic benefits also are featured in the Australian, Canadian, New

Zealand, and UKdefinitions. The German definition refers to resources in the definition of an asset, but explains that a resource is an inflow of future economic benefits. The Japanese definition does not refer directly to economic benefits rather, it refers to economic resources, but does, in the background discussion, discuss resources in terms of benefits. A working definition of asset from above discussion may be as follows An asset of an entity is a present right, or other access, to an existing economic resource with the ability to generate economic benefits to the entity. EVERY PROJECT IS AN ASSET Therefore, every Project is an asset, i.e. an existing economic resource with the ability to generate economic benefits to the Company. Consequently, prior to allowing the asset to reach the stage of performing asset (PA), it can not be classified as Non Performing Asset (NPA) by any stretch of imagination. However, in recent past, some lending banks and financial institutions have classified a Project as Non Performing Asset (NPA) even prior to allowing the asset to reach the stage of performing asset (PA) which is against the law.

Comparative analysis on non performing assets - Document Transcript

1. COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS<br />Name: Mohit Kakkar (2008 -2010)<br />Title: COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS<br />OF CANARA BANK AND PUBLIC SECTOR BANKS<br />Executive Summary<br />The accumulation of huge non-performing assets in banks has assumed great importance. The depth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000 crores. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of banks, weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements.<br /> <br />Objectives:<br />The basic idea behind undertaking the Grand Project on NPA was to:<br />

o o

To evaluate NPAs (Gross and Net) in different banks. To study the past trends of NPA

o o o o o o o o

To calculate the weighted of NPA in risk management in Banking To analyze financial performance of banks at different level of NPA To evaluate profitability positions of banks To evaluate NPA level in different economic situation. To Know the Concept of Non Performing Asset To Know the Impact of NPAs To Know the Reasons for NPAs To learn Preventive Measures

Recommendations :<br />Bank should check the credibility of farmer like the proper identification and also his/her reputation in the village.<br />Banks have to find out the original reasons for the loan.<br />Proper identification of the guarantor should be check by the bank and his/her wealth also, so that he/she cant mislead the bank.<br />Sarpanch of the village should also inquire before the disbursement of the loan amount.<br />Agriculture loan comes in priority sector, so banks are bound to achieve the targets set by government. In this situation government has to relax some norms about the priority sector.<br />The stocks and receivables are to check randomly by the bank, so that the bank are aware of position of the firms.<br />Banks have to be assure that the collateral security should not be disputed asset and neither any other loan is taken on that security.<br />Banks have to make a separate department, whose duty is only inquire the personnel goodwill in the city apart from the financial asset.<br />In the export related loan, banks have to check the authenticity of the firm with the export house.<br />Banks should have to consider the market condition of economy before disbursement of loan in case of import, export.<br />Banks also have to consider the market condition of that product, which is going to export or import.<br />The recovery process is very slow, so the governments have to update the process which is fast and effective.<br />And last not the least, the bank officers shouldnt forget the ethics of doing job. <br />Limitations:<br /> o The first limitation is authenticity of data, the data which I get from the bank is molded, because bank doesnt want to reveal the original facts.

The other limitation is the traveling factor, because for the primary study I have to go Chandigarh, circle office and that is very hectic from Gurgaon. Time factor is other limitation in this study, because the bank officials didnt have proper time to meet and solve mine queries. Some of my recommendations are not for all banks because they are basis on high cost.