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Andhra Bank Ltd._CD money.umakant.info Q2 2010 by icestar

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									CD Equisearch Pvt Ltd
                                                                                                    31st May, 2010



 Andhra Bank Ltd.                               Company Brief
                                                Andhra Bank Ltd. is a fast growing mid-sized public sector bank (PSB),
 No. of Shares (Crore)               48.50
                                                having pan-India presence with a network of 2502 business delivery
 Face Value (Rs)                     10.00
                                                channels with over 20 million customers. The bank has grown its
 Mkt. Cap (Rs. Crore)               6508.70     business at a CAGR of 24% in the last five financial years to Rs 134000
 Price (28/05/2010)                  134.20     crore. It also enjoys excellent asset quality as it has consistently
 Book Value (Rs.)                    90.93      maintained a net NPA of less than 0.2%.
 P/BV                            1.48           Highlights
 BSE Code                       532418
                                                   Andhra Bank plans to expand its branch network by adding 500
 NSE Code                    ANDHRABANK
                                                   branches in the next four years. A stronger branch network coupled
 Bloomberg                          ANDB IN        with up-tick in credit growth will help the bank to grow its loan
 Reuters                        ADBK.BO            book by 27% in the current financial year.
 Avg. Vol. (weekly) (NSE)           1100985        The bank is restructuring its business model by focusing more on
 52 W H/L (Rs.)                138.50 / 74.30      high yielding agriculture loans, micro, small and medium
                                                   enterprises (MSME) loans and retail loans instead of corporate
                                                   loans, thereby helping it maintain its margins.
 Shareholding pattern                 %
 Govt. Holding - Promoters           51.55         Andhra Bank has been consistently improving its net interest
                                                   margins (NIMs) on the back of sharp decline in cost of deposits.
 MFs / Banks / FIs                   18.70
                                                   Going forward, it expects to maintain margin of more than 3.0% on
 Foreign                             13.07         the back of better liability-side management and higher yield on
 Non-Promoter Corp.                   3.00         advances.
 Total Public                        13.68
                                                   Andhra Bank commands one of the best asset quality profiles in the
 Total                               100.00
                                                   banking industry as it has consistently maintained a net NPA of less
 (As on 31st Mar, 10)
                                                   than 0.2% in the last five financial yeas due to controlled slippages
                                                   and better recovery management.
 Recommendation
                                                   The stock is currently trading cum dividend (Rs 5 per share).
 BUY                                               Dividend yield on current market price works out to 3.7%.
 Analyst                                           At the CMP of Rs 134, the stock trades at a P/BV of 1.1 x FY11E BV
 ROHIT AGARWAL                                     & at a P/E multiple of 4.8 x FY11E earnings. We recommend a
 Phone: +91-33-22805601/02                         “BUY” on the stock with a price target of Rs 166, assuming a P/BV
 E-Mail: rohit.agarwal@cdequi.com                  of 1.4 x FY11E BV, an upside of 24%, over a period of 12 months.
                                                                                                        Rupees in Crores
                                                FY07           FY08           FY09           FY10           FY11E
 Total Net Income                               2003.92       1984.82        2409.14        3159.36         3749.40
 Operating Expenditure                          1008.78        927.88        1121.11        1349.54         1493.46
 Operating Income                                995.14       1056.94        1288.03        1809.82         2255.94
 Net Profit                                      537.64        575.41         652.81        1045.45         1351.01
 EPS                                              11.09         11.86          13.46         21.56           27.86
 P/E (x)                                           7.2           6.6            3.5           5.2             4.8
 P/BV (x)                                          1.2           1.1            0.6           1.2             1.1
 Dividend (%)                                      38            40             45            50              65

Equities       Derivatives     Commodities         Distribution of Mutual Funds          Distribution of Life Insurance
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            Company Background
            Andhra Bank Ltd., founded by the freedom fighter Dr. Bhogaraju Pattabhi Sitaramayya, is one of the
            fastest growing public sector banks in the country with a total business size of Rs.134000 crore as on 31st
            March 2010. This mid sized public sector bank was incorporated in 1923 and nationalized in 1980. The
            Government of India (GoI) is a major shareholder of Andhra Bank with a stake of 51.55%. The bank
            offers retail banking, small and medium enterprise (SME) banking, treasury and financial institutional
            services. It enjoys an excellent asset quality as it has been consistently maintaining a net NPA of less
            than 0.2% in the last five financial years.

