ANDHRA BANK

“In the swim of growth opportunities”

KRChoksey Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Factset and Capital IQ
ANDHRA BANK

India Institutional Equity Research I BFSI Initiating Coverage

ANDHRA BANK ` 170

In the swim of growth opportunities BUY

Strong credit growth outlook Price Outlook : ` 208

Though the credit demand has been sluggish of late we believe that it will pick up in Market Data October 18, 2010
H2FY11 on the back of corporate capex, infrastructure development and improved retail
Shares outs (Cr) 48.5
credit demand. Management is sanguine about 3-5% above industry average credit growth in
FY11. We are modeling ~23.7% loan CAGR over FY10-13E driven by credit demand from Equity Cap (` Cr) 485.0
infrastructure, MSME and retail loans. Mkt Cap (` Cr) 8,245
52 Wk H/L (`) 177/94
Margins are sustainable at 3% with positive bias
The bank has been swift in raising the lending rates in order to protect its margins. ~26% of Avg Vol (1yr avg) 234,305
the total deposits are bulk deposits incl. CDs and out of that ~70% will come for re-pricing in Face Value (`) 10
the next couple of months which will mount pressure on the margins in near term. Bloomberg Code ANDB IN
However, we expect that bank would be able to maintain its margin at 3.2% going forward.
Further, bank enjoys one of the best risk adjusted spread in the industry. Market Info:
Superior Asset quality- Higher coverage to cushion earnings SENSEX 20,125
Bank has one of the lowest Gross NPA in the industry which has continuously been declining NIFTY 6,063
from 2.52% in FY05 to 0.87% in FY10. The delinquencies were contained at 0.71% during
FY10, however we have factored in 1.0% slippage in the next three years as a result the Price Performance
credit cost would also go up to 76bps in FY13 from 54bps in FY10.
180

Operating leverage to boost core profitability 170

160
The bank has heavily invested in technology to provide market competitive transaction 150
platforms and build technology sawy brand image. We believe improved customer service 140

and lower turnaround time in credit origination will result into better efficiency and 130
120
improve cost structure. The bank has successfully implemented Core Banking Solutions 110
(CBS) on entire branch network, which resulted in 344bps decline in Cost to Income ratio in 100

FY10 and going forward we expect it to eventually settle at around 39-40% which is a 90

healthy ratio in the industry. 80

Jul-10
Oct-09

Dec-09

Jan-10

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10
Nov-09

Mar-10

May-10

Sep-10
Sustainable ROE, Core operations to drive RoE expansion
Andhra Bank’s RoAE and ROAA in FY10 stood at 26.0% and 1.3% respectively, against an Andhra BSE SENSEX

average 20.7% during FY06-10, which is one of the best in the industry. Even core RoAE has
been quite robust at 18.8% during FY06-10. We expect bank to maintain 24-25% RoAE over Share Holding pattern (%)
FY11-13E. We expect 22.7% CAGR in core earnings over FY10-13E despite factoring in lower Particulars Sep-10 Mar-10 Chg
treasury gains and higher provisioning costs.
Promoters 51.6 51.6 0.0
View & recommendation
Andhra Bank has outperformed the Sensex by ~ 3.2x in last one year driven by strong core Institutions 16.9 18.7 -1.9
profit growth, healthy asset quality, improving margins and impressive returns. We expect FII 16.8 12.9 3.9
the bank will continue to maintain growth momentum on the back of 23% CAGR growth in Public/Others 14.8 16.9 -2.1
loans, increased thrust on high yielding assets. The bank is well capitalized for the next
Total 100.0 100.0
three years and we believe strong internal accruals and headroom for Tier I & II will support
future growth. We initiate coverage on the bank with BUY rating with a price target of ` Source: BSE
208, an upside of 22%.

` in crores Analysts :
Deepak Tiwari
Particulars FY09 FY10 FY11E FY12E FY13E deepak.tiwari@krchoksey.com
Net Interest Income 1,627 2,195 2,730 3,436 4,212 ℡ 91-22-6696 5555
Pre-provisioning Profit 1,305 1,851 2,125 2,683 3,226
Net Profit 653 1,046 1,175 1,403 1,643 Manish Ostwal
EPS 13 22 24 29 34 manish.ostwal@krchoksey.com
ABV 74 89 101 117 134 ℡ 91-22-6696 5555
ROAE 18.9% 26.0% 24.6% 25.2% 25.3%
P/E 12.6 7.9 7.0 5.9 5.0 www.krchoksey.com
P/ABV 2.3 1.9 1.7 1.5 1.3
℡ 91-22-6696 5555
Source: Bank, KRChoksey Research
¬ 91-22-6691 9569

2 KRChoksey – Institutional Research

ANDHRA BANK

Table of Contents

INVESTMENT RATIONALES

• Strong credit growth outlook 4

• Margins are sustainable at 3.2% with positive bias 6

• Superior Asset quality- Higher coverage to cushion earnings 10

• Operating leverage to boost core profitability 13

• Benign non- interest income growth expected in FY11E 15

• Well capitalized for growth 16

• Sustainable ROE, Core operations to drive RoE expansion 17

• Lower MTM Risk 17

PEER COMPARISION 19

INVESTMENT RISK & CONCERNS 20

FINANCIAL ANALYSIS & VALUATION

• Financial analysis 20

• Sensitivity analysis 23

• Quarterly expectations 24

• Valuation & recommendation 25

COMPANY OVERVIEW 27

FINANCIALS 28

3 KRChoksey – Institutional Research

ANDHRA BANK

INVESTMENT RATIONALES

Strong credit growth outlook

We expect 23.7% CAGR loan
over FY10-13E driven by high
yielding segments such as
SME and retail loans.
Andhra Bank registered loan CAGR of 26.2% over FY06-10 against 21.3% CAGR at the system
level. During FY10 advances grew by 27.1% against 17.0% of systemic growth. On the other hand,
deposits CAGR over FY06-10 pegged at 23.0% against 21.1% at the system level while in FY10,
deposits growth of the bank was one of the highest growth achieved by the bank ever against
17.1% for the industry. Most importantly, the bank clocked such an impressive growth despite
challenging environment and increased competition while improving its market share.
Though the credit demand has been sluggish of late and most of the demand has been for short
term loans such as working capital loans and one off spike due to 3G loans. However we are of
the opinion that credit demand will pick up in H2FY11 on the back of corporate capex,
infrastructure development and improved retail credit demand. Management is sanguine about
3-5% above industry average credit growth in FY11. We are modeling ~23.7% loan CAGR over
FY10-13E driven by credit demand from infrastructure, MSME and retail particularly housing and
gold loans. We expect 2.5x growth in gold loan book over FY11-13E on which the bank earns a
handsome yield of 14.75%. MSME remains a thrust area for growth while retail book will continue
to grow by 20-25%.

