| We arranged a tele conference call for institutional clients with the senior management of Andhra Bank. Key takeaways of the discussion are as follows.
Attractive valuation: At current price, the stock quotes at 1.1x adjusted book value and dividend yield of 5.5%. In FY11-12, we estimate that the bank would report RoAA and RoAE of 1.26-1.30% and 24.9% respectively. We value the bank on Gordon growth model with assumptions of target RoAE of 25%, cost of equity of 14% and constant growth of 4.0% at 2.09x adjusted book value FY12; we determine the bank's target price at Rs266.
Expansion in branch network: During the Q4FY10 and FY10, the bank opened 13 and125 branches respectively predominantly in the north, west and eastern parts of the country taking the total to 1,557. In FY11, the bank is planning to open 120 branches.
The bank's management expects 25% growth in business in FY11: Andhra Bank'smanagement expects growth in credit book to come from retail, SME and agriculture sectors. The bank's management expects 25% (Y/Y) growth in total business in FY11.
Deposit profile favorable: As on end-March 2010, Andhra Bank had total bulk deposit,certificate of deposits and CASA deposits at 4.7%, 18.8% and 29.4% of total deposits respectively. Average maturity of certificate of deposits ranges from six months to twelve months. The bank's management expects to improve CASA share going forward.
Asset side re-pricing would enhance margin going forward: In FY11, improvement inmargin would come from faster re-pricing in assets in an increasing interest scenario. We expect 15 bps (Y/Y) improvement in margin in FY11 to 3.1%.
Establishment expenses to remain flat in FY11: In FY10, Andhra Bank provided forpension liability to an extent of Rs300 mn apart from other provisions for wage revisions. In FY11, the bank would continue to provide for pension liabilities in a range of Rs300- 350 mn; overall, in FY11 total establishment expenses is expected to be flat.
Asset quality comfortable: The bank's management does not expect any considerablestrain on asset quality; as on end-March 10, the bank had gross NPA and net NPA of 0.86% and 0.17% respectively with provision coverage of more than 90% (including technical write-offs) and 80% (excluding technical write-offs).
Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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