Branch Mix -                 From being perceived as a regional bank with presence mostly in the South, especially
                             Andhra Pradesh, it has come a long way to be recognised as a tech-savvy bank with a
                             pan-India presence. The bank is rendering services through 2502 Business Delivery
       Metro
       16%          Urban    Channels consisting of 1557 branches, 48 Extension Counters 859 ATMs and 38 satellite
                    29%      offices spread over 23 states and 3 Union Territories at the end of March 2010. It has
    Rural                    implemented Core Banking Solutions (CBS) across all its branches in India which will
    27%
               Semi-         allow the bank to offer anywhere banking to its customers. Andhra Bank in joint venture
               Urban
               28%
                             with BOB and IOB has recently signed a MOU for launching a banking subsidiary in
                             Malaysia. This will help the bank in expanding its presence in Malaysia.
                                              Andhra Bank is restructuring its business model and product mix by
Credit Mix –                                  focusing more on high yielding agriculture loans, micro, small and
               2%                             medium enterprises (MSME) and retail loans instead of corporate
                                     16%
                                              loans. As a result, the bank has recorded a growth of 35% in
                                              agriculture loans, 55% in the MSME sector and about 48% rise in retail
   51%                                        credit as compared to 15% growth in corporate credit, in last financial
                                         1 6%
                                              year.
                                                The bank has created verticals at Head Office for major business
                                         1 5%   segments such as Resources, Large Corporate, Mid Corporate, Retail,
      A g riculture           R eta il          MSME, New Branches and Stable State Branches. These verticals are
      M SM E                  C o rp o ra te    headed by GMs and DGMs who are responsible for achieving specific
      Others A d va nces
                                                targets.
            In order to broaden its product stream, Andhra Bank has forayed into life insurance business in the last
            financial year, by setting up a life insurance company, IndiaFirst Life insurance Company (IndiaFirst
            Life), though a 30% joint venture with Bank of Baroda (44% stake) and London based Legal and General
            (26% stake). IndiaFirst Life was launched on 1st Jan 10 for rolling out products. In the first three months
            itself the Bank has sold 19689 policies and collected premium of Rs.53.44 crore and earned commission of
            approx Rs. 2 crore.
            Andhra Bank has been adjudged the Bank with the Best 'Asset Quality' by “Business Today-KPMG
            Study”. The bank with a brand value of $134 million has been recently listed as one the Top 500 Global
            Financial Services Brands by UK based Brand Finance Co. The bank is ranked 461 in the Brand Finance @
            Global Banking 500, an annual international ranking and is one of the Top 20 Indian banks.
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           Industry Outlook
             Indian banks are a direct play on the domestic economic upswing and PSU banks with more than
             70% market share are among the biggest beneficiaries of this upturn. Historically, recovery at the
             macro level is followed by an up-tick in loan growth of the banks. Loans have grown in multiples of
             1.7x-1.8x to nominal GDP and surge in industrial production is normally followed by loan growth
             with a 3-6 months lag. We expect loan demand to pick up rapidly in the current financial year as
             industries will need more funds to expand operations in an economy forecasted to grow more than
             8 percent in this fiscal year. Moreover retail businesses of the banks will do well going forward on
             the back of demand pickup in mortgage loans, car loans and personal loans. Within personal
             loans, education and housing loans are expected to grow at a robust pace.
             Indian public sector banks (PSBs) are key beneficiaries of strong parental support in form of
             Government of India, as government remains committed to infuse fresh capital into banks in the
             event of distress to facilitate their growth. In the last Union Budget, government has provided Rs
             16,500 crore to ensure that PSBs are able to attain minimum 8% Tier-I capital by March 2011. Going
             forward, PSBs are likely to be adequately capitalised, thus providing them the financial flexibility to
             implement future growth plans in a relatively under-banked Indian market.
             Credit Deposit (CD) Ratio is expected to increase going forward as loan growth will outpace deposit
             growth for most banks in subsequent quarters. Major banks have cut deposit rates due to which
             current deposit rates have become unattractive. The CD ratio of the banking system is below 70%.
             Disbursements are likely to remain robust going forward, driven by infrastructure and corporate
             loans. Growth in retail finance has picked up meaningfully, led by housing and vehicle loans.
             Some banks have seen their CASA get affected due to a dip in interest rates. According to RBI, during
             the last financial year, there was a slowdown in the pace of deposit mobilisation, mainly due to the
             gradual decline in interest rates on time deposits in a lagged response to lower policy rates. With the
             increasing demand for credit from the banking system, deposit mobilisation has begun to gain
             strength, and deposit rates have also moved up.
             Fitch has upgraded its outlook for Indian banks for the financial year. Although the bad loans of
             Indian banks are expected to peak in 2010-11, when most restructured loans mature, the RBI's
             prescription of a mandatory 70 per cent provisioning to be made on bad loans has made Fitch
             provide a positive outlook. The RBI had asked banks to restructure loans by extension of a
             moratorium period, an increase in the contracted tenor of principal repayment, reduction in lending
             rate or a combination of these options. According to Fitch estimates, 25 per cent of the restructured
             loans were likely to mature in 2009-10, 50 per cent in 2010-11 and 25 per cent in 2011-12.
             Although the central bank raised policy rates by a quarter basis point for the second month in a row
             in its last monetary policy, commercial banks are unlikely to increase their lending rates in the near
             term because of improved liquidity condition on account of huge capital inflows. India will continue
             to remain an attractive investment destination leading to improvement in liquidity, as crisis in
             Greece will force the policy makers of the central banks of Europe and US to continue with soft
             interest rates.
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           Investment Arguments
            Robust business growth
            Andhra Bank is one of the fastest growing mid-sized public sector banks (PSB), having pan-India
            presence with a network of 2502 business delivery channels and with over 20 million customers.. The
            bank has been consistently growing above the industry growth rate in the last few years. Total business
            has grown at a CAGR of 24% in the last five financial years.
                                                        In fact, the bank has maintained the trend of outgrowing the
                                                        industry throughout the last financial year as well, when other
 200000                                    32.0%        banks found it difficult to grow due to falling economic
                                                        growth. The bank’s total business grew by 29% to Rs 134000
 150000                                    24.0%        on the back of 31% growth in deposits and 27% in net
 100000                                    16.0%        advances.