Loan book of the bank will continue to grow 3-5% ahead of the system

Exhibit-1: Advance growth trend

30%

26%

Andhra Bank to continue to 22%

outpace system growth for
the next few years. 18%

14%

10%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Andhra Bank System

CAGR FY07-10: 19.1% CAGR FY10-13E: 23.7%

35%
29%
30% 27%
26%
23% 24% 24%
25% 23%
rd
Almost 2/3 loans are based
20%
on floating rates and ~86%
15%
loans are secured loans.
10%

5%

0%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Advance Growth

Source: RBI, Bank, KRChoksey Research

4 KRChoksey – Institutional Research

ANDHRA BANK

Corporate loans to dominate but MSME will grow faster.

60%

50%
15%
40%
12%
8% 6% 12%
Corporate loans dominate 30% 12%

with 39% but SME book will 20% 39%

28% 29% 31%
grow faster. 10%
26%
23%

0%
FY05 FY06 FY07 FY08 FY09 FY10

Large Industries M SM E

Exhibit-2: Loan break-up

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11

Corporate loans MSME Retail

Agriculture Others

Source: Bank, KRChoksey Research

About ` 18,000 crore loans
are sanctioned mostly to the
infrastructure sector.
Currently, the total sanctioned loans amount to ` ~18,000 crore mostly from infrastructure space
(power sector in particular). The total exposure to power sector has increased to ~21% in Q1FY11
from 14% in Q4FY10. About 50% of the loans to power sector are given to State Electricity
Boards, Power Financing companies and other PSUs engaged in T&D businesses and remaining
loans are given for Greenfield projects. These sanctioned loans are of mixed nature- short term
as well as long term with average duration of ~3 years. We expect drawdown to pick up in
H2FY11.

Exhibit-3: Exposure to top 10 industries as on June 30, 2010

The exposure to the power

sector has almost hit the
sectoral limit of 25%.

Power Construction Housing

Iron & Steel Textiles NBFC
Commercial Real Estate Rice Mill Engg (Heavy & Light)
Petroleum Products

Source: Bank, KRChoksey Research

5 KRChoksey – Institutional Research

ANDHRA BANK

Margins are sustainable at 3.2% with positive bias

~10% loans are linked with
Base Rate System.
Bank’s Net Interest Margin (NIM) in June 2010 quarter was one of the highest amongst the PSBs
at 3.72% only next to PNB’s 3.94%. Net interest margins have seen improvement by 87 bps from
June 2009 to June 2010 largely on account of re-pricing of deposits and stable asset yield. Going
forward, the bank is focusing on relatively higher yield segments like SME, housing loan,
education loan and gold loans which positively impact on blended asset yield. We expect strong
growth in SME book over FY10-13 and gold loan book to grow 2.5x over FY11-13. We believe
asset mix in favour of high yield assets, 2/3rd floating loan book will be able to sustain margins
in a rising interest rate environment. Our analysis shows that relatively weaker CASA base will
not be major hurdle in maintaining ~ 3% plus NIM going forward.

Exhibit-4: CASA & Margins trends

35% 3.3%
34%
33% 3.2%
Notwithstanding decline in
32%
CASA ratio, margins have
31%
been maintained at above 3.1%
3.0%. 30%
29%
28% 3.0%

27%
26% 2.9%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E

CASA NIM

Source: Bank, KRChoksey Research

Taking signal from the RBI, the bank raised base rate and BPLR by 25 bps and 75 bps respectively
to pass on increase in cost of funds since Q1FY11

Exhibit-5: Revised base rates

Bank has quickly revised its Base Rates Old New Change
BPLR as well base rate in Allahabad Bank 8.00% 8.50% 0.50%
order to pass on the rise in Uco Bank 8.00% 8.50% 0.50%
cost of funds and protect Corporation Bank 7.75% 7.75% 0.00%
margins. Andhra Bank 8.25% 8.50% 0.25%
Dena Bank 8.25% 8.25% 0.00%
Source: KRChoksey Research

With base rate coming into force from July 1, 2010, continued thrust on retail credit, the
management is confident of maintaining NIM of 3.2% in FY11. Since AAA rated corporate loans
amount to ` 1,290 crore constituting 2.28% of the total advances, there will not be much
pressure on the margins on account of large corporate clients resorting to commercial papers.
Moreover, since bank has swiftly raised its lending rates it will help arrest the margin pressure
arising as a result of re-pricing effect.

We believe that margin will remain stable with positive bias as re-pricing of assets offset
increase in cost of funds along with shift of asset mix in favour of SME and retail.

6 KRChoksey – Institutional Research

ANDHRA BANK

Exhibit-6: Banks’ margins in the industry in June 2010 quarter

4.00% 3.7% 3.7%

3.3%
3.1% 3.0% 3.1%
2.9% 2.8% 2.9%
3.00% 2.6%

During Q1FY11, Andhra Bank

had one of the best margins 2.00%

at 3.72% in the industry.

1.00%

0.00%

Allahabad

Andhra

Dena
Central

Uco
Canara

Indian Bk

OBC
Vijaya
Corporation

Bank
Source: Bank, KRChoksey Research

Exhibit-7: Risk adjusted spreads of the banks

5.00%

4.00%
Andhra Bank enjoys one of
the best risk adjusted 3.00%
spreads in the industry.
2.00%

1.00%

0.00%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Allahabad Andhra Corporation Uco Canara SBI

Source: Bank, KRChoksey Research

The following table shows the deposits and credit profiles of the bank as on March 31, 2010. It is
evident that ~87% of the advances were extended at more than the base rate of the bank (8.5%)
while 39% of the loans were given at more than the BPLR of 12%. Further, one third of the term
deposits were raised at 6% or below 6%. Close to 87% term deposits were raised at the interest
rate ranging in between 3-9% which helped the bank maintain excellent margin of 3.21% during
FY10.

Advances Term Deposits

Interest Rate Amount %age Interest Rate Amount %age

Sub 5.0%-6.0%
Sub 3.0%-4.0% 3,089 7.7%
685 1.2%
4.0%-5.0% 1,799 4.5%
6.0%-8.0%
5,835 10.4% 5.0%-6.0% 7,631 19.0%
8.0% -9.0% 6.0%-7.0% 13,006 32.3%
3,222 5.8%
7.0%-8.0% 7,421 18.4%
9.0%-10.0%
8,422 15.1% 8.0%-9.0% 1,876 4.7%
10.0%-12.0%
15,971 28.5%
9.0%-10.0% 2,298 5.7%
10.0%-12.0% 3,077 7.6%
>12.0% (BPLR)
21,822 39.0% Above 12.0% 37 0.1%
Source: Bank, KRChoksey Research

7 KRChoksey – Institutional Research

ANDHRA BANK

Asset Liability Management

An analysis of the maturity patterns of the bank’s rate sensitive assets and liabilities elicit that
the re-pricing gap or dollar gap (RSA minus RSL) has been continuously widening. Generally
speaking, in case of a positive dollar gap (RSA > RSL), increasing interest rates are beneficial for
the banks. Andhra Bank had a negative dollar gap of ` 5,252 crore in FY06 which has
continuously expanded to 27,058 crore in FY10. Similarly, the Interest Rate Sensitivity Ratio
(RSA/RSL) declined to 46.8% in FY10 from 69.5% in FY06. However, bank is well within the
maturity gap limits prescribed by RBI. In a rising interest environment, NIM often falls in case of
negative dollar gap subject to liquidity in the system.

