'Andhra Bank's asset quality to remain under pressure'

Andhra Bank's asset quality would stay under pressure in the medium term, CRISIL has said, due to a sizable exposure to vulnerable sectors such as infrastructure and iron & steel.

The rating agency has downgraded the rating on Andhra Bank's tier-I perpetual bonds and upper tier-II bonds to AA\stable from AA+\stable.

The downgrade reflected the weakening of the state-owned lender's earnings profile due to a deterioration in asset quality. CRISIL, however, has factored in the strong support that Andhra Bank would get from the government and the bank's comfortable capitalisation.

The Hyderabad-based public sector bank had a modest earnings profile, as reflected in its lower-than-industry average return on assets (RoA).

The RoA had declined sharply to 0.4 per cent (annualised) for the six months ended September 30, 2013, from around one per cent for the financial year ended March 2012-13. The dip was primarily due to higher provisions, given the deterioration in the asset quality, and a decline in interest margins.

Andhra Bank's cost of borrowings at 7.4 per cent (annualised) for the six months ended September continued to be higher than the industry average. This was due to the small share of low-cost deposits (current account and savings accounts at 24 per cent).

The bank's gross non-performing asset (NPA) ratio rose sharply in the previous 18 months to 5.15 per cent as on September (industry average four per cent) from 3.7 per cent in March 2013 and 2.12 per cent in March 2012. The increase in gross NPAs was mainly due to deterioration in large and medium corporate advances in times of a weak macroeconomic environment. Also, its total restructured standard advances were high at 10.3 per cent of total advances as on September 30, 2013.