 50000                                     8.0%         The bank is well positioned to sustain its operations and
                                                        continue branch expansion on meaningful scale. We expect
     0                                     0.0%         the bank to continue growing at a faster pace than the
           FY FY FY FY FY FY
             06 07 08 09 10 11E                         industry and achieve a business growth of 25%, led by 24%
            Business (In Rs Cr)       %Growth           growth in deposits and 27% surge in advances in the current
                                                        year. The bank expects to cross total business level of Rs
                                                        150000 crore by the end of September 2010,

            Change in product mix to improve yields
                                      FY09                       FY10             Andhra Bank has restructured its
  Segment (In Rs Crore)
                            Amount     Contribution     Amount    Contribution    business model and product mix
  Agriculture                5998         13.5%          9173        16.2%        by focusing more on high yielding
  Retail                     6042         13.6%          8920        15.8%
                                                                                  agriculture loans, micro, small and
  MSME                       5657         12.7%          8285        14.7%
  Corporate & Commercial     24849        55.9%          29295       51.8%
                                                                                  medium enterprises (MSME) loans
  Others Advances            1882          4.2%           832         1.5%        and retail loans instead of
  Gross Bank Credit          44428       100.0%          56505      100.0%        corporate loans.
            The bank already tested this model in 2009-10, and this strategy paid off as the bank’s yields have
            improved in a low interest rate environment. Instead of focusing on the corporate sector, Andhra Bank
            tried to make use of its well established network in the country by focusing on other sectors of the loan
            portfolio. As a result, the bank has recorded a growth of 34% in agriculture loans, 55% in the MSME
            sector and about 48% rise in retail credit as compared to 15% growth in corporate credit.
            Going forward, we expect the bank to continue focusing on these assets. Retail lending holds tremendous
            potential and banks expects a 30% growth in retail segment.




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            Expansion in distribution network to boost business
            From being perceived as a regional bank with presence mostly in the South especially Andhra Pradesh, it
            has come a long way to be recognised as a tech-savvy bank with a pan-India presence. The Bank is
            rendering services through 2502 Business Delivery Channels consisting of 1557 branches, 48 Extension
            Counters 859 ATMs and 38 satellite offices spread over 23 states and 3 Union Territories at the end of
            March 2010.

Expanding network                                                            Andhra Bank has a strong branch network in
 Particulars           Mar-09    Jun-09    Sep-09    Dec-09         Mar-10   South India (around 66%) and is now working
 Branches               1432      1448      1536      1544           1557    to consolidate its presence in other regions of the
 Extension Counters      52        50        49        49             48     country. The bank plans to aggressively expand
 ATMs                   726        778       798      839            859     its branch network by adding 500 more branches
 Satellite Offices       38        38        38        38             38     in the next four years to increase its total branch
 TOTAL                  2248      2314      2421      2470           2502    network to over 2000.
            In the current financial year, the bank is planning to open 150 branches across India with greater
            emphasis on northern and western zone. Further, the bank has recently signed a MOU for launching a
            banking subsidiary in Malaysia jointly with Bank of Baroda and Indian Overseas Bank. This will help the
            bank in expanding its presence in Malaysia.
            Increased branch network would accelerate improvement in CASA (and thereby margins) and
            enriched customer profile would augment fee income.