However, we carried out this analysis for several banks and found out a wide mismatch in the
maturity profile of assets and liabilities. We believe this can be attributed to the fact that the
smart depositors are wary of unattractive and negative real interest rates on bank deposits
thanks to volatile inflationary expectations. Thus, we deduce that bank’s margin also depends a
lot on the ability of the bank to pass on the rise in the cost of funds which Andhra Bank has
demonstrated.

Exhibit-8: Re- pricing gap

-5,000
-5,252
-6,986
-10,000
-11,366
-15,000
-14,664
-20,000

-25,000

-27,058
-30,000
FY06 FY07 FY08 FY09 FY10

Re-pricing Gap ( Rs crore))

Exhibit-9: Liquidity position

3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
-7.00%
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11

Liquidity Position*

Note: Ratio of cum. Gap as % to cum. Outflow up to 1 year period; liquidity position as on last
reporting Friday of the Quarter end.

Low cost liability franchise

The CASA ratio of the Andhra Bank declined from 34.5% in FY07 to 29.4% in FY10. Though the
bank has been laying emphasis on increasing its CASA deposit base in order to keep the cost of
deposits lower and planning to open branches in top 100 banking centers to improve its low cost
liability franchise, we have modeled current ~30% CASA ratio going forward. Notwithstanding the
bank has lower CASA ratio than PSU bellwethers we believe the ability to pass on the rise in the
cost of funds will help the bank to protect its margin well above 3.2%.
8 KRChoksey – Institutional Research
ANDHRA BANK

Exhibit-10: CASA Comparison with peers (Q1FY11)

40.0%
34.2% 33.3% 34.2%
35.0%
29.6%
30.0%
24.1% 25.0%
25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
Andhra Allahabad Corporation Indian Central Uco
Bank

Source: Bank, KRChoksey Research

Exhibit-11: CASA growth trend

100% 40.0%
90% 35.0%
80%
30.0%
70%
60% 25.0%

50% 20.0%
40% 15.0%
30%
10.0%
20%
10% 5.0%

0% 0.0%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E

CA SA CASA Ratio CASA Growth

Source: RBI, Bank, KRChoksey Research

Re-pricing of Deposits maturing in One year % of total deposits

Andhra 62.8%
The re-pricing of advances BoB 60.9%
will mitigate the impact of BoI 58.1%
Indian 58.0%
the re-pricing of deposits on
Axis 55.2%
margins.
Corporation 54.5%
Allahabad 51.1%
ICICI 48.0%
Central Bank 39.4%
Union Bank 39.3%
PNB 36.6%
SBI 35.8%
Source: Bank, KRChoksey Research

Re-pricing of advances would lead to improvement in the margins as almost 2/3rd loans are
based on floating rates.

9 KRChoksey – Institutional Research

ANDHRA BANK

Superior Asset quality- Higher coverage to cushion earnings

Andhra Bank has maintained its superlative asset quality and remained unscathed even during
the financial crisis. Bank has one of the lowest Gross NPA in the industry which has continuously
been declining from 2.52% in FY05 to 0.87% in FY10.

The delinquencies were contained at 71bps during FY10 however we believe Gross NPA is likely
to rise to 1.5% by FY12E. We have factored in 1.0% slippages over FY11-13E as a result the credit
cost would also go up to 76bps by FY13E from currently 54 bps. Further, Bank has been
maintaining high provisioning coverage ratio of 90% plus which provides cushion to its earnings in
troubled times. Its PCR pegged at 85.9% during Q1FY11.

Exhibit-12: Gross NPA and Net NPA (Q1FY11)

3.0%

2.4%

2.4%
2.5%

2.0%

1.5%

1.5%
1.5%

1.1%
1.1%
1.0%

Bank had one of the lowest

0.8%
0.8%
1.0%
Gross NPA in the industry

0.4%
0.4%
0.3%

during June 2010 quarter. 0.5%

0.0%
Andhra Allahabad Corporation Indian Central Bank Uco

GNPA (%) NNPA (%)

Exhibit-13: Impaired assets to advances (FY10)

8.0% 7.6%

Impaired assets (NNPA plus 5.8%

6.0%
restructured book post tax)
to advances pegged at 3.7% 4.0%
3.7% 3.6% 3.7%
3.1%
while impaired assets to net 2.8%
worth stood at 46.5% in 2.0%
FY10.
0.0%
Indian

IOB
Corporation
Allahabad

Uco
Central
Andhra

Bank

Exhibit-14: Comfortable Provisioning coverage ratio

100.0%
85.9% 85.4% 83.1%
76.7%
80.0%
68.8%
Bank also has superlative
coverage ratio at 85.9% in 60.0%
58.0%
Q1FY11.
40.0%

20.0%

0.0%
Andhra Allahabad Corporation Indian Central Uco
Bank

Source: Bank, KRChoksey Research

10 KRChoksey – Institutional Research

ANDHRA BANK

Exhibit-15: Slippage in FY10

5.0%

4.0%
4.0%

3.0%
Fresh slippages during FY10
1.7%
pegged at 0.7% which is 2.0%
1.3%
lowest in the PSU space. 0.7% 0.8%
0.9% 1.0%
1.0%

0.0%

Indian

IOB
Corporation
Allahabad

Uco
Central
Andhra

Bank
Source: Bank, KRChoksey Research

Restructured assets of the bank stood at ` 3,036 crore which is equivalent to 5.31% of the
advances in Q1FY11 which was lower than some leading PSU banks such as PNB (6.6%) and BOI
(6.0%). However only 5.0% of the restructured assets have turned into NPA against 22.1% in case
of BOI, 11.5% for SBI, 9.0% for BOB and 8.0% for PNB. We factor in further 5.0% slippages from
Exposure to the aviation restructured assets book and still we believe bank will be able to generate a 22.7% CAGR in core
sector amounts to `~ 640 profits over FY11-13E.
crore. Bank has taken several steps to monitor restructured accounts such as creating special cells at
all the controlling offices. Zonal managers personally monitor all the restructured accounts
while high value accounts of ` 50lacs and above are monitored from the Head Office. Moreover,
progress on this account is reviewed in fortnightly video conference with all zonal offices.
Exhibit-16: Restructured Book (Q1FY11)
10.0%

