Andhra Bank 5yr Consolidated Performance - Interesting mixed bag! or potential bargain?
April 9, 2009 Andhra Bank's 5yr performance seems like a mixed bag. It has shown a good record in improving cost-efficiency and NPA levels on a consistent basis. These are now comparable to the best in the business. It also boasts of high Return on Assets and Return on Equity ratios. However the marginal growth in Net Interest Income (NII) and declining trends in Net Interest Margin and Net Margin may be a cause for concern. That the stock is available at 0.77 Consolidated Book and high dividend yield of over 7% certainly makes us interested! 
Data, Analysis contributed by Ayush Mittal Want to collaborate with me and contribute towards India Stock Analysis? Strong Capital BaseA strong capital base is the number one issue to consider before investing in a lenderAndhra Bank's Capital Adequacy ratio at 11.62 percent, is lower than most banks, but still much above the mandatory 9 percent requirement stipulated by RBI. Gross and Net NPAs (Non-Performing Assets) have been brought down sequentially, year on year, to very comfortable levels in FY08. FY08 Gross and Net NPAs stand at 1.09% and 0.16%, respectively,on par with the best in the business. Financial Leverage at over 17xin FY08 has again climbed high, after seeing a dip for the last 3 years. Return on Equity (RoE) and Return on Assets (RoA)These metrics are the defacto standards for gauging bank profitability.Andhra Bank's record on profitability is patchy. In FY04 and FY05 high financial leverage and relatively high net margins accounted for solid RoEs in the range of 30-33%. However the declining Net Margins and lower asset turnover in the subsequent years have taken its toll with RoEs fallling substantially. FY08 RoE has climbed to over 19% despite a drastic fall in Net Margin due to high financial leverage at over 17x. (an Average Bank has a financial leverage of around 12x) It must be mentioned though that on FY08 basis, RoE for Andhra Bank at over 19% beats the record set by Yes Bank and State Bank of India! Efficiency RatioThe efficiency ratio or cost to income ratio, measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better)Cost Efficiency ratio has seen significant improvements on a consistent basis in the last 5 years to touch 29 percent. This beats its private sector peers HDFC Bank, ICICI Bank, and even the smaller, nimbler Axis Bank handsomely and rivals the much smaller Yes Bank. Net Interest Margins (NIM)Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.Net Interest margins have seen a gradual decline to go below the 3 percent mark for the first time in FY08 from a high of 3.78% in FY04. FY08 Net Interest Margin stands at 2.86 percent. Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthWhile 5yr growth CAGR may seem poor at ~14%, FY08 growth has been good. Interest Income and Total Income growth stands at ~30 percent. However Net Interest Income growth in FY08 showed only very marginal growth at just 20 basis points! We need to watch Andhra Bank's performance on this count. Price to BookBecause a bank’s balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.
Data, Analysis contributed by Ayush Mittal Want to collaborate with me and contribute towards India Stock Analysis? Andhra Bank is currently (Apr 9, 2009) trading at 0.77 Consolidated Book Value, historically at its lowest levels seen in the past 5 years. It is also showing a high dividend yield of 7.7% at current levels, which isn't insignificant. Considering its historical dividend payout record of ~27-33 percent range, it seems likely that the dividends may be sustained. Andhra Bank's FY08 RoE at over 19 percent beats even Yes Bank and State Bank of India's record. With low P/B relative to its peers but with the highest RoE, Andhra Bank seems like a potential bargain, but we will want to do some gold digging. P/BV and RoE have a very strong correlation for Bank stocks as mentioned in - However, while Andhra Bank is a much more efficient and competitive bank today, it needs to sustain this performance and stabilise the falling margins trend before it can be a worthy rival to leading private sector banks. Overall verdictInteresting to investigate further. May be a good bargain prospect. If you are interested in PSU Bank stocks in the Indian stock market, its time to get to get to quick-check stock analysis step 2: Peer Comparisons
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