Stock Review: Andhra Bank

 

Andhra Bank looks to be an attractive bet considering its healthy loan book and asset quality. Long-term investors can buy it

 

STATE-OWNED Andhra Bank is a mid-sized bank with a network of 1,564 branches. Though the bank is mainly concentrated in south India, it is increasing its reach in other parts as well. In order to boost its fee income, the bank has entered into an insurance joint venture with Bank of Baroda and Legal & General with a 30% stake in the venture. In a bid to redress concerns of its customers, the bank launched customer-friendly initiative involving complaint redressal mechanism through mobile phones called 'UPSET'.

FINANCIALS:

The bank has reported an average profit growth of 21% year-on-year over the past four quarters. This was supported by a 25% growth in its loan book. Typically, when a bank expands at a faster pace, it could end up having a huge pile of bad loans once the growth period is over. Andhra Bank has shown resilience in its asset quality. Net non-performing assets have formed 0.2% of net advances at an average over the past eight quarters that have seen tough times for many banks. While there could be some bad loan additions as the bank moves to system marked bad loan recognition, the effect would be limited as the bank is adequately provisioned.

   The bank's net interest margin — the difference between its borrowing and lending costs, has been in excess of 3% for the past five quarters. The bank's performance here is laudable as most Indian banks struggle to keep it at 3%. This is because almost 80% of bank's loans are floating in nature and hence most of the increase in borrowing costs is passed on to lenders. Its high share of low-cost current and savings account balances, which form almost a third of its total deposit base, have also supported the margins. Andhra Bank has reported an average 1.4% in the past four quarters. This shows that the bank ranks higher than its peers in terms of utilisation of its assets.

VALUATION:

The bank's stock is trading at a price-to-book value (P/BV) of 1.3. This is much lower compared to its peers City Union Bank and Karur Vysya Bank, which have a P/BV of around 2. Moreover, Andhra Bank's dividend yield at 3.8% is much higher than that of its peers, which average 2%. Investors would, therefore, benefit doubly from its cheap price and high dividends.

   Recently the government has decided to infuse capital in public sector banks to raise its stake in them to 58%. A higher capital adequacy suggests that the bank has lower liquidity risk. This also helps the bank in growing its loan book at a fast pace. Crisil has upgraded Andhra Bank's hybrid debt instruments – Tier I perpetual bond and upper tier II bonds to AA+ from AA.

   Investors are cautious about bank stocks given their lending exposure to telecom and microfinance companies. Further, hardening interest rates may put pressure on banks margins. Among mid-sized banks, Andhra Bank looks a safe bet as it has a healthy loan book growth coupled with a good asset quality and utilizes its assets better than its peers. Investors with a long-term perspective can consider the stock.