7.7%
8.0%
6.6%
6.0%
6.0% 5.3%
4.8%
4.3% 4.3%
4.0%
2.5%
2.0%

Only 5.0% of the 0.0%

restructured assets have
Indian

SBI

BOI
Corporation
Allahabad

Central

PNB
Andhra

Bank

turned into NPA and we

factor in further 5.0%
slippages from restructured
assets book.
Exhibit-17: NPA from Restructured Book (Q1FY11)
24.0% 22.1%

20.0%

16.0%
11.5%
12.0%
7.8% 8.0%
8.0% 6.2%
5.0% 5.2%
4.0% 2.9%

0.0%
Indian

SBI

BOI
Allahabad

Corporation

Central

PNB
Andhra

Bank

Source: Bank, KRChoksey Research

11 KRChoksey – Institutional Research

ANDHRA BANK

Exhibit-18: Asset quality profile

Gross NPA is likely to Asset Quality Profile FY 09 FY 10 FY 11E FY 12E FY 13E

increase to 1.5% going Gross NPA 368 488 841 1,283 1,831
forward, as a result credit Net NPA 79 96 231 321 525
cost will also go up to 75bps Gross NPA as % of Advances 0.83% 0.87% 1.22% 1.50% 1.73%
from 54bps currently. Net NPA as % of Advances 0.18% 0.17% 0.33% 0.37% 0.49%
Credit Costs 0.39% 0.54% 0.61% 0.75% 0.76%
Source: Bank, KRChoksey Research

12 KRChoksey – Institutional Research

ANDHRA BANK

Operating leverage to boost core profitability

The Cost to Income Ratio of the bank is comfortable at 46% (Q1FY11). Going forward we expect
C/I Ratio to improve as operating leverage kicks in. C/I Ratio is higher in comparison to peers
such as Corporation Bank (35.6%) and Allahabad Bank (38.7%) but bank has provided for the
liabilities on account of gratuity/second option unlike Corporation Bank. Moreover bank has
successfully implemented CBS and computerization across its entire branch network which
Cost to income is expected
ensures better productivity and results in rationalization of its operating costs. Going forward,
to moderate to 39-40% going
we expect it to eventually settle at around 39-40% which is a healthy ratio in the industry.
forward as operating
leverage will kick in. Bank has already provided for ` 17.5 crore on account of Second Pension Options, under which
~6,000 employees fall, during Q1FY11 assuming total liability of ` 350 crore. However we believe
bank will get to amortize such liability over 20 quarters mitigating any immediate pressure on
the bottom lines. During Q1FY11, the bank also provided for the gratuity amounting to ` 30 crore
unlike some leading banks such as BoB, BoI and Corporation Bank.

Bank has recruited 2,607 employees in the last three years ended on March 2010 against 400
employees who retired during the same period. 179 employees have retired till August 2010.
About 23% officers (who form 58.9% of the total employee strength of 14,256) are going to retire
in next five years.

Exhibit-19: Employee cost break up

Employee Costs Break-up FY08 FY09 FY10

Total Employee Costs 509 624 824
Bank has provided for Gratuity 4 -9 23
liabilities such as gratuity Pension 40 42 119
and second option pension Leave Encashment 26 14 21
liabilities. Others 0 0 1
Total Retirement benefits cost 70 47 164
Retirement Benefits/Employee Costs 13.7% 7.5% 19.9%
Source: Bank, KRChoksey Research

Branch expansion and technology leverage to improve operating efficacy

The bank has outlined in their business growth strategy that SME and retail will be the next loan
growth drivers going forward. Andhra bank has formed specific branches and credit and
monitoring cells for quicker credit sanction and improves customer service. Moreover, the bank
Bank implemented 100% CBS heavily invested in technology to provide market competitive transaction platforms and build
in FY09 which resulted in technology sawy brand image. After conscious efforts to enhance its brand image and visibility
during the previous year, the bank is aiming to increase its delivery channels- it plans to open
344bps decline in Cost to
100 branches in largely potential centers in Northern and Eastern India- 50% will be opened in
Income Ratio in FY10.
tier 3-6 cities and rest will be opened in top 100 banking centers. It opened 125 branches in
Northern and Eastern India in FY10. Bank has already implemented CBS in all its branches and is
set to reap the benefits by leveraging on technology enhancing its products offerings such as
internet and mobile banking. Such measures will augment its CASA base and arrest the margin
pressure.
Exhibit-20: Yearly branch expansion
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E
Branches 1,128 1,168 1,213 1,289 1,366 1,432 1,557 1,677
Additions 28 40 45 76 77 66 125 100
Source: Bank, KRChoksey Research

13 KRChoksey – Institutional Research

ANDHRA BANK

Exhibit-21: Branch profitability & productivity in ` lakh (FY10)

Profit per branch
120.0
101.5
100.0 88.6

80.0
67.1 67.1
Branch productivity and
60.0 52.8
profitability is likely to
improve going forward. 40.0 29.6 30.9

20.0

0.0

Indian

IOB
Allahabad

Corporation

Uco
Central
Andhra

Bank
Business per branch

16,000
13,501 13,589
14,000
12,000
10,000 8,594 8,563 8,303
7,768 7,478
8,000
6,000
4,000
2,000
0 Indian

IOB
Allahabad

Uco
Corporation

Central
Andhra

Bank
Source: Bank, KRChoksey Research

14 KRChoksey – Institutional Research

ANDHRA BANK

Benign non- interest income growth expected in FY11E

Bank generates fee income from corporate banking, SME banking, transaction banking and
distribution of financial products. Over the years, fee income growth has been laggard the asset
growth due to relatively lower service charges on fee generating products and lack of focus on
fee income by the management. However, under the leadership of R S Reddy, bank saw
transformational change in terms of introduction of fee income generating products, revision of
service changes and strategic focus. Andhra Bank has undergone service charges revision for
their non fund based products during FY10 resulting into one time increase in fee income.

Exhibit-22: Fee income growth trend

120%
102%
100%
Spike in fee income in FY08
could partly be attributed to 80%

79.5% growth in fee income 60%

through bancassurance.
40%
28%
17% 14%
20% 8% 8% 11%

0%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Fee Income

Source: Bank, KRChoksey Research

Bank has a joint venture in life insurance with BoB and Legal & General Plc of UK which
commenced its business from January 2010. We expect bancassurance business will boost the
fee based income of the bank however any meaningful impact would reflect only after FY12
when bancassurance business will pick up. However, we have modeled in 14.2% CAGR in fee
based income over FY10-13.

We have factored in lower
MTM loss provisioning- 1.2%
on profit before taxes over
FY11-13
Treasury gains have been a key contributor to ROE of the bank, however, we believe going
forward core earnings will drive the ROE expansion and thus we have modeled lower treasury
gains- 80bps of the SLR investment book as trading profits in FY11 and 70bps and 60bps in FY12
and FY13 respectively against an average of 140bps in FY08-10. From the following table we can
observe that the contribution of treasury income to the profit before taxes has declined
significantly.

