Andhra Bank Sep09 Results Updated Detailed Report

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Firstcall India Equity Advisors Pvt Ltd

Andhra Bank

BUY Target Price: Rs.136.00

CMP: Rs.116.40 Market Cap.: Rs.56454.00mn.

Date: November 18, 2009

Key Ratios:

Particulars FY09 FY10E FY11E

OPM(%) 23.97 26.25 28.44

PAT Margin(%) 12.15 16.44 17.40

ROE(%) 17.91 21.94 20.35

ROCE(%) 2.00 2.29 2.46

P/BV(x) 1.55 1.21 0.96

P/E(x) 8.64 5.51 4.73

Debt-Equity(x) 16.64 14.29 12.52

Key Data:

Sector Banking

Face Value Rs.10.00

52 wk. High/Low Rs.125.00/Rs.37.00

Volume (2 wk. Avg.) 172341

BSE Code 532418

SYNOPSIS

• Andhra Bank is one of the leading public sector

Banks offering a wide range of banking/financial

services to its customers.

• Bank has achieved a Total Business of Rs.1104610

million as on 30th

Sep09 against Rs. 869480 million

as on 30th

Sep08, with a growth of 27.04 %.

• Andhra Bank aims to attain a business mix of

Rs.13,00,000 million by the end of March’10 at a

growth rate of 30% and Rs.15,00,000 million by

September’10.

• Bank formed Joint Venture with Bank of Baroda and

Legal & General group of U.K. to take up Insurance

Business.

• Bank is entering MoU with Bank of Baroda and

Indian Overseas Bank for forming a Banking

Subsidiary in Malaysia.

• Andhra Bank proposed to add 500 more branches in

the next four years to increase its total branch

network to 2000.

• NII and PAT of the bank are expected to grow at a

CAGR of 18% & 28% over FY08 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]

2


Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 08

3. Peer Group Comparison 09

4. Key Concerns 09

5. Financials 10

6. Charts & Graph 12

7. Outlook and Conclusion 13

8. Industry Overview 14

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Investment Highlights

• Q2 FY10 Results Update

Andhra Bank reported a phenomenal rise in standalone net profit for the quarter ended Sep.

2009. During the quarter, the profit of the company rose 69.61% to Rs 2,739.72 million from

Rs 1,615.31 million in the same quarter previous year. Interest earned for the quarter rose

17.29% to Rs 15,577.29 million, while total income for the quarter rose 22.37% to Rs

17,909.21 million, when compared with the prior year period. It posted earnings of Rs 5.65 a

share during the quarter, registering 69.67% growth over prior year period.

Quarterly Results - Standalone (Rs in mn)

As at Sep - 09 Sep - 08 %Change

Interest Income 15,577.29 13,281.33 17.29

Net Profit 2,739.72 1,615.31 69.61

Basic EPS 5.65 3.33 69.67

Segment-wise Revenue for the Q2 FY10

Particulars (Rs.mn.) Q2 FY10

Treasury 3886.50

Corporate / Wholesale Banking 4883.20

Retail Banking 8492.40

Other Banking Operations 647.10

Total 17909.20

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Sectoral Exposure of Credit

• Finance to Agricultural Sector has gone up by Rs. 15440 million over Sep-08 and stood at

Rs. 74820 million as on Sep-09.

• Retail credit registered robust growth of 34.73% over previous year and reached Rs.

71490 million as at the end of Sep-09.

• Lending to MSME sector has gone up by 52.19% and reached Rs. 68350 million.

• All other advances including Corporate credit moved up to Rs. 256450 million from Rs.

198000 million, year on year.

Total Business Growth

Bank has achieved a Total Business of Rs.1104610 million as on 30th

Sep09 against Rs.

869480 million as on 30th

Sep08, with a growth of 27.04 %. Deposits grew by 23.30% from

Rs.505110 million as on 30th

Sep08 to Rs.622790 million as on 30th

Sep09. Gross advances of

the bank surged to Rs.481820 million as on 30th

Sep09 from Rs.364370 million as on 30th

Sep08 with a growth of 32.23%. CASA deposits increased by 16.81% over Sep08 and reached

Rs.201400 million as at the end of Sep09.

