BWR assigns AA+ to Andhra Bank bonds

BANGALORE, INDIA: Brickwork Ratings (BWR) had assigned BWR AA+ to Andhra Bank’s proposed Tier I perpetual bonds issue INR 2 billion or Rs 200 crores.

The rating reflects several factors including, majority ownership of the Government of India, favourable operating spread and returns, lower NPA, less risky loan portfolio, higher Tier 1 capital and leverage. However, the bank’s operation largely concentrated in the state of Andhra Pradesh might be a limiting factor.

Andhra Bank, a mid sized public sector bank incorporated in 1923, was nationalised in 1980. The bank offers retail banking, small and medium enterprise (SME) banking, treasury and financial institutional services. The Government of India (GoI) is a major shareholder of Andhra Bank with a stake of 51.55 percent.

The bank’s total business increased 20.5 percent to reach INR 839.93 billion as on 31st March 2008. This high growth was sustained in spite of 23.55 percent growth recorded in the previous year - FY 2007. The bank’s total deposits stood at Rs 494.36 billion, as on March 2008, a growth of 19.3 percent over 2007. The bank has shown adequate growth in branch expansion as well as technology platform that can help grow its business.

Andhra bank is one of the profitable mid-sized public sector banks in India, with total income of INR 48.71 billion for FY 2008, reflecting the continued buoyancy in the bank’s core business income, fee based income and focus on healthy asset-quality contributed to the improvement in the profitability. Further, the bank’s interest income is 71 basis points more than its peers. The non interest income of the bank has been marginally lower than that of peers. To augment non-interest income, the bank pursued multi channel approach to sell insurance and investment products. The efficient cash-management system coupled with higher income helped the bank improve its cost to income ratio to 47.2 percent from the previous of level of 50.1 percent.

The bank’s lower cost CASA deposits declined to 33.6 percent and its credit deposit ratio has been higher than its peers. These imply that the bank may have to take liquidity enhancing measures. The bank’s cost of mobilizing deposits increased from 5.32 percent to 6.58% during the year 2008. While the bank’s net interest margin at 2.86%, is satisfactory compared to peers, yet the margin for Andhra Bank declined from the level of 3.20%. The bank’s return on assets also marginally dropped to 1.16% from 1.31% in the previous year. These declines in return on assets and net interest margin are largely attributed to increased cost of funds. The bank’s operating expenditures have increased 33% and largely in line with total income that increased 29.5 percent.

While bank’s cost of funds at 6.12 percent is slightly higher than that of peers, the bank has shown higher returns at 9.25% and higher spreads 3.14%. Even though the bank has shown higher returns, the bank’s loan portfolio does not appear riskier. Gross NPAs dipped to 1.07 percent compared to 1.88 percent of peers. Net NPAs were down to 0.15 percent from 0.17 percent. The real estate loans sensitive exposure has been just 7.94 percent, less than half of that of bank’s peers. The bank’s term loan exposure at 41.95 percent is lower than the peers’ average. The bank has large provisions of 85.39 percent for its non-performing assets, which compares favorably with its peers. As on 31st March 2008, the bank has recovered an amount of INR 903 million under SARFAESI Act. 

While Andhra Bank’s total capital adequacy ratio increased to 11.61 percent in FY 2008, yet the ratio is less than that of its peers. The bank needs to supplement its capital. Brickwork calculates Leverage that assess bank’s capital adequacy with reference to both on balance and off balance sheet exposures. Andhra Bank has shown a reasonable leverage of 16.4 compared to its peer group at 21.3. Inspite of lower leverage the bank’s ROE was healthy at 17.97 percent in FY 2008.