Exhibit-23: Contribution of treasury gains to PBT

Treasury gain/PBT FY05 FY06 FY07 FY08 FY09 FY10
Andhra Bank 58% 30% 2% -1% 12% 4%
The contribution of the Allahabad Bank 42% -7% -8% 46% 31% 43%
treasury income to the profit Corporation Bank -15% 13% 8% 13% 21% 15%
before taxes has declined Central Bank 39% -134% -15% 9% 35% 46%
significantly. Indian Bank 17% -10% -6% 5% -4% 9%
Uco Bank 43% -75% -30% 25% 55% 16%
IOB 36% 9% 17% 5% 33% 30%
Source: Bank, KRChoksey Research

15 KRChoksey – Institutional Research

ANDHRA BANK

Well capitalized for growth

Many PSBs are likely to raise equity capital to shore up their tier I capital which we believe
would be book accretive as they will raise funds at substantially higher price than the book
value. The 13.9% capital adequacy ratio (CAR) provides enough headroom for the future business
growth.
Andhra Bank’s tier I capital is a tad below 8% and may raise ` 650 crore equity capital through
rights issues this fiscal. However, we have not factored in any equity capital infusion in our
estimation. We believe ploughing back of profits will help asset book of the bank to grow by 57%
over FY11-13E. Besides, it has enough headroom available to raise tier I and tier II capital and
thus capital is not a constraint for the bank to grow its asset base that too without any equity
dilution.

Andhra Bank to maintain 23%+ growth in assets without further equity capital infusion
Expected retained earnings - FY11-13 2,592
Assumed leverage (x) 20
Internal accruals may help Potential incremental Asset base 51,831
the asset book to grow by FY10 Asset size 90,431
57% over FY11-13E. Internal Accruals driven growth potential 57%
Source: Bank, KRChoksey Research

Headroom available to raise capital without effecting any equity dilution.

Exhibit-24: Headroom available

Headroom Available as on June 30, 2010 Existing Headroom Available
Tier I Capital Instruments 200 2,750
Innovative Perpetual Debt Instruments (IPDI) 200 463
Perpetual Non Cumulative Preference Shares (PNCPS) 0 2,287
Tier II Capital Instruments 2,740 1,321
Upper Tier II 1,000 849
Subordinate Debt 1,740 472
Total 2,940 4,071
Source: Bank

16 KRChoksey – Institutional Research

ANDHRA BANK

Sustainable ROE, Core operations to drive RoE expansion

A strong growth in net interest income on account of volume growth and better loan yields,
further aided by robust growth in fee based income and treasury gains helped the bank in
maintaining 1.15% ROA and 21.0% ROE (Core 18.0%) during FY08-10. FY2010 was exceptionally
good for the bank as ROE improved significantly. Even excluding FY10, bank maintained 18.9%
ROE and 18.0% core RoE over FY07-09. Andhra Bank’s RoAE and ROAA in FY10 stood at 26.0% and
1.3% which are one of the best in the industry. Even core returns were quite robust at 20.1% and
1.0% respectively. We expect bank will be able to maintain 24-25% RoE over FY11-13E. We
expect 22.7% CAGR in core earnings over FY10-13E despite factoring in lower treasury gains and
higher provisioning costs.

Exhibit-25: RoAE decomposition

ROAA Decomposition FY 09 FY 10 FY 11E FY 12E FY 13E

NII/Total Avg Assets 2.60% 2.76% 2.75% 2.87% 2.90%

Fee Income/Total Avg Assets 0.75% 0.75% 0.70% 0.65% 0.61%

Treasury & other Income/Total avg assets 0.50% 0.52% 0.28% 0.27% 0.22%

Employee Cost/Total avg Assets 1.00% 1.04% 0.94% 0.92% 0.92%

We believe bank will
Operating Costs/Total avg Assets 0.77% 0.66% 0.65% 0.64% 0.59%
maintain 24-25% RoE over
FY11-13E. Provisions/Total avg Assets 0.65% 0.52% 0.51% 0.63% 0.66%

Tax/Total avg Assets 0.39% 0.49% 0.45% 0.45% 0.43%

ROAA 1.04% 1.32% 1.18% 1.17% 1.13%

RoAE 18.9% 26.0% 24.6% 25.2% 25.3%

Source: KRChoksey Research

Lower MTM Risk

Andhra Bank is well placed than its peers for mark to market risk on AFS portfolio as it has small
AFS investment portfolio (12.6%) and lowest duration (0.9 year). Bank has pruned its AFS
portfolio quite significantly from 27.8% in Q4FY09 to 12.6% in Q1FY11. Even the duration has
decreased to 0.9 years from 2.63 years in Q4FY08. In a rising interest rate environment, small
AFS book and lower duration will help mitigate interest rate risk to earnings. We have factored
in lower MTM loss provisioning- 1.2% on profit before taxes over FY11-13 against 8.5% during
FY08-10.

Exhibit-26: Lowest AFS portfolio and duration in the industry

AFS (%) AFS (%) Q1FY11 AFS Duration Q1FY11

IOB 34.90% 2.6

Axis 32.70% 2.8

Allahabad 28.80% 1.9

Corporation 28.60% 1.0

Union Bank 24.60% 1.8

BoI 22.10% 1.8

SBI 21.40% 3.5

BoB 19.90% 2.2

OBC 19.90% 3.3

Canara 19.10% 1.9

PNB 18.20% 2.4

Andhra 12.60% 0.9

Source: KRChoksey Research

17 KRChoksey – Institutional Research

ANDHRA BANK

MTM Impact on FY11E PBT ` crore

AFS- Investments 2,763

AFS (%) 12.6%

Duration (Years) 0.87

Change in Yields 0.50

MTM impact 12.0

PBT FY11E 1,620

Impact (%) 0.7%

Bond Yields
10%

9%

8%

7%

6%

5%

4%

3%
Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10
10 yr Bond

Source: KRChoksey Research

18 KRChoksey – Institutional Research

ANDHRA BANK

PEER COMPARISION
Andhra Allahabad Corporation Indian Central Bank Uco IOB
CAGR FY05-10
26.2% 27.6% 27.8% 27.6% 31.0% 24.4% 25.7%
Loan Growth
FY10
FY10 Loan
27.1% 21.8% 30.3% 20.8% 23.3% 19.9% 5.5%
growth
Profit per
67.1 52.8 101.5 88.6 29.6 67.1 30.9
branch (` lakh)
Business per
branch (` 8,594 7,768 13,501 8,563 7,478 13,589 8,303
Lakh)
Slippages 0.7% 1.7% 0.8% 0.9% 1.0% 1.3% 4.0%
Impaired
assets/ on 45.5% 44.3% 33.9% 51.5% 68.5% 49.0% 94.9%
networth
Impaired
assets/ 3.6% 3.6% 3.1% 5.8% 3.7% 2.8% 7.6%
advances
Opex/AA 1.7% 1.5% 1.1% 1.9% 1.4% 1.3% 2.0%
Employee/AA 1.0% 0.9% 0.6% 1.3% 0.9% 0.8% 1.4%
Retirement
benefits/Emplo 19.9% 14.4% 18.8% 29.3% 13.1% 33.9% 27.9%
yee costs
5 year average
1.2% 1.2% 1.2% 1.5% 0.5% 0.5% 1.2%
RoA
5 year average
20.7% 23.1% 17.7% 24.2% 15.0% 17.2% 24.4%
RoE
5 year average
18.8% 17.1% 14.0% 24.3% 14.4% 16.3% 18.6%
Core ROE