            Asset quality – One of the best in industry
            Despite growing its loan book consistently above the industry growth rate, Andhra Bank commands
            one of the best quality assets profiles in the banking industry as it has been consistently maintaining
            a net NPA of less than 0.2% in the last five financial yeas due to controlled slippages and better
            recovery management.
Best asset quality                                                      The bank reported a Gross NPA (GNPA) of 0.86%
                                                                        and Net NPA (NNPA) of 0.17% with provision
  1.50     90.9 76.5 76.7 91.1    85.9 83.7 91.1 91.6 100.0             coverage ratio (PCR) of as high as 91.6% during
  1.20                                                       80.0       Q4FY10, one of the best in the industry. A higher PCR
  0.90                                                       60.0       provides cushion against any significant downward
  0.60                                                       40.0       risk to its earnings.
  0.30                                                       20.0
                                                                        Going forward, the bank hopes that there would not
  0.00                                                       0.0        be any major increase in gross NPA level and it
                                                                        expects to maintain a GNPA of 1% in times to come.
        09


         9

        09

        09

        10

        10

        10

        10
       Y0
      FY




      FY

      FY

      FY

      FY

      FY

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     2F
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    Q3

    Q4

    Q1

    Q2

    Q3

    Q4
    Q




            Gross NPA (%)    Net NPA (%)    Prov. Cov. (%)



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              Improving margins on back of sharp decline in cost of funds
Yield analysis -                                                                Andhra Bank has been consistently improving its net
                                                                                interest margins (NIMs) in the past few quarters on the back
 14.0                                                                4.0
 12.0                                                                           of sharp decline in cost of deposits. NIMs have improved
                                                                     3.0
 10.0                                                                           from 2.6% in Q4FY09 to 3.4% in Q4FY10. During the same
  8.0
  6.0
                                                                     2.0        period, cost of deposits declined by 190 bps to 5.6% whereas
  4.0                                                                1.0        yield on advances declined by 92 bps to 10.6% in Q4FY10.
  2.0
  0.0                                                                0.0        Despite a decline in yield on advances and fall in CD ratio
        Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10                               from 74% to 72% in FY10, Andhra Bank has improved its
         Cost of dep (% )        Yld. on adv. (% )         NIM (%)              NIMs to 3.2% in the last financial year as compared to 3.0%
                                                                                in FY2009.
Improvement in CASA key to maintain NIM                                         Although margin might witness some pressure on account
                                                                                of cost side pressure due to payment of daily interest on
  37%                                                               4%          savings deposits and rising interest rate scenario, Andhra
                                                                                Bank expects to maintain margin of more than 3.0% on the
  34%                                                               3%
                                                                                back of better liability-side management and higher yield
  31%                                                               2%          on advances due to re-pricing of advances at higher rate in
  28%                                                               1%          increasing interest rate scenario. It is generally observed
                                                                                that in a rising interest rate scenario, banks have always
  25%                                                               0%
                                                                                expanded their NIM, since yield on advances goes up faster
          FY06     FY07       FY08     FY09     FY10     FY11E
                                                                                than cost of deposits, as the deposits get re-priced at the
                   Share of CASA deposits            NIM                        time of renewal, whereas the interest on advances increases
                                                                                immediately.
              The bank has also shifted its loan mix by focusing more on high yielding agriculture loans, micro, small
              and medium enterprises (MSME) loans and retail loans instead of corporate loans, thereby helping it to
              maintain its margins.

              Cost efficiency to aid profitability
Declining Cost/Income ratio -                                                           Andhra Bank has improved its operating efficiency by
                                                                                        keeping operating costs under check, while expanding
   75 .0%
                   6 1 .0 %                                                             the core operating revenue. The Cost to Income Ratio
   60 .0%                               4 9 .8 %              4 5 .9 %
   45 .0%                   5 3 .1 %
                                                                                        has improved from 61.0% in FY06 to 49.9% in FY09 and
                                                   4 9 .9 %
   30 .0%                                                                4 2 .0 %       further by 400 bps to 45.9% in FY10 on the back of
   15 .0%
                                                                                        efficient cash-management system coupled with higher
    0 .0%
                 FY 06      FY 07      FY 08    FY 09         FY 10 FY 11E
                                                                                        income. The bank has been taking various corrective
                                                                                        steps to improve its operating efficiency.
               Hereon, we expect the trend to persist, and Cost to Income Ratio is expected to improve further to
               42.0% in the current financial year.

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            Adequately capitalised for growth
            Andhra Bank has a comfortable capital adequacy ratio (CAR) of 13.93% as per the Basel II norms as
            against RBI mandated requirement of 9%. The Tier I capital of the bank stands healthy at 8.18%, which
            we believe will help the bank for future growth. The bank intends to keep Tier I capital in excess of 8%.
 Headroom available as on Mar 2010                               The management believes that there is no need to
                                     Capital      Head           raise any capital now, as it has access to Rs 4058 crore
  Name of the Capital Instrument   Instruments    Room           over three years. However, the bank has submitted its
                                     Existing    Available       capital requirement to the Reserve Bank of India (RBI)
  A. Tier I Capital                                              for the next two financial years and expects to receive
  Innovative Perpetual Debt
                                       200        463.13         the funds in the current financial year. Andhra Bank is
  Instrument (IPDI)
  Perpetual Non Cumulative                                       targeting to maintain its CAR between 13% and 14%
                                         -        2284.12
  Preference Shares (PNCPS)                                      over the next three years. This will be achieved by an
  Sub Total A                          200        2747.25        increase in the Tier I capital with an accelerated growth
  B. Tier II Capital                                             in net profit and mobilizing the Tier II Bonds as per the
  Upper Tier II                        1000        881.05
                                                                 headroom eligibility. The bank also intends to go for
  Subordinated Debt                    1780        430.44
                                                                 the rights issue in future. We have not assumed any
  Sub Total B                          2780       1311.49
  TOTAL                                2980       4058.74        capital infusion in our projections.

