The Hindu Business Line : Andhra Bank: Buy

An investment may be considered in the stock of Andhra Bank with a one-year perspective. The bank's increasing focus on high-yielding loan segments, buoyancy in fee income and ability to mop up low-cost funds augur well for its growth over the medium term.

For the September quarter, the bank has turned in a good set of numbers. Its strategy of adopting a controlled credit growth without unduly stretching its balance sheet appears to have paid off. Unlike many other banks, which have grown their loan book by about 40 per cent, Andhra Bank has recorded a modest 23 per cent growth in advances.

By restricting its deposits growth to nine per cent against the industry average of 20 per cent, and staying away from bulk deposits to a large extent, the bank has managed to expand its net interest margins by about 10 basis points to 3.82 per cent on a sequential basis.

The growth in low-cost deposits has also helped the bank in containing costs. Low-cost deposits, which grew by 21 per cent YoY, now accounts for close to 40 per cent of its total deposits.

Non-fund based activities that remained relatively dull during FY 06 are now beginning to pick up sharply. The fee income has risen by 35 per cent in second quarter on the back of 12 per cent increase in first quarter. The momentum in the fee income is likely to remain high on the back of its initiatives in third-party distribution and credit cards business.

The deliberate change in loan-mix with higher focus on high-yielding segments such as retail, agriculture and SMEs also augur well. The growth in retail assets has been highest at 36 per cent.

Andhra Bank sports one of the cleanest balance sheets with bad loans constituting 0.1of net advances. Higher provisioning coverage (93.5 per cent) coupled with faster recoveries also offers a great deal of comfort on the asset quality.

The bank's ability to sustain its return on networth of 18 per cent post-equity expansion is a strong positive. Even with a modest profit growth of 10-12 per cent, the bank is likely to sustain its return on equity. The stock is quoting at a P/BV of 1.3 times its trailing 12 months earnings and appears attractively valued.