Andhra Corporation Allahabad IOB Indian UCO

EPS
FY11E 24.2 93.5 32.6 15.9 38.7 22.4
FY12E 28.9 113.9 41.3 22.1 48.0 29.0
BVPS
FY11E 106 468 150 121 184 77
FY12E 124 556 184 139 221 101
ROA
FY11E 1.2% 1.1% 1.1% 0.6% 1.5% 0.9%
FY12E 1.2% 1.1% 1.1% 0.8% 1.5% 0.9%
ROE
FY11E 24.6% 21.2% 20.7% 12.5% 21.2% 23.5%
FY12E 25.2% 21.5% 21.4% 15.6% 21.7% 23.4%
PE (x)
FY11E 6.8 7.7 7.3 9.4 7.8 5.4
FY12E 5.7 6.3 5.7 6.8 6.3 4.2
P/B (x)
FY11E 1.5 1.5 1.6 1.2 1.6 1.6
FY12E 1.3 1.3 1.3 1.1 1.4 1.2
Source: Bloomberg, KRChoksey Research
Note: We have taken Bloomberg estimates for stocks not under our coverage.

19 KRChoksey – Institutional Research

ANDHRA BANK

INVESTMENT RISK & CONCERNS

1. Higher than expected slippages from restructured assets: Though we have factored in
5.0% further slippages from the restructured books and 1% fresh slippages over FY11-
13E, any further delinquencies would have an adverse impact on the profitability of the
bank.

2. Concentration risk: Though the bank is expanding its reach and opening new branches in
Northern and Eastern parts of India, over 65% branches are located in Andhra Pradesh,
thus there is a concentration risk.

3. Shorter tenure of the new CMD: A short tenure of the new CMD, who will retire in the
next one and half years, affects long term business strategies and plans.

FINANCIAL ANALYSIS & VALUATION

Financial analysis

Advances
Advances grew by 26.2% CAGR over FY06-10 driven by strong growth in SME book that grew by
61.5% CAGR followed by loans to large industries segment that registered 35.6% CAGR.
Agriculture loans too posted 24.2% CAGR during the period. Housing loans grew two fold over
FY07-10 while education loan book clocked 22% CAGR during the same period. Bank has been
able to improve its market share.

Exhibit-27: Advance growth trend

60,000 40.0%

35.0%
50,000
30.0%
40,000
25.0%
30,000 20.0%

15.0%
20,000
10.0%
10,000
5.0%

0 0.0%
FY05 FY06 FY07 FY08 FY09 FY10

Advances Advances growth

Source: Bank, KRChoksey Research

20 KRChoksey – Institutional Research

ANDHRA BANK

Deposits
Deposits grew by 23% CAGR over FY06-10. Bank’s CASA base has not been improved as bank
continue to be dependent on high cost term deposits that clocked 26.2% CAGR against 21.6%
CAGR in current account deposits and 14.9% CAGR in savings deposits. The average CASA growth
pegged at 18.2% over FY06-10 while CASA ratio has continuously been declining from 36.3% in
FY06 to 29.4% in FY10. In the last three years the proportion of CA deposits in CASA deposits has
improved 290 bps whilst that of savings deposits has declined.

Exhibit-28: Deposit growth trend

90,000 35.0%
80,000 30.0%
70,000
25.0%
60,000
50,000 20.0%

40,000 15.0%
30,000
10.0%
20,000
10,000 5.0%

0 0.0%
FY05 FY06 FY07 FY08 FY09 FY10

Deposits Deposit growth

Credit to Deposit ratio

The credit to deposit ratio stood at 72.2% during FY10 against 74.3% in FY09. The ratio has
continuously improved since 2002 onwards when it stood at 52.3%. On an average this ratio was
~60% over FY02-07 which improved to 71.9% during FY08-10.

Exhibit-29: Credit to deposit ratio trend

76.0%

72.0%

68.0%

64.0%

60.0%

56.0%
FY05 FY06 FY07 FY08 FY09 FY10

Credit to Deposit Ratio

Net Interest Income

The net interest income of the bank clocked 17% CAGR over FY06-10 primarily because of lower
growth in interest on investments that posted just 10.7% CAGR over the same period. Interest
income from advances grew by 30.8% CAGR against 28.6% CAGR in interest on deposits during the
said period.

Exhibit-30: Net Interest Income Growth trend

2,500 40.0%
35.0%
2,000 30.0%
25.0%
1,500 20.0%
15.0%
1,000 10.0%
5.0%
500 0.0%
-5.0%
0 -10.0%
FY05 FY06 FY07 FY08 FY09 FY10

NII NII growth

21 KRChoksey – Institutional Research

ANDHRA BANK

Net Interest Margins

The margins (calculated) of the bank were maintained at an average of 3.64% during FY02-07
which declined to 2.93% during FY08-10 primarily because of decline in the interest income on
investments. The interest income on investments that contributed to the total interest income
earned about 37.6% during FY02-07 it declined to 20.7% during FY08-10.

Exhibit-31: Net Interest Margin trend

3.80%
3.58%
3.60%

3.40% 3.32%
3.20% 3.21%
3.20%
3.00% 3.03%
3.00%

2.80%

2.60%
FY05 FY06 FY07 FY08 FY09 FY10

NIM

Cost to Income Ratio

The cost to income ratio stood at 42.2% while the cost to core income ratio was 46.9% during
FY10. The average cost to income ratio during FY02-06 was 58.1% which declined to an average
of 48.7% during FY07-10. We expect further improvement going forward as the operating
leverage kicks in.

Exhibit-32: Cost to income ratio trend

54.0%

46.0%

38.0%

30.0%
FY05 FY06 FY07 FY08 FY09 FY10

Cost to Income Ratio

22 KRChoksey – Institutional Research

ANDHRA BANK

Asset quality
Andhra Bank has maintained its superlative asset quality and remained unscathed even during
the financial crisis. Bank has one of the lowest Gross NPA in the industry which has continuously
been declining from 2.52% in FY05 to 0.87% in FY10. The delinquencies were contained at 0.71%
during FY10 Further, Bank has been maintaining high provisioning coverage ratio of 90% plus
which provides cushion to its earnings in troubled times. Its PCR pegged at 85.9% during Q1FY11.
As a result of good asset quality, the credit cost too remained lower- declining to 0.54% from
1.88% in FY04.