            Interest rate risk relatively less
                                              The bank’s approach to investment management is sound and consistent
Investment Portfolio                          with various regulatory guidelines. It is strengthened by undertaking
Category               Mar 10    % of total   stress testing and back testing of the investment portfolio at quarterly
  HTM                  17747        85.0%     intervals, besides daily monitoring of duration and value at risk (VAR).
  AFS                   3123        15.0%
  HFT                    11         0.1%      As on Mar 10, around 85% of bank’s investment portfolio was in Held
                                              to maturity (HTM) category and hence is not susceptible to Mark to
Net Investments        20881       100.0%
Duration - AFS                  2.4           Market (MTM) losses. For the remaining portfolio, the duration is
Duration - Portfolio            5.6           very short. Low exposure to Available for sale (AFS) segment will lead
NDTL                          74323           to low MTM losses for the bank in an environment where bond yields
SLR (%)                        27.0           are under pressure owing to inflation and high government borrowing
                                              programme.

            JV with BoB and Legal & General to aid profitability
            In order to broaden its product stream, Andhra Bank has forayed into life insurance business in the last
            financial year, by setting up a life insurance company, IndiaFirst Life insurance Company (IndiaFirst
            Life), through a 30% joint venture with Bank of Baroda (44% stake) and London based Legal and General
            (26% stake). IndiaFirst Life was launched on 1st Jan 10 for rolling out products. In the first three months
            itself the Bank has sold 19689 policies and collected premium of Rs.53.44 crore and earned commission of
            approx Rs. 2 crore. The target for this year is to collect a premium of Rs 200 crore.

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              Healthy financials
              Andhra Bank has been growing at a healthy pace in the past few years on the back of rapid expansion
              of the Indian economy. Andhra Bank has grown its Net interest income (NII) at a CAGR of 17% on the
              back of 26% CAGR in advances in the last five financial years. Net Profit has grown at a CAGR of
              21% over the same period.
                                                                              In the last financial year, Andhra Bank has
                                  74.3% 72.3% 74.1%                           reported 60% increase in the net profit to Rs 1045
   120000       65.1% 67.3% 69.3%                   80%
                                                                              crore on the back of 35% increase in the NII to Rs
   90000                                                            60%       2195 crore. NII growth was driven by 27% growth
                                                                              in advances and 23% growth in investments. The
   60000                                                            40%       bank improved its NIM by 230 bps to 3.2%,
   30000                                                            20%       primarily as a result of a steeper decline in the cost
                                                                              of funds vis-à-vis the yield on advances. The cost
         0                                                          0%        to income ratio of the bank has declined by 400 bps
               FY06     FY07     FY08    FY09      FY10   FY11E               to 45.9%, which lifted Operating Profit by 41% to
                                                                              Rs 1810 crore. The asset quality remained stable as
         Deposits (In Rs Cr)     Advances (In Rs Cr)       CD Ratio (%)
                                                                              well with the gross non-performing assets in
                                                                              relative terms (GNPA) coming in at 0.86% and
                                                                              NNPA stood at 0.17%.
  3200       3.8%                                                   4.0%
                        3.7%                                                  India continues to be one of the fastest growing
                                                                    3.6%      economies of the world, which will help the
  2400                                             3.2%     3.2%
                                2.9%     3.0%                                 domestic banks to maintain their growth
                                                                    3.2%
  1600                                                                        momentum going ahead. In the current financial
                                                                    2.8%      year, we expect Andhra Bank to grow its NII by
   800                                                                        26% to Rs 2754 crore driven by 180 bps
                                                                    2.4%
                                                                              improvement in credit-deposit ratio, 27% growth
     0                                                              2.0%      in advances, 24% growth in investments and 24%
             FY06     FY07      FY08     FY09      FY10    FY11E              growth in deposits. Net profit is expected to grow
               NII (In Rs Cr)      Profit (In Rs Cr)      NIM (%)             by 29% to Rs 1351 crore.


