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October 1, 2010

Institutional Equities

Andhra Bank (Rs160)
Target Price: Rs266

India Research

Stock Data
Bloomberg Code Market Cap. (Rs bn / US$ bn) 52-week High/Low (Rs) Shares Outstanding (mn) Avg. daily volume ('000) Avg. daily value (Rs mn) Promoter holding (%) Free float (%) FII holding (%) ANDB.IN 77.6/1.7 170/95 485 1,459 170 51.6 48.4 14.1

Quality franchise at attractive valuation
Andhra bank posted quality volume growth in total business of 26.5% (CAGR in FY08-10) with improvement in margin on the back of lesser liability costs and reported further improvement in asset quality. Going forward in FY10-12, we expect compounded growth of 21.5% in business with slight improvement in margin to 2.96% in FY12 from 2.84% in FY10 mainly driven by faster re-pricing of assets. We estimate the bank's return ratios to remain robust; traction in return on assets would come from higher margin, operating cost efficiency and lesser credit cost though much lower treasury gains would dent the profitability. We estimate that in FY12, the bank would report RoAA and RoAE of 1.21% and 24.9% respectively. We maintain our earning estimates for FY11 and FY12 and reiterate our BUY rating with a price target of Rs266 at 2.1x adjusted book value FY12. • Strong volume growth: We expect credit book expansion would mainly be driven by SME, retail and agriculture sectors. In recent past, growth in SME sector came from across segments particularly from rice mills, iron & steel and textile industries. The bank's retail loans composition is still contained at 15.5% and it is expected that the bank would further increase exposure to the sector; under the sector, high-yielding non-agriculture gold loans reported robust growth of three times to Rs13.8 bn. Going forward, the bank's management expects strong growth in the sub-segment to continue. FY2008 FY2009
23,923 12,880 2.7 6,531 13 13 11.9 2.1 2.2 2.8 46.2 1.0 18.9 8.7

Relative Performance
80 60 40 20 0 (20) 30-Sep-09 31-Mar-10 Andhra Bank 30-Sep-10 BSE-Sensex

(Rs mn)

FY2010 FY2011E FY2012E
31,594 18,098 2.8 10,459 22 60 7.4 1.8 1.8 3.1 42.7 1.3 26.0 8.2 36,865 21,180 2.9 11,658 24 11 6.7 1.5 1.5 3.6 42.5 1.2 24.1 7.9 44,533 25,963 3.0 14,396 30 23 5.4 1.2 1.3 4.1 41.7 1.2 24.9 7.7

BSE Sensex


Rakesh Kumar +91-22-22895028

Total Net Income 19,660 Profit before provisions 10,600 NIM (%) 2.7 Net Profit 5,786 EPS (Rs) 12 EPS Growth (%) 8 P/E (x) 13.4 Price/Book Value (x) 2.4 Price/Adjusted Book Value (x) 2.4 Dividend Yield (%) 2.5 Cost-to-income (%) 46.1 ROA (%) 1.1 ROE (%) 18.1 Tier-1 Capital (%) 8.5

Source: Company & Karvy Institutional Research

Karvy Institutional Equities • 2nd Floor, Regent Chambers, Nariman Point - Mumbai 400 021 • +91-22-2289 5000. For Private Circulation only. For important information about Karvys’ rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters.

as on end-June'10. almost 6570% of advances are on floating rate basis. the bank had gross NPA and net NPA of 1. higher proportion of advances would come for re-pricing since almost 65-70% of advances are based floating rate leading to improvement in margin. • • We maintain our earning estimates for FY11 and FY12 and reiterate our BUY rating with a price target of Rs266 at 2.October 1. demand for non-fund based products from corporate and traction in insurance venture income. In increasing interest rate scenario. On credit book side. 2 .5%. On asset-liability maturity analysis. on 2nd August'10 the bank increased its BPLR by 50 bps to 12. The bank's 70% of deposits come from retail and whole-sale term deposits and rest from CASA deposits. 2010 Institutional Equities Andhra Bank • Expansion in margin: The bank's margin is expected to expand on the back of faster re-pricing of assets. The bank's management does not expect any major strain on asset quality going forward.01% and 0. Fresh advances disbursed on base rate system would be re-priced with a time lag. almost 40% of the bank's advances and 60% of deposits would come for re-pricing in a year time horizon. At current price. Almost 60% of the total term deposits (42% of aggregate deposits) could come for re-pricing in a year time.1x adjusted book value FY12.26x ABV FY12.30% respectively with provision coverage of 86% (including technical write-offs) and 71% (excluding technical write-offs). The bank's fee based income would gather pace on the back of higher credit processing volume. the stock trades at 1.

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