Exhibit-33: Asset quality profile

3.00% 0.60%

2.50% 0.50%

2.00% 0.40%

1.50% 0.30%

1.00% 0.20%

0.50% 0.10%

0.00% 0.00%
FY05 FY06 FY07 FY08 FY09 FY10

GNPA NNPA Credit Cost

Source: Bank, KRChoksey Research

Sensitivity analysis
A 2% change in advances growth from our base case of 23% advance growth in FY11, can impact
the EPS by 3.2% while on book value impact will be of 40bps. ROE may decline or improve by
72bps. On the other hand, a 10bps change in the margin or 20bps change in credit cost too can
have a material impact on earnings and return ratios.

Exhibit-34: Impact analysis on EPS, book value and ROE

Bear case Bull case
FY11E Loan Growth 21% 25%
EPS -3.2% 3.2%
BVPS -0.4% 0.4%
ROE -73 bps 72 bps
Bear case Bull case
NIM 2.9% 3.1%
EPS -5.6% 4.9%
BVPS -0.8% 0.7%
ROE -129 bps 111 bps
Bear case Bull case
FY11E LLP / Loans 81 bps 41 bps
EPS -8.6% 8.6%
BVPS -1.2% 1.2%
ROE -196 bps 194 bps
Source: KRChoksey Research

23 KRChoksey – Institutional Research

ANDHRA BANK

Exhibit-35: Quarterly trends

Particulars Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11E

Interest Earned 1,558 1,603 1,708 1,865 1,975

Interest expended 1,043 1,020 1,052 1,129 1,225

Net Interest Income 515 583 656 736 749

Other Income 233 224 269 208 200

Trading Profits 95 48 53 48 35

Total Income 748 807 925 944 949

Total Operating Expenses 295 325 398 434 407

Pre-provisioning Profits 453 482 527 510 542

Provisions & Contingencies 58 96 223 52 104

Loan Loss Provisions 57 66 194 52 103

PBT 395 385 304 458 438

Provision for taxes 121 110 64 138 132

Net Profit 274 275 240 320 306

Source: Bank, KRChoksey Research

24 KRChoksey – Institutional Research

ANDHRA BANK

Valuation & recommendation

We value bank on relative price to book method and residual income model as it captures
earnings growth and return profile of the bank. Historically stock has traded at ~25% discount to
SBI. Applying the same discount we have assigned 1.7x P/BV multiple to FY12ABV of `117 giving
a value of ` 200 per share. Further, using the Residual Income Valuation method we have arrived
at a valuation of ` 230 per share. Our target price is derived by ascribing 70% weight-age to
relative valuation method and 30% to the residual income valuation method.

Exhibit-36: Valuation matrix shift in different market stages

Underlying fundamental focus and valuation methods
In bear market, investor focuses on margin of safety, value buying and
stable earning profile
Uncertain growth outlook
Bear market Firms have limited capital raising opportunities at reasonable prices to
fund their growth plans
Valuation metric: Price to book
In a rapidly rising economic cycle, investor's focus shift to growth stocks,
market out-performers, value unlocking etc.
Bull market Bull market provides ample avenues to the firms to raise capital through
capital markets and improve their leverage capacity
Valuation matrix: Price to earnings, Discounted Cash Flow Method
Source: KRChoksey Research

Andhra Bank is expected to report 24-25% ROAE over FY11-13E on the back of ~23.7% CAGR in
loan book driven by SME and retail assets while maintaining stable margins with positive bias.

The stock has outperformed the market benchmark 3x on the back of strong profit growth and
healthy asset quality in the last one year. We continue to believe the bank to report superior
returns with core earnings CAGR 22.8% driven by 23.7% CAGR loan and stable margins in the PSU
space. RoA and RoE are expected to remain healthy at ~ 1.1% and ~25% over FY10-FY13. At, `
170 the stock trades at 1.5x FY2012 book and 5.9x FY2012 earnings which provides sufficient
margin of safety with target price of `208, implying upside 22%.

Key Assumptions to Residual Income Valuations

Rf 7.9%
Beta 1.0
ERP 7.2
Cost of Equity 14.7%
Payout Ratio 33.0%
Terminal growth 4.0%
Source: KRChoksey Research

Recommendation
Strong growth outlook, sustainable earnings, 20% plus core profit growth and superior asset
quality lead us to initiate on the bank with BUY rating with a target price of ` 208.

25 KRChoksey – Institutional Research

ANDHRA BANK

Exhibit-37: Price discount to SBI

80%
Discount To SBI
60%

40%

20%

0%

-20% Avg Dis

-40%

-60%

-80%
Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10
Exhibit-38: Price bands- PB & PE bands

300

2.4 x
250

1.9 x
200

150 1.4 x

100 0.9 x

50 0.4 x

0
Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

350

300 11.0 x

250 9.0 x
200
7.0 x
150
5.0 x
100

50

0
Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Source: KRChoksey Research

26 KRChoksey – Institutional Research

ANDHRA BANK

COMPANY OVERVIEW

Andhra Bank, established in the year 1923, is a Hyderabad headquartered state owned bank with
an asset size of ` ~90,500 crore and network of 1,560 branches, 886 ATMs and 14,256 employees.
Over 65% of the branches are located in Andhra Pradesh only. The government ownership is at
the 51.6%. Bank is predominantly based in south Indian states and expanding its reach to
northern terrains in order to become a pan India player. Andhra Bank’s total business touched `
131,844 crore as on June 30, 2010, with deposits at ` 74,700 crore and advances of ` 57,144
crore. Its credit-deposit ratio stood at 76.5% in Q1FY2011. Bank has a joint venture in life
insurance with BoB and Legal & General Plc of UK which commenced its business from January
2010. The Bank holds 30% stake in this joint venture while BoB holds 44%. It is also planning to
form a banking joint venture with BoB and IOB in Malaysia for which it has got the necessary
approval from the RBI.

Shareholding Pattern Management profile

Andhra bank has a strong and experienced team of professionals having an average experience of
15%
35 years. Recently, Mr. R. Ramachnadran, who has long stints with Indian Bank and Syndicate
14% Bank, was appointed as new CMD of the bank by the government of India on September 1, 2010
52%
replacing Mr. RS Reddy. Mr. Ramachandran has wide overseas experience and also exposure to
19% areas of corporate credit, forex treasury and international banking. He took charge of all the
departments by rotation which will give him an edge in his new role. However he will have a
GoI DII tenure of about one and half years. A strong management team reinforces confidence in the
FIIs Others Bank’s ability to deliver high growth while keeping a tab on asset quality.