              Attractive dividend yield
              Andhra Bank has a strong track record of paying dividends. It has been consistently increasing the rate
              of dividend since the last five financial years. Dividend rate increased from 35% in the financial year
              ended 2006 to 50% in the financial year ended 2010. Further, we expect the dividend rate to be increased
              to 65% (Rs 6.50 per share) in the current financial year, which translates into a tax free yield of 4.8% at
              the current market price.




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           Valuation gap between PSU Banks and Private Banks to shrink
                                                                                        Prov.
                                     NII                      CASA      CD        NN                                         Div.
                 Equity       CMP            NIM    Spread                              Cov.     CAR     ROA           P/
Company                              Grw.                     Ratio    Ratio      PA                            P/E          Yld
                 (Rs Cr)      (Rs)           (%)     (%)                                Ratio    (%)     (%)           BV
                                     (%)                       (%)     (%)        (%)                                        (%)
                                                                                         (%)
PSU BANKS
Allah. Bank       446.7    161.1     22.8    2.9      4.6     35.0%     69.3      0.7   79.0      13.6    1.2   6.0    1.2   3.4
Andhra Bank       485.0     134.2    34.9    3.2      4.8     29.4%     72.7      0.2   80.1      13.9    1.4    6.2   1.5   3.7
BOB               365.5     706.7    15.9    3.1      4.5     35.6%     72.6      0.3   74.9      14.4    1.2    8.6   1.6   2.1
Canara Bank       410.0     399.1    20.4    2.8      3.7     34.4%     72.2      1.1   77.7      13.4    1.3    5.4   1.3   2.5
Corp. Bank        143.4     516.6    30.7    2.4      4.0     28.5%     68.2      0.3   80.8      15.4    1.3    6.3   1.2   3.2
Indian Bank       429.8    222.2     26.7    3.7      4.6     31.8%     71.0      0.2   79.6      12.7    1.7   6.1    1.4   2.9
Oriental Bank     250.5     328.4    45.6    2.8      3.6     25.0%     70.2      0.9   76.7      12.5    0.9   7.3    1.1   2.8
SBI               634.9    2235.3    13.4    2.7      3.9     46.7%     73.6      1.7   59.2      13.4    0.9   15.5   2.2   1.3
UCO Bank          549.4     76.1     41.3    2.2      3.7     22.3%     68.1      1.2   50.3      13.2    0.9    4.1   1.1   2.0
Union Bank        505.1    289.6      9.9    2.7      4.0     31.7%     71.3      0.8   74.0      12.5    1.3    7.1   1.6   1.9
Vijaya Bank       433.5     56.1     28.8    2.5      4.1     24.6%     67.7      1.4   64.0      12.5    0.8    4.8   0.9   4.5

Axis Bank          405.6   1220.5    35.8    3.8      4.3     46.7%     73.8      0.4   72.4      15.8    1.7   19.7   3.1   1.0
HDFC Bank          458.5   1888.3    13.0    4.4      5.5     50.0%     76.0      0.3   74.8      17.4    1.5   29.4   4.0   0.6
ICICI Bank        1115.1   863.8     (3.0)   2.5      2.8     41.7%     71.0      2.1   59.5      19.4    1.1   23.9   1.9   1.4
IndusInd Bank      410.8   192.3     93.1    2.9      1.6     23.7%     76.9      0.5   60.0      15.3    1.1   22.5   3.6   0.9
Yes Bank           340.5    280.8    54.7    3.1      4.0     10.5%     82.8      0.1   78.4      20.6    1.6   20.0   3.1   0.5
Note: Spread is calculated by deducting Cost of Deposits from Yield on Advances

           Despite PSU banks fast catching up with private banks in terms of performance levels on all
           parameters, they still continue to trade at a sizable discount to their private peers, which we feel will
           narrow down in times to come. On an average, PSU Banks trade at 1.3 x book versus 3 x book for private
           banks. While the valuation gap between PSU and private sector peers may not be bridged completely it
           will certainly get narrowed. Andhra Bank will be one of the biggest beneficiaries of this adjustment.

           PSU banks enjoy better profitability than their private counterparts as they have an advantage over them
           in terms of size and reach. In small towns, private banks -- with their narrow reach tends to lose out to
           their well-entrenched public sector counterparts. Valuation of PSU banks may also improve from
           consolidation of weaker banks with stronger ones. On the asset quality front too, PSU banks are better
           placed. Moreover, they have a strong track record of paying handsome dividend, thereby helping
           investors to enjoy both capital appreciation and tax free income in form of dividends.
           Among the PSU banks, Andhra Bank is well placed to reap the benefits. With a strong RoE of around
           26% and stable NIMs of around 3.2%, it commands one of the best asset quality profiles in the
           banking industry, as it has been consistently maintaining a net NPA of less than 0.2% in the last five
           financial yeas due to controlled slippages and better recovery management. Currently it is available at
           P/BV of around 1.5 x compared to the private sector banks, which are quoting at 3+ P/BV multiples.