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Improving Asset quality

Gross NPAs as a percentage to Gross Advances stood at 0.83% (30.09.2009) against 1.03%

(30.09.2008). The delinquency Ratio stands at 0.23% as on 30-09-2009. Provision Cover for

NPAs as on 30.09.09 stands at 83.66%.

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Bank Network

Number of branches increased from 1388 (30.09.08) to 1536 (30.09.09) covering 22 states

and 2 Union Territories. Number of Business Delivery Channels increased from 2175

(30.9.08) to 2421 (30.09.09).

Return on Assets

Return on Assets (ROA) stood at 1.53% as on Sep09 against 1.12% as on Sep08.

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• Plans to roll out more 500 branches

Andhra Bank proposed to add 500 more branches in the next four years to increase its total

branch network to 2000. It is known that the bank is expanding its network outside Andhra

Pradesh by opening 121 branches this year. It has currently had 1452 branches.

• Aims Rs 1,300 bn business by FY10 end

Andhra Bank is targeting a total business of Rs 1,300 billion during this fiscal. The bank,

presently is a medium-sized one, plans to attain a large size by September-2010. The bank is

also looking at a growth of over 25% in its loan portfolio this fiscal. During the first quarter of

this fiscal, the bank has also seen a growth in its loans.

• Religare enters into strategic alliance with Andhra Bank

Religare, a diversified financial services company and Andhra Bank, a well known public

sector bank in the country, have entered into a strategic tie-up offering Religare`s internet

trading services platform to the bank`s customers. The partnership is a step forward to

further strengthen the ``Bancinvest`` Channel created by Religare, which already includes tie-

ups with Indusind Bank, Tamilnadu Mercantile Bank, Bank of Rajasthan and Karur Vysya

Bank. This new alliance is in line with Religare`s strategy of increasing its reach and

penetration across the country. This also facilities the creation of new business opportunities

and customer centricity by leveraging to work closely and leverage each other`s strengths to

eventually ensure ``customer delight.``

The internet trading facility on online trading service, as it is called, will be part of the value-

added offering for the Bank`s savings account customers, offering them a savings and a DP

account from the Bank along with an internet trading account, powered by Religare.

• kicks-off brand-building initiative

Andhra Bank launched a major brand-building initiative by revealing a new mascot and also a

new corporate slogan with the aim of growing its business to Rs 1500 billion by September

2010 by expanding its presence across the country. The bank revealed Dolle, a `friendly,

intelligent and responsive` dolphin that will be the bank`s new mascot. Andhra Bank, which

has 1,438 branches in India, derives about 40% of its business from outside Andhra Pradesh.

• Bank plans Annual Credit Plan of Rs 9.41 billion for Ganjam

Andhra Bank, the lead bank for Ganjam district in south Orissa, has prepared the Annual

Credit Plan (ACP) for 2009-10 with a total outlay of Rs 9.41 billion. This is 14.61% higher than

the bank`s plan outlay for 2008-09 which stood at Rs 8.21 billion. The major portion of the

bank`s outlay is earmarked for crop loans, agriculture term loans (ATLs), allied activities and

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other priority sectors (OPS). The growth rate of credit flow in the priority sector for this fiscal

has been projected at 23%.

• Business Expansion

Andhra Bank has planned to jump into the group of big banks by setting a goal of Rs 1,500

billion business by September 2010. The public sector lender clocked total business of Rs

1,038 billion as on Mar. 31, 2009 and hopes to achieve the next target by 2010.

• MoU with BOB, IOB

The bank has entered into a memorandum of understanding (MoU) with two other PSU

banks- Bank of Baroda and Indian Overseas Bank for forming a subsidiary in Malaysia.

