ANDHRA BANK RESEARCH

EQUITY RESEARCH
RESULTS REVIEW Share Data Market Cap Price BSE Sensex Reuters Bloomberg Avg. Volume (52 Week) 52-Week High/Low Shares Outstanding Valuation Ratios (Standalone) FY11E EPS (Rs.) +/- (%) PER (x) P / PPP (x) P / ABV (x) Shareholding Pattern (%) Promoter FIIs Institutions Public & Others Holding >1% (Non-Promoter) Genesis Indian Investment Company Ltd - General Sub Fund Life Insurance Corporation of India Bajaj Allianz Life Insurance Company Ltd LIC of India Money Plus LIC of India Market Plus 6.1 5.0 3.1 3.0 2.5 52 14 19 15 27.8 28.9% 6.0x 3.4x 1.5x FY12E 34.9 25.6% 4.8x 2.6x 1.3x Rs. 81bn Rs. 166.95 19,594.8 ADBK.BO ANDB:IN 0.25 Rs. 169.5 / 92.2 485.0 mn

September 17, 2010

Andhra Bank
Strong operating performance and positive outlook

BUY

For the quarter ended 30 June 2010, Andhra Bank reported net profit of Rs. 3.2 bn, indicating healthy growth of 25.1% yoy. This is attributable to the robust growth in net interest income (NII), which grew 66.8% yoy to Rs. 7.4 bn. The net interest margin (NIM) rose to 3.72% in Q1'11, as against 2.85% in Q1'10 due to a decline in the Bank's cost of funds. We expect the NIM to improve in the coming quarters due to the expansion process undertaken by the Bank to widen its presence in the Retail Banking space. The asset quality and coverage ratio of the Bank is still one of the best in the industry. Also, given the improving macroeconomic scenario, we foresee robust growth in the Bank's business in the coming quarters. We believe that the market has not factored in all these positives and as such, we foresee a significant upside in the stock price. Our SOTP valuation suggests a fair value estimate of Rs. 196.6, indicating an upside potential of 17.8% over the current stock price. Thus, we give a Buy rating for the stock. Margins to improve: The NIM rose to 3.72% in Q1'11, as against 2.85% in Q1'10 due to a decline in the Bank's cost of funds, which fell by 94 bps yoy, whereas the yield on funds declined marginally by 10 bps yoy. The Bank's CASA ratio declined marginally yoy, but is still at a healthy level of 29.6% in Q1'11, as against 30.6% in Q1'10. The CASA ratio improved by 14 bps on a sequential basis. We expect the CASA ratio to improve in the coming quarters as the Bank has