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           Financials
           Quarterly Results                                                 In Rs. Crores
                                                     Q4FY10        Q4FY09       % Chg.
           Interest Earned                           1707.94       1506.70        13.36
           Interest Expended                         1051.77       1111.44        (5.37)
                            Net Interest Income       656.17        395.26        66.01
           Other Income                               269.11        320.40       (16.01)
                                    Net Income        925.28        715.66        29.29
           Operating Expenses                         398.08        283.87        40.23
                              Operating Income        527.20        431.79        22.10
           Provisions & Contingencies                 222.94        185.58        20.13
                                            PBT       304.26        246.21        23.58
           Tax                                         64.00         45.00        42.22
                                      Net Profit      240.26        201.21        19.41
                                  EPS (FV 10/-)         4.95          4.15        19.41
           Capital Adequacy Ratio                     13.93          13.22
               Tier I Capital                          8.18          8.67
               Tier II Capital                         5.75          4.55
           (%) Gross Non Performing Assets            0.86           0.83
           (%) Net Non Performing Assets              0.17           0.18
           Return on Assets (Annualised)              1.14           1.22


           Profit & Loss                                                                               In Rs. Crores
           Year ended 31st March                       FY07        FY08       FY09            FY10         FY11E
           Interest income                            3315.33     4209.56    5374.62         6372.87       8122.24
           Interest Expended                          1897.79     2870.00    3747.71         4178.13       5368.57
                              Net interest income     1417.54     1339.56    1626.91         2194.74       2753.67
           Growth (%)                                 21.26%      -5.50%     21.45%          34.90%        25.47%
           Other Income                               586.38      645.26     782.23          964.62        995.73
                                      Net Income      2003.92     1984.82    2409.14         3159.36       3749.40
           Operating Expenditure                      1008.78     927.88     1121.11         1349.54       1493.46
                               Operating Income        995.14     1056.94    1288.03         1809.82       2255.94
           Provisions & Contingencies                  210.24     139.37      389.98          373.97        400.15
                                              PBT      784.90      917.57     898.05         1435.85       1855.79
           Tax                                         247.00      342.00     245.00          390.00        504.77
                                              PAT      537.90      575.57     653.05         1045.85       1351.01
           Extraordinary Items                          0.26        0.16       0.24            0.40          0.00
                                        Net Profit     537.64      575.41     652.81         1045.45       1351.01
                                              EPS       11.09       11.86      13.46           21.56         27.86
                                              DPS        3.8         4.0        4.5             5.0           6.5

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           Balance Sheet                                                                             In Rs. Crores
           Year ended 31st March                        FY07       FY08       FY09        FY10E          FY11E
           SOURCES OF FUNDS
           Equity Share Capital                         485.00     485.00     485.00       485.00        485.00
              Equity Share Capital                      485.00     485.00     485.00       485.00        485.00
           Reserves                                     2671.28   2764.29    3161.99      3925.04       4768.33
           Total Shareholders Funds                    3156.28    3249.29    3646.99      4410.04       5253.33
           Total Deposits                              41454.02   49436.55   59390.02     77688.21      96333.38
           Borrowings                                   733.54     590.51    3351.23      5852.44       6730.31
           Other Liabilities & Provisions              2214.06    3347.99    2140.97      2429.77       2721.21
                                  Total Liabilities    47557.90   56624.34   68529.21     90380.46     111038.23
           APPLICATION OF FUNDS
           Current Assets                               4024.17   5694.31    5287.50      11167.65     11486.20
           Investments                                 14300.72   14898.24   16911.11     20881.00      25892.44
           Advances                                    27889.07   34238.39   44139.26     56151.57      71368.65
           Fixed Assets                                  192.35    219.46     335.29       355.66        375.13
           Other Assets                                 1151.59   1573.94    1856.05      1824.58       1915.81
                                       Total Assets    47557.90   56624.34   68529.21     90380.46     111038.23




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           Key Financial Ratios
           Year ended 31st March                     FY07       FY08        FY09       FY10E        FY11E
           Growth Ratios
           Interest Income                           23.9%      27.0%      27.7%        18.6%       27.5%
           Net Interest Income                       21.3%      -5.5%      21.5%        34.9%       25.5%
           Advances                                  26.2%      22.8%      28.9%        27.2%       27.1%
           Deposits                                  22.2%      19.3%      20.1%        30.8%       24.0%
           EPS                                       10.8%       7.0%      13.5%        60.1%       29.2%
           Yield Measurement Measures
           Yield on advances                          9.7%      10.4%      10.9%        10.3%       10.7%
           Cost of deposits                           5.0%       6.3%       6.9%         6.1%        6.2%
           Spread                                     4.6%      4.1%       4.0%         4.2%        4.5%
           Net interest margin                        3.7%       2.9%       3.0%         3.2%        3.2%
           Balance Sheet Ratios
           Credit - Deposit Ratio                    67.3%      69.3%      74.3%        72.3%       74.1%
           Investment - Deposit Ratio                34.5%      30.1%      28.5%        26.9%       26.9%
           CASA Ratio                                34.5%      33.6%      31.4%        29.4%       29.7%
           Capital Adequacy Ratio – Basel II (%)      11.3       11.6       13.2         13.9        13.8
               - Tier I (%)                           10.0        8.5        8.7          8.2         8.1
           Asset Quality Ratios
           Gross NPA (%)                              1.41       1.07       0.83         0.86          0.88
           Net NPA (%)                                0.17       0.15       0.18         0.17          0.18
           Provision Coverage Ratio                   86.5       85.4       91.1         91.6          91.2
           Profitability Ratios
           RoA                                       1.2%       1.1%       1.0%         1.3%        1.3%
           RoE                                       17.8%      18.0%      18.9%        26.0%       28.0%
           Efficiency Ratios
           Cost to Income Ratio                      53.1%      49.8%      49.9%        45.9%       42.0%
           Productivity Ratio
           Business per Employee (in Rs Cr.)          5.4        6.3         7.3         9.4           10.9
           Profit per Employee (in Rs lakh)           4.0        4.3         4.6         7.3            8.8
           Valuations
           P/E                                         7.2        6.6       3.5          5.2            4.8
           P / BV                                      1.2        1.1       0.6          1.2            1.1
           Dividend yield                             5.0%       5.4%      10.0%        4.6%           4.8%

           Risk & Concerns
             Deterioration in economic environment will result in lower than expected credit growth, which will
             hamper growth prospects of the bank.
             Higher dependence on costlier bulk deposits leading to NIMs being lower than estimated.
             Higher credit costs could lead to earnings growth being lower than estimated.


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           Valuation & Recommendation
           Indian banks are a direct play on the domestic economic upswing and PSU banks with a market share of
           more than 70% are among the biggest beneficiaries of this upturn. We believe, Andhra Bank is well
           placed to reap the benefits on the back of its strong fundamentals and healthy return ratios.

           Despite PSU banks fast catching up with private banks in terms of performance levels on all
           parameters, they still continue to trade at a sizable discount to their private peers, which we feel will
           narrow down in times to come. Andhra Bank will be one of the prime beneficiaries of this move. With
           a strong RoE of around 26% and stable NIMs of around 3.2%, it commands one of the best asset
           quality profiles in the banking industry, as it has been consistently maintaining a net NPA of less
           than 0.2% in the last few yeas due to controlled slippages and better recovery management.

           India continues to be one of the fastest growing economies of the world, which will help domestic banks
           to maintain their growth momentum going ahead. In the current financial year, we expect Andhra Bank
           to grow its NII by 26% to Rs 2754 crore driven by 180 bps improvement in credit-deposit ratio, 27%
           growth in advances, 24% growth in investments and 24% growth in deposits. Net profit is expected to
           grow by 29% to Rs 1351 crore.
           Andhra Bank has a strong track record of paying dividends. It has been consistently increasing the rate of
           dividend since the last five financial years. Dividend rate increased from 35% in the financial year ended
           2006 to 50% in the financial year ended 2010. Further we expect the dividend rate to be increased to 65%
           (Rs 6.50 per share) in the current financial year, which translates into a tax free yield of 4.8% at the
           current market price.
           Given the healthy sector outlook, sound fundamentals, good dividend yield, strong return ratios and
           earnings visibility, this stock seems to be a good buy for investors.

           At the current price of Rs 134, the stock trades at a P/BV of 1.1 x FY11E BV. It is also
           attractively valued at P/E multiple of 4.8 x FY11E earnings. Moreover, the stock is currently
           trading cum dividend (Rs 5 per share), which provides investors an opportunity to latch on tax
           free yield of 3.7%.
           With this backdrop we believe this to be an excellent opportunity for investors, we recommend
           a “BUY” on the stock with a price target of Rs 166, assuming a P/BV of 1.4 x FY11E BV, an
           upside of 24% from the current levels, over a period of 12 months.

           Disclaimer
           This document is meant for our clients only and is not for public distribution. This material is for the personal information of the authorized recipient, and we are not soliciting any
           action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would
           be illegal. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Neither CD
           Equi Search Pvt. Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own
           investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a
           reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are
           cautioned that any forward-looking statements are not predictions and may be subject to change without notice. If you have any questions about this report please get in touch with CD
           Equi search Pvt. Ltd.

           CD Equisearch Pvt. Ltd. 10, Vaswani Mansion, 2nd Floor, Dinshaw Waccha Road, Mumbai – 400 020 Phone +91 (22) 2283 0652 / 0653, Fax +91 (22) 2283 2276,

           Email: research@cdequi.com Website: www.cdequi.com

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