Company Profile

Andhra Bank was founded by the eminent freedom fighter and a multifaceted

genius, Dr.Bhogaraju Pattabhi Sitaramayya. The Bank was registered on 20th November 1923

and commenced business on 28th November 1923 with a paid up capital of Rs 1.00 lakh and an

authorised capital of Rs 10.00 lakhs. Andhra Bank is expanding its global wings to the Western

and Middle Eastern countries mainly USA and UAE, as the maximum number of NRI's is either

settled in America or Dubai. The bank aims to provide home country services to the NRI's with

the specialized banking solutions it provides.

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Peer Group Comparison

Name of the company CMP(Rs.)

(As on Nov.

18, 2009)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E

(x)

P/BV

(x)

Dividend (%)

ANDHRA BANK 116.40 56,454.00 19.47 5.98 1.55 45.00

PUNJAB NATIONAL BANK 914.05 288,202.30 115.14 7.94 2.19 200.00

BANK OF INDIA 383.90 201,614.80 49.32 7.78 1.71 80.00

BANK OF BARODA 533.70 194,409.00 74.44 7.17 1.51 90.00

Key Concerns

• The Banking industry is very competitive and the ability of banks to grow depends on their

ability to compete effectively.

• Banking in India is a heavily regulated industry and material changes in the regulations could

adversely affect Banks business.

• Exchange rate fluctuations may have an impact on banks financial performance.

• A slowdown in economic growth in India could cause banks business to suffer.

• The introduction of technology in banking operations has also imposed greater responsibility

to protect against various information security threats and to ensure wider assurance of

safeguard of the interest of customers.

• Implementation of Basel II requires higher capital.

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Financials

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs. in million) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Income 42898.68 53746.17 62345.56 68580.11

Other Income 5813.47 7653.82 9567.28 11959.09

Total Income 48712.15 61399.99 71912.83 80539.21

Interest Expended -28699.96 -37477.12 -43080.78 -47320.28

Net Interest Income 20012.19 23922.87 28832.05 33218.93

Operating Expenses -9442.75 -11042.58 -12469.11 -13716.02

Operating Profit 10569.44 12880.29 16362.94 19502.91

Provisions & Contingencies -1393.74 -3899.78 -2127.18 -2925.44

Profit before Tax 9175.70 8980.51 14235.76 16577.47

Tax -3420.00 -2450.00 -3986.01 -4641.69

Profit after Tax 5755.70 6530.51 10249.75 11935.78

Equity Capital 4850.00 4850.00 4850.00 4850.00

Reserves 27642.89 31619.93 41869.68 53805.45

Face Value (Rs) 10.00 10.00 10.00 10.00

Total No. of Shares 485.00 485.00 485.00 485.00

EPS (Rs) 11.87 13.46 21.13 24.61

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs. in million) 31-Mar-09 30-June-09 30-Sep-09 31-Dec-09E

Description 3m 3m 3m 3m

Net Income 15067.02 15046.27 15577.29 16044.61

Other Income 3203.98 2380.74 2331.92 2471.84

Total Income 18271.00 17427.01 17909.21 18516.44

Interest Expended -11114.39 -10632.56 -10430.71 -10749.89

Net Interest Income 7156.61 6794.45 7478.50 7766.56

Operating Expenses -2838.69 -3314.46 -2950.44 -3048.48

Operating Profit 4317.92 3479.99 4528.06 4718.08

Provisions & Contingencies -1855.82 32.22 -578.34 -566.17

Profit before Tax 2462.10 3512.21 3949.72 4151.91

Tax -450.00 -950.00 -1210.00 -1245.57

Profit after Tax 2012.10 2562.21 2739.72 2906.34

Equity Capital 4850.00 4850.00 4850.00 4850.00

Face Value (Rs) 10.00 10.00 10.00 10.00

Total No. of Shares 485.00 485.00 485.00 485.00

EPS (Rs) 4.15 5.28 5.65 5.99

E=Estimated

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Charts

1) Net Income & PAT Chart 2) P/E Chart

3) Debt-Equity Chart 4) P/BV Chart

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1 Year Comparative Graph

ANDHRA BANK BSE SENSEX

Outlook and Conclusion

• At the market price of Rs.116.40, the stock trades at 5.51x and 4.73x for the earnings of

FY10E and FY11E respectively.

