Better than the peers
Stands out on quality of assets, productivity and profitability
Andhra Bank (ANDB), established in 1923, was nationalised in April 1980. The bank made its maiden public issue of 15 crore equity shares of Rs 10 each for cash at par, aggregating Rs 150 crore, in March 2001. The government of India (GoI) currently holds 62.5% of the pre-issue paid-up equity share capital (Rs 400 crore), which will come down to 51.5% after the issue.
On September 2005, ANDB had 1,177 branches in India, serving 1.39 crore customers. However, 854 of its branches (72.5%) are in Andhra Pradesh (AP). Sixty-three per cent of the bank’s outstanding domestic loans are to corporate & commercial businesses (includes small and medium enterprises comprising 12%). The share of the housing & retail sector constitutes 19%, and agriculture the remaining 18%.
The main objectives of the second IPO include augmenting the capital base to meet the future capital requirements arising from the implementation of the Basel II standards. Funds are also required to sustain the growth in credit in tune with the expansion of the Indian economy. On September 2005, ANDB’s capital adequacy ratio (CAR) stood at 11.95% compared to the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to grow by expanding geographically in India and internationally, by increasing its volume of retail business and cross-selling various fee-based financial products and services to its customers.
Strengths
*ANDB’s asset quality is the best in its peer group, with net NPA ratio at 0.26% and gross NPA ratio at 2.27% on September 05. The bank also has a well-diversified portfolio with maximum funded exposure to the power sector (20%), followed by the textile sector (9%).
*All branches are computerised, with 88% of the business on the core banking solution platform, which will help the bank to reduce its operating expenses in the long run and confront stiff competition from private banks.
*ANDB is fully prepared to meet the Basel II requirement.
* The credit growth is a healthy at above 30%, with incremental credit deposit ratio above 100% for FY 2005. In H1FY 2006, it was 80%. With the busy season ahead, numbers could be better than last year.
*The net interest margin (NIM) had improved from 3.79% in FY 2004 to 3.95% in FY 2005. However, with a fall in yield on earning assets, NIM end September 2005 stood at 3.62%, considered quite healthy in the banking sector.
Weaknesses
*Treasury contributed above 40% of the total revenue like most other PSU banks. In a rising interest rate scenario, banks have reduced the duration of their portfolio to minimise interest-rate risks by selling high yield, long-term securities, hitting the yield on investment and restricting the net interest-income growth. However, credit growth remains buoyant and the fall in yields will be made up after a time lag.
*Operating expenses, as a percentage of net total income (OE/NTI), end September 2005 was 51%, which is comparatively higher than its peer group. The OE/NTI ratio is expected to remain at the higher end with expansion plans on the horizon.
* 72.5% of ANDB’s branches in AP generated around 58% of the advances end September 2005. The bank needs to have a larger share of business in other parts of the country to maintain the growth momentum.
Valuation
In the first half ended September 2005, ANDB’s net interest income witnessed a growth of only 4% to Rs 563 crore due to a more than 10% fall to Rs 378 crore in its interest on investments. `Other income’ fell 57% to Rs 195 crore mainly due to a 90% fall in the treasury income to Rs 33 crore end September 2005, from Rs 300 crore a year ago. However, commission income showed a promising growth of 31% to Rs 80 crore, from Rs 61 crore. The 57% fall in `other income’ weighed heavily on the net profit, which registered a fall of 29% to Rs 203 crore.
The last one-year and six-month average price of the scrip is Rs 97, whereas for the last three months, it is Rs 94.
ANDB’s annualized EPS for H1FY06 on post-IPO equity works out to Rs 8.4/ Considering the higher price band, post-IPO book value (BV) is Rs 58 and adjusted book value (ABV) is Rs 57. At the price band of Rs 82 to Rs 90, P/E is 9.8 to 10.7, which is a bit higher compared to most of its peers. P/BV and P/ABV are both around 1.6, which is in line with its peers.
Besides quality of assets, ANDB scores higher on certain other grounds compared to its peers Allahabad Bank, Corporation Bank, Indian Overseas Bank, Syndicate Bank and Vijaya Bank. Its productivity and profitability are comparatively higher than most of to its peer group members, barring Corporation Bank.