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Suresh Krishnamurthy

FRESH investments can be considered in the stock of Andhra Bank. The stock is relatively attractively valued compared to larger public sector banks such as Punjab National Bank and Canara Bank.

Andhra Bank is one of the regional banks with a reasonable record. Its net non-performing assets to net advances ratio at less than two per cent is one of the lowest in the banking industry, including new private sector banks. In addition, even though the bank's operations are concentrated in a particular region (Andhra Pradesh), the bank is not a small sized bank. With total business of about Rs 33,000 crore, the bank would be comparable to HDFC Bank and Corporation Bank.

The bank, however, has a few negative factors to contend with. Its cost of deposits is not among the lowest in the industry. Its cost of deposits at about 7.12 per cent will make it difficult to compete with other larger banks. Larger banks such as State Bank of India would enjoy a cost differential of more than one per cent over Andhra Bank. However, such cost disadvantages have till now not reflected in higher non-performing assets.

In addition, Andhra Bank is meeting with success in reducing its cost disadvantage. The proportion of low-cost deposits rose by two per cent in the year ended March 2003.

The stock's valuation is also attractive. It now offers a dividend yield of about 7.3 per cent. The possibility of maintaining the dividend yield is also high considering that Andhra Bank is scheduled to return a portion of its capital to the Government. Aggressive growth targets of about 24 per cent in total business also augurs well for profit growth in 2003-04.

In terms of interest rate risk, the investment portfolio of Andhra Bank appears less prone to fluctuations - average portfolio maturity is just in excess of 5 years. A comparison of the bank's yield on investments of 9.78 per cent with the prevailing yield on Government securities of less than six per cent suggests that the bank is still sitting on sizeable unrealised gains. These factors suggest that the downside to the stock price is limited.

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