• Price to Book Value of the stock is expected to be at 1.21x and 0.96x respectively for FY10E

and FY11E.

• Earning per share (EPS) of the bank for the earnings of FY10E and FY11E is seen at Rs.21.13

and Rs.24.61 respectively for equity share of Rs.10.00 each.

• Net Income and PAT of the bank are expected to grow at a CAGR of 17% & 28% over FY08 to

FY11E.

• Bank formed Joint Venture with Bank of Baroda and Legal & General group of U.K. to take up

Insurance Business. Bank shall be rolling out the insurance products of its own Joint Venture

for sale by July 2010.

• Bank is entered into MoU with Bank of Baroda and Indian Overseas Bank for forming a

Banking Subsidiary in Malaysia.

• Bank has tied up with Piaggio Vehicles for offering a highly competitive retail financing

scheme that ensure low interest rates to the customers.

• Andhra Bank aims to attain a business mix of Rs.13,00,000 million by the end of March’10 at

a growth rate of 30% and Rs.15,00,000 million by September’10.

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• Bank has introduced a friendly, intelligent, responsive ‘Dolle’ (The Dolphin), as Mascot of the

bank, first of its kind in the industry to reflect the stance of the bank and as a step towards

bringing national visibility.

• Bank has plans of opening 121 branches in the present financial year mostly in the Northern

parts of India and installing 50 ATMs.

• Bank entered into Tie Ups with MF organizations such as Reliance, Kotak Mahindra, Fedility

Mutual Fund and Birla Sun Life Mutual Fund for sale of their Mutual Fund Products.

• We recommend ‘BUY’ in this particular scrip with a target price of Rs.136.00 for Medium to

Long term investment .

Industry Overview

• The Banking sector is gearing itself to support growth.

• Competition, consolidation and convergence will transform banking.

• Technology will be the key and drive the change.

• Banks strengthening capital base, risk management and skills.

• Banks outsourcing norms introduced by Reserve bank of India.

• With the economic growth picking up pace and the investment cycle on the way to recovery,

the banking sector has witnessed a transformation in its vital role of intermediating between

the demand and supply of funds. The revived credit off take (both from the food and non

food segments) and structural reforms have paved the way for a change in the dynamics of

the sector itself. Besides gearing up for the compliance with Basel II accord, the sector is also

looking forward to consolidation and investments on the FDI front.

• Public sector banks have been very proactive in their restructuring initiatives be it in

technology implementation or pruning their loss assets. Windfall treasury gains made in the

falling interest rate regime were used for writing off the doubtful and loss assets.

Incremental provisioning made for asset slippages have safeguarded the banks from

witnessing a sudden impact on their bottom lines.

• Retail lending (especially mortgage financing) formed a significant portion of the portfolio for

most banks and the entities customized their products to cater to the diverse demands. With

better penetration in the semi urban and rural areas the banks garnered a higher proportion

of low cost deposits thereby economizing on the cost of funds.

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• Apart from streamlining their processes through technology initiatives such as ATMs,

telephone banking, online banking and web based products, banks also resorted to cross

selling of financial products such as credit cards, mutual funds and insurance policies to

augment their fee based income.

Global Outlook

The global economic environment continues to be uncertain. The world economy, which was

passing through unprecedented financial turmoil since August 2007, experienced a jolt in

September 2008 when the failure of Lehman Brothers led to widespread panic across global

financial markets. The liquidity crisis that ensued not only engulfed developed markets but also

quickly transmitted to emerging markets, including India. The US Federal Reserve responded by

infusing dollar liquidity into large financial centres through currency swap arrangements with

major foreign central banks in addition to massive injection of liquidity in the domestic market

through several innovative schemes.

Domestic Outlook

Like other EMEs, India too has been affected by the global financial crisis. Real GDP growth

moderated to 7.8 per cent in the first half of 2008-09 as against 9.3 per cent in the first half of

2007-08. The third quarter of 2008-09 witnessed signs of further moderation in growth,

especially in the industrial sector and some segments of the services sector.

