Andhra Bank 5yr Consolidated Performance - Interesting mixed bag! or potential bargain?

Step 1: quick-check stock analysis

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!

Strong Capital Base

RoE and RoA

It must be mentioned though that on FY08 basis, RoE for Andhra Bank at over 19% beats the record set by Yes Bank and SBI

Efficiency Ratio

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)

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 Revenues

While 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 Book

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 verdict

Interesting to investigate further. May be a good bargain prospect.