Fitch Ratings has today affirmed Andhra Bank's (AB) National Long-term (LT) rating at 'AA+(ind)' with a Stable Outlook, and National Short-term rating at 'F1+(ind)'. The agency has also affirmed AB's Individual rating at 'C/D' and Support rating at '3'.
Fitch Ratings has today affirmed Andhra Bank's (AB) National Long-term (LT) rating at 'AA+(ind)' with a Stable Outlook, and National Short-term rating at 'F1+(ind)'. The agency has also affirmed AB's Individual rating at 'C/D' and Support rating at '3'. Additional rating actions are included at the end of the release.AB's LT ratings reflect its established regional franchise, sound asset quality metrics and solid profitability, which are partly offset by its relatively weaker funding profile and Tier 1 capitalisation having declined below 8% as at H1FY11, although Fitch expects the latter to be restored to above 8% in 2011. Dependence on South India, although high (64% of advances; 58% of deposits), is partly mitigated via continued diversification efforts (250 branches in last two years, mainly in northern and western India). AB's Support rating was upgraded to '3' in July 2010 following the government's recapitalisation initiatives,which in Fitch's opinion, would result in a higher incidence of capital support for the bank if required, given its strong regional importance.
The rating on AB's lower tier 2 subordinated bonds is consistent with the approach taken for other similar performing securities based on Fitch's criteria.
A sharp rise in AB's NPLs in H1FY11 (+93%) -- a result of expiry of agriculture debt waiver relief scheme and gradual phasing of special dispensation on restructured loans -- had a relatively muted impact on its earnings. Existing low levels of NPLs (gross NPL ratio: 0.86% as at FY10) coupled with a strong provisioning coverage ratio (specific coverage consistently above 80% for the last five years) were able to absorb the impact to a large extent. While gross NPL ratio as a whole and specific to restructured loans increased to 1.26% and 5% at end-H1FY11, respectively, the figures compared better than most peers'.
AB's specific provision coverage although declined to 61% at end-H1FY11; but including technical write-offs it increased to a comfortable 79%.
AB's earnings did take a hit during H1FY11 (return on assets for H1FY11: 1.36%; H1FY10: 1.5%; FY10: 1.32%) on account of higher NPL provisioning (+40%) and increase in costs - due to provisioning for changed gratuity norms and second pension option to employees. However, the impact was mitigated to a large extent supported by strong growth in net interest income (NII at end-H1FY11: +59%) and continued improvement in its net interest margins (NIM for H1FY11: 3.7%; H1FY10: 2.8%; FY10: 3.1%). A better yielding asset mix has made asset yields more resilient compared to funding costs, allowing NIM to improve even during benign interest rate environment in FY09-FY10. Fitch believes that AB could manage NIM above 3% even under rising interest rates - given better pricing power under base rate, which should partly offset funding cost pressures. However, stable asset quality -- given growing proportion of riskier asset classes -- would be pivotal to profitability over the mid- to long-term.
Funding remains a relatively weaker point for AB with its significant dependence on term deposits (end-FY10: 71% of total deposits). Although AB has been opening branches to improve its low-cost current-savings account (CASA) deposit base,
improvements have been relatively slow to come (CASA share for H1FY11: 30.4%; FY10: 29.4%). However, Fitch draws comfort from AB's low deposit concentration (top 20 deposits: 8.4% of total deposits) and from larger share of retail term
deposits (around 70% of term deposits) in the overall share.
The bank's reported Tier 1 ratio of 7.3% (H1FY11) will likely improve by end-FY11 to over 9% post inclusion of full year net earnings (RBI guidelines allow inclusion of only full year earnings for Tier 1 capital calculation) and following INR10bn of capital support expected from the government. That said, the agency also draws comfort from the bank's strong internal accruals, sufficient headroom to raise Tier 1 and Tier 2 capital and relatively strong capital quality.
An upgrade to the Individual rating is considered unlikely in the short-term, as it would be largely contingent on AB successfully managing growth while ensuring stable asset quality, given increasing share of riskier asset classes and new regions. However, AB's inability to check asset quality during this growth phase could eventually manifest into losses and erosion of capital, which could lead to a downgrade of its National long-term rating, albeit Fitch views this as unlikely in the near future.
- INR15bn lower Tier 2 bonds: affirmed at 'AA+(ind)'; and
- INR40bn certificate of deposits programme: affirmed at 'F1+(ind)'.