Over the last five years, India clocked 8.8 per cent average annual growth, driven largely by

domestic consumption and investment even as the share of net exports rose. While the benign

global environment, easy liquidity and low interest rates helped, at the heart of India’s growth

have been its growing entrepreneurial spirit and rise in productivity. These fundamental

strengths continue to be in place. Nevertheless, the global crisis will dent India’s growth

trajectory as investments and exports slow. Clearly, there is a period of painful adjustment

ahead of us. However, once the global economy begins to recover, India’s turnaround will be

sharper and swifter, backed by our strong fundamentals and the untapped growth potential.

Meanwhile, the challenge for the Government and the Reserve Bank is to manage the

adjustment with as little pain as possible.

Liquidity Impact

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The cumulative reduction in the CRR by 400 basis points since mid-September 2008 released

additional Rs.1,60,000 crore of primary liquidity. Unwinding of MSS has released primary

liquidity of a little over Rs.63,000 crore. Further, potential liquidity has been made available

through various refinance facilities for banks and financial institutions to the tune of Rs.80,000

crore. The term repo facility gives an additional potential liquidity of Rs.60,000 crore. The SPV

for NBFC will augment potential liquidity by another Rs.25,000 crore. In sum, the actions of the

Reserve Bank since mid-September 2008 have resulted in augmentation of actual/potential

liquidity of over Rs.3,88,000 crore. In addition, the permanent reduction in SLR by 1.0 per cent

of NDTL has made available liquid funds of the order of Rs.40,000 crore for the purpose of

credit expansion.

Monetary Measures

• The Bank Rate has been kept unchanged at 6.0 per cent.

• The repo rate under the LAF has been kept unchanged at 4.75 per cent.

• The reverse repo rate under the LAF has been kept unchanged at 3.25 per cent.

• The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or

at variable rates as circumstances warrant.

• The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo

under the LAF depending on market conditions and other relevant factors. The Reserve Bank

will continue to use this flexibly including the right to accept or reject tender(s) under the

LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity

management.

• The cash reserve ratio (CRR) of scheduled banks has been kept unchanged at 5.0 per cent of

NDTL.

Liquidity Facilities

The Reserve Bank has allowed banks to avail liquidity support under the LAF for the purpose of

meeting the funding requirements of mutual funds (MFs), nonbanking financial companies

(NBFCs) and housing finance companies (HFCs) through relaxation in the maintenance of SLR up

to 1.5 per cent of their NDTL. Second, a special refinance facility for scheduled commercial

banks (excluding RRBs) was provided by the Reserve Bank on November 1, 2008 under Section

17(3B) of the RBI Act, 1934 up to 1.0 per cent of each bank’s NDTL as on October 24, 2008. Both

these facilities are currently available up to June 30, 2009. In order to ensure that banks

continue to have flexibility in their liquidity management operations in the current market

conditions, it has been decided to extend both the refinance facilities up to September 30,

2009.

Key points

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• Supply- Liquidity is controlled by the Reserve Bank of India (RBI).

• Demand- India is a growing economy and demand for credit is high though it could be

cyclical.

• Barriers of Entry- Licensing requirement, investment in technology and branch network.

• Bargaining power of customers- High during periods of tight liquidity. Trade unions in public

sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall.

• Bargaining power of borrowers- For good creditworthy borrowers bargaining power is high

due to the availability of large number of banks

• Competition- High. There are public sector banks, private sector and foreign banks along

with non banking finance companies competing in similar business segments.

_________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for

the purchase or sale of any financial instrument or as an official confirmation of any transaction.

The information contained herein is from publicly available data or other sources believed to be

reliable but we do not represent that it is accurate or complete and it should not be relied on as

such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in

the information contained in this report. This document is provide for assistance only and is not

intended to be and must not alone be taken as the basis for an investment decision.

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Documents

Andhra Bank Sep09 Results Updated Detailed Report