Exhibit-39: Core Management Team

CMD R.Ramachandran
Large Corporate R.J.Vaidyanathan, Chief GM
Inspection & Audit S.Suryanarayana, GM
Retail Assets D.Jogiraju, GM
Insurance & Broking Rakesh Sethi, GM
Risk Management Rakesh Sethi, GM
Treasury B.Raj Kumar, GM
HR S.R.K.Prasad, GM
Alternate Channels R.Athmaram, GM
Operations K.S.Rama Krishnan, GM
Mid-Corporate & MSME Y.Pramila Rani, GM
Microfinance & Agriculture B.Narendranath Reddy, GM
Source: Bank

Branches mix

16%
17%
27% 5%
In FY09, out of total 6,698
branches in Andhra Pradesh, 7%
~23% branches belonged to
Andhra Bank.
28%
72%
28%

Andhra Pradesh Orissa

Rural Semi- urban Urban Metro Tamilnadu Others

Source: Bank, KRChoksey Research

27 KRChoksey – Institutional Research

ANDHRA BANK

FINANCIALS
Exhibit-40: Income Statement Summary
Particulars FY09 FY10 FY11E FY12E FY13E

Interest Earned 5,375 6,373 8,449 10,588 13,085

Interest expended 3,748 4,178 5,719 7,152 8,873

Net Interest Income 1,627 2,195 2,730 3,436 4,212

Other Income 782 1,006 978 1,107 1,211
Fee Income 467 596 699 779 888
Trading Profits 238 325 200 225 225
Misc. Income 78 86 79 103 98
Total Income 2,409 3,200 3,708 4,543 5,423
Total Operating Expenses 1,104 1,350 1,584 1,860 2,197
Pre-provisioning Profits 1,305 1,851 2,125 2,683 3,226
Provisions & Contingencies 407 415 504 747 960
Loan Loss Provisions 170 305 421 642 806
PBT 898 1,435 1,620 1,936 2,267
Net Profit 653 1,046 1,175 1,403 1,643
EPS 13 22 24 29 34
BVPS 75 91 106 124 144
Adjusted BVPS 74 89 101 117 134
Source: Bank, KRChoksey Research

Exhibit-41: Balance Sheet Summary

Particulars FY09 FY10 FY11E FY12E FY13E

Networth 3,647 4,410 5,131 5,993 7,002

Deposits 59,390 77,688 94,003 114,683 141,061
Borrowings 3,351 5,852 5,852 6,352 6,852
Other Liabilities & provisions 2,141 2,480 3,230 3,777 4,617

Cash & Bank Balances 5,288 11,168 10,134 10,214 10,952

Advances 44,139 56,114 69,020 85,584 106,125
Investments 16,911 20,881 26,421 31,997 39,109
Fixed Assets & Other Assets 2,191 2,269 2,642 3,010 3,345
Total Assets 68,529 90,431 108,217 130,806 159,531
Source: Bank, KRChoksey Research

Exhibit-42: Key Ratios

Particulars FY09 FY10 FY11E FY12E FY13E

LDR 74% 72% 73% 75% 75%

CASA Ratio 31% 29% 30% 30% 30%
C/I Ratio 46% 42% 43% 41% 41%
ROAA 1.04% 1.32% 1.18% 1.17% 1.13%
ROAE 19% 26% 25% 25% 25%
CAR (calculated) 13.5% 13.5% 12.1% 11.8% 11.3%
Tier I 9.0% 8.1% 7.7% 7.5% 7.2%
Tier II 4.5% 5.4% 4.4% 4.4% 4.2%
Gross NPA 0.83% 0.87% 1.22% 1.50% 1.73%
Net NPA 0.18% 0.17% 0.33% 0.37% 0.49%
Credit Cost 0.39% 0.54% 0.61% 0.75% 0.76%
Source: Bank, KRChoksey Research

28 KRChoksey – Institutional Research

ANDHRA BANK

Exhibit-43: Growth Ratios

Particulars FY09 FY10 FY11E FY12E FY13E

Deposit 20% 31% 21% 22% 23%

Advances 29% 27% 23% 24% 24%
NII 21% 35% 24% 26% 23%
Fee income 8% 28% 17% 11% 14%
Opex 21% 22% 17% 17% 18%
Pre-provisioning profit 21% 42% 15% 26% 20%
Provisions 157% 2% 21% 48% 28%
PAT 13% 60% 12% 19% 17%
Book Value 12% 21% 16% 17% 17%
Source: Bank, KRChoksey Research

Exhibit-44: Spread Analysis

Spread Analysis FY 09 FY 10 FY 11E FY 12E FY 13E

Yield On Advances 10.8% 10.3% 11.0% 11.2% 11.2%

Yield On Investments 6.9% 6.3% 6.4% 6.4% 6.4%
Yield On Int Earning Assets 9.6% 8.9% 9.3% 9.7% 9.9%
Cost Of Deposits 6.4% 5.5% 6.1% 6.3% 6.5%
Cost of Funds 6.6% 5.7% 6.2% 6.5% 6.6%
Spread 2.9% 3.0% 3.0% 3.1% 3.1%
Cost on Int Earning Assets 6.7% 5.8% 6.3% 6.5% 6.7%
NIM 2.9% 3.1% 3.0% 3.1% 3.2%
Source: Bank, KRChoksey Research

29 KRChoksey – Institutional Research

ANDHRA BANK

Rajiv Choksey Co-Head Institutional Equities rajiv.choksey@krchoksey.com +91-22-6653 5135

Anuj Choksey Co-Head Institutional Equities anuj.choksey@krchoksey.com +91-22-6696 5500

Kunal Dalal Head Research kunal.dalal@krchoksey.com +91-22-6696 5574

Andhra Bank Rating Legend

180
170
Our Rating Upside
160
150 Strong Buy More than 25%
140
130
120 Buy 15% - 25%
110
100
90 Hold 10% - 15%
80
Jul-10
Oct-09

Dec-09

Jan-10

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10
Nov-09

Mar-10

May-10

Sep-10

Reduce Nil – 10%

Andhra
Sell Less than 0%

Disclaimer:
This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a
security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to
satisfy themselves before making any investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the
authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same.
Further, KRC Research Reports only provide information updates and analysis. All opinion for buying and selling are available to
investors when they are registered clients of KRC Investment Advisory Services. As per SEBI requirements it is stated that, Kisan Ratilal
Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or
sale thereof while this report is in circulation.

Please send your feedback to research.insti@krchoksey.com

Visit us at www.krchoksey.com

Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.

Registered Office:
1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai – 400 001.
Phone: 91-22-6633 5000; Fax: 91-22-6633 8060.

Branch Office:
ABHISHEK, 5th Floor, Link Road, Dalia Industrial Estate, Andheri (W), Mumbai – 400 058.
Phone: 91-22-6696 5555; Fax: 91-22-6691 9576.

30 KRChoksey – Institutional Research