In 1QFY08, Andhra Bank's net profit grew by 21% to Rs1.4 billion compared to our estimate of Rs1.46 billion; marginally lesser bottom line was due to lower interest income.

The bank reported operating profit of Rs 2.2 billion against our estimation of Rs 2.5 billion. Reported net interest income of Rs 3.6 billion was lower than our estimate of Rs 4.0 billion mainly due to higher interest expenses.
Decline in low-cost deposits' share made dent in the NII and margin. Containment in operating expenses and lower provisions led to strong growth in bottom line and improvement in return ratios.

Growth in bank's business

The bank's business grew by 25% to Rs 685 billion on the back of 27% growth in credit to Rs 277 billion and 23% growth in deposit to Rs 408 billion.

High yielding credits' share increasing

Advances to agriculture, SME and educational segments grew by 26%, 34% and 35% respectively; credit to total priority segment grew by 31% leading to increase in % share of priority sector in total advances. Upward revision in the bank's lending and higher growth in these sectors resulted into 42% jump in interest income from advances.

Decline in CASA share

In the quarter, term deposits and low-cost deposits (LCDs) grew by 32% and 9.3% respectively leading to decline in CASA's share to 33.4% from 37.7% in 1QFY07. Decline in LCDs led to increase in cost of deposits to 6.16% from 5.04% in 1QFY07 and cost of funds to 5.42% from 4.4% in 1QFY07. The bank redeemed almost Rs 3.5 billion of high-cost bulk deposits; at present the bank bulk deposits are 25% of total deposits.

Healthy growth in non-interest income

Higher recovery on written-off accounts and treasury income resulted into 33% growth in non-interest income. During the quarter, fee-based income did not show any growth.

Stagnancy in asset quality

In absolute terms, gross NPA remained at Rs4.2 billion as compared to Rs 4.17 billion in 1QFY07; net NPA went up by three times to Rs0.5 billion. In percentage terms, GNPA drifted down to 1.5% from 1.9% in 1QFY07.

Comfortable capital adequacy

As on end-June 2007, bank's capital adequacy was 12.5% with Tier I and tier II at 11.07% and 1.42% respectively. The bank is adequately capitalized and has enough headroom for tier II capital. We re-affirm our BUY rating on the stock a target price of Rs146.