Bank on it

IPO REVIEW

Plans to expand geographically, better quality of assets and technology initiative is likely to change the face of this Andhra based public sector bank.

As far as public sector banks go, Andhra Bank is not among those, which attracts a lot of attention. However, by the looks of it things may be about to change for the better.

Predominantly based in the state of Andhra Pradesh, the 83-year old public sector bank plans to spread its wings geographically in India and abroad. The bank also plans to grow its assets namely loans and investments and at the same time comply with Base ll II norms to be implemented by March 2007.

Thus the bank plans to offer 8.5 crore equity shares in the price band of Rs 82-90, whereby 10 per cent is reserved for the employees. Post issue, the government's holding is expected to come down from 62.50 per cent to 51.55 per cent.

The capital adequacy ratio of the bank is expected to increase from 11.95 cent in September 2005 to 14 per cent post issue with Tier I capital of over nine per cent.

At the price band of Rs 82-90, the stock trades at a price to adjusted book value of 1.2-1.3 times (post issue) for FY07E, much cheaper compared to its peers like Corporation bank (1.3 times) and Vijaya Bank (1.7 times). A banking analyst from a leading brokerage firm is bullish about the bank and advises investors to subscribe for the issue.

He expects about 15 percent upside from the current levels. According to Anand Kuchelan, banking analyst from Pioneer Intermediaries, investors should subscribe to the issue with a long term perspective. He sets a target of Rs 140 on the stock in a year's time.

Rajesh Malhani from Prabhudas Liladhar feels that the issue is attractively priced, considering the good asset quality and its emphasis on technology.

Andhra bank has 1177 branches predominantly in the state of Andhra Bank and 526 delivery channels including extension counters, ATMs and satellite offices and a large base of 13.9 million customers.

According to analysts the bank's concentration in Andhra Pradesh can limit its growth until the bank's expansion plans in others parts of India fructify. The bank also plans to expand internationally and has received approvals for establishing its first representative office in Dubai in UAE.

The bank has aggressively started its "anywhere banking" initiatives. It is currently implementing core banking technology project throughout the organisation and 70 per cent of its branches are connected to this network. It has also recently introduced mobile phone banking in 453 branches and will be providing internet banking by FY06.

Strong credit growth
The rising financial needs of the retail and commercial sector has led to the advances growth of 23.3 per cent CAGR in FY03-05 and 31.9 per cent in H1FY06. The bank increased its credit to deposit ratio to about 64.55 per cent which is in line with the industry average for scheduled commercial banks as compared to 58.55 per cent in FY04.

According to V R Venkataraman, general manager, Andhra Bank, the bank is expected to end the year with a growth of about 30 per cent in advances in FY06, on the back of its continued focus on the retail and SME sector. Share of retail loans increased by 100 bps to 19 per cent in September 2005.

The bank plans to increase its fee based income by offering new products and services by cross selling to customers. It has already begun selling mutual funds and life insurance and general insurance products and also started 8 am to 8pm in 14 branches and Sunday banking in 12 branches.

Last year, it increased the number of locations for western Union Money transfers services from 252 to 700. 
 

ANDHRA BANK
(Rs crore)	H1FY05	H1FY06	% chg
Net interest income	541.30	562.9	3.99
NIM(%)	4.21	3.62	-
Other Income	455.93	195.12	-57.20
Operating profit	632.83	345.88	-45.34
Cost to income ratio (%)	36.54	54.37	-
PAT	287.61	203.31	-29.31
NPM (%)	28.84	26.82	-
EPS	7.19	5.08	-

Cost of funds decline
Share of current and savings deposits (CASA) in total deposits have decreased from 36.1 per cent in FY05 to 35.9 per cent in H1FY06 (38.3 per cent in H1FY05).

Says Venkataraman, "This is expected to change as the bank is targetting share of CASA beyond 40 per cent in the next financial year to reduce its cost of funds. The bank has been adding 50000 savings bank accounts every month. Besides it has 12500 ATM network including those shared with SBI, HDFC bank and UTI bank. Thus its costs of deposits are expected to improve.

Cleaner balance sheet
Thanks to strong growth in advances, the share of investments to total assets has come down from 42.6 per cent in FY03 to 29.5 per cent in H1FY06 and that of advances has been maintained at 53.5 per cent.

In order to grow the advances portfolio, the bank has not compromised on the quality of assets. Its gross NPAs of 2.27 per cent is one of the lowest in the industry. Similarly the bank has reduced its net non-performing assets from 0.28 per cent in FY05 to 0.26 per cent in September 2005. 
  

FINANCIALS
Other parameters (%)	FY05	H1FY06
Capital Adequacy ratio	12.11	11.95
Share of CASA	36.10	35.90
Credit-Deposit Ratio	65.18	64.55
Share of retail credit	18.03	19.00
Gross (Net) NPAs	2.46 (0.28)	2.27 (0.26)
Share of investments in total assets	32.50	29.50

Says Venkataraman, "The bank has 89 per cent coverage on its loans and efforts will be focussed more on reducing the NPAs".

In H1Y06, net interest income increased by only 4 per cent despite higher advances growth. This was mainly due to lower income from other investments and higher cost of deposits. Thus NIM declined by 59bps to 3.62 per cent. Other income declined by whopping 57 per cent due to a sharp decline in treasury profits. This had a cascading effect on the operating and net profits which witnessed a sharp decline.

The bank is unlikely to see any major hit on its profit as it has shifted majority of its investments to HTM category, which forms about 64.45 per cent of its total investments as on September 2005.

Overall the worst seems to be over for the Indian debt market as there has been already an increase of 100-120 bps in the yields till now, says a banking analyst.