Andhra Bank

Fresh investments can be considered in the Andhra Bank stock, as a defensive option in the banking space.

The stock's low valuation and the fact that it is relatively better placed than peers to weather credit and interest rate risks, makes it a good investment option.

In addition, strong profitability ratios, stable margins, improving operating efficiency (cost-income ratio of 40 per cent) and adequately capitalised loan book are the other positives.

As overall bank credit picks up, Andhra Bank may continue to grow at higher than industry rates. The bank's credit growth for the year ended December 31, 2009 stood at 22 per cent against 13 per cent for the entire banking system. Credit growth for scheduled commercial banks has accelerated to 16 per cent according to the latest data. As the economy revives, the bank may be in a position to pass rate hikes to its customers, there by protecting its margins.

Andhra Bank scores on two counts over its peers who are grappling with deteriorating asset quality and falling bond prices. The net NPA ratio of Andhra Bank was a low 0.17 per cent as of end-2009. With only 2 per cent excess gilt securities and a credit-deposit ratio of 77 per cent, the bank is less exposed to treasury losses from hardening interest rates.

Andhra Bank also has a high provision coverage ratio of 91 per cent; well above the RBI-mandated 70 per cent.

At current market price of Rs 100, the stock is trading at a modest valuation of 4.5 times its estimated FY10 earnings and 1.1 times its FY10 adjusted book value. The dividend yield on the stock works out to 4.5 per cent, even assuming that dividends are not increased.

Andhra Bank, a mid-sized public sector bank, is aggressively expanding its branch network which would help increase its low-cost deposit base and increase fee income. Net interest margin has steadily improved over the last few quarters aiding profit growth.

Advances growth was aided by MSME, agriculture and retail loan growth (especially gold and housing loans). High cost deposits currently getting re-priced at a lower rate would continue to aid margins over the next couple of quarters.

However, for Andhra Bank to maintain the margins of 3.35 per cent (December 2009) would be a challenge due to lower proportion of low-cost deposits (30 per cent) and higher rate of interest payable on these deposits from April 1, 2010.

The current levels of capital adequacy (14.95 per cent) along with internal accruals may be sufficient to maintain a 30 per cent asset growth in FY11. The bank also has more than Rs 4,000 crore of headroom to raise tier 1 and 2 capital, but may have to step up its core equity contribution beyond next year.