Andhra Bank

Andhra Bank managed to grow its profit by 30% in the December quarter, when its peers recorded flat numbers due to absence of trading gains and a slowdown in lending

Andhra Bank is a mid-sized public sector bank (PSB) operating mostly in Andhra-Pradesh with two-thirds of its total 1,546 branches in the state. The bank is known for maintaining extremely low non-performing assets (NPA). On an average, net NPA formed just 0.2% of net advances over the past five fiscal years.

At such low NPA levels, the bank has one of the best asset quality in the industry. It has the history of growing its loan book at higher than industry rates. For instance, its loan book grew at an average rate of 28% during FY05-FY09. It has maintained the same trend in the current fiscal as well.

The bank’s advances grew 22% in the quarter ended December 2009, which was double the industry growth rate and its credit deposit ratio stood at 77.5% — one of the highest in the industry, showing the bank’s effectiveness in terms of lending, when the industry was struggling with falling growth in credit.

In fact, the bank has maintained the trend of outgrowing the industry throughout the current fiscal year, when other banks found it difficult to grow due to falling economic growth. This shows that the bank has clearly bucked the trend and it is just a matter of time, when it will be re-rated.

FINANCIALS :

In the first six months of the current fiscal, interest rates were falling, which helped banks earn treasury gains, as bond prices went up. But thanks to rising inflation and rising concerns over the government’s deficit, interest rates started moving up in the quarter ended December 2009 making it almost impossible for banks to earn money on their investment books. On the top of it, banks found it extremely difficult to lend to corporate sector, as the growth in the aggregate credit slipped to the lowest in the decade.

Despite such an environment, the bank managed to post 30% rise in profits in the quarter ended December 2009, when most of the other banks recorded flat numbers. The profit growth was fuelled by a 29% growth in net interest income (NII) and some moderation in expenses. NII is the difference between interest earned and interest expense. The bank has maintained an average net interest margin (NIM) of 3.5% over the past five years. NIM is a measure of spread between cost of borrowings and lending rate.

Even in the December 2009 quarter, NIM stood at 3.35%. It must be noted that a 3% NIM is considered to be a benchmark in banking industry and not many banks have maintained such a high level of NIM over a long period.

Moreover, mid sized banks find it difficult to maintain high NIM, since the share of low cost current account and savings account deposit in total deposits is less compared to large banks. Despite which, the bank has a maintained high margins. Even on other parameters, the bank’s performance has been exemplary.

For instance, its provision coverage ratio stood at more than 90% in the December’09 quarter. This shows that the bank has more than sufficient coverage against bad assets. In fact, the coverage is more than minimum 70% advised by the Reserve Bank of India (RBI) last year.

VALUATIONS:

Since the beginning of the current rally on March 9, 2009, Andhra Bank’s stock price has gone up by more than 150%. The benchmark, Bank Nifty index, too has gone up by similar percentage points. However, banks, which have performed better than industry, have gone up by much higher margin. Therefore, at current levels, it doesn’t seem that the performance of Andhra Bank is entirely discounted by the stock price. In terms of valuations, it is trading at a price to book value (P/BV) ratio of 1.3. Its valuations are far away from its own peak valuations of 2.4 P/BV in FY05. At the same time, the stock is trading at a price-to-earning multiple (P/E) of 4.8, which is low since almost all PSB are trading at a P/E of more than 5.

It seems that the price has a scope to catch up. Moreover, at current price, its stock offers a dividend yield of 4.6%, which is one of the highest yields across PSBs. So, the stock has some value even for the conservative investors who are interested in a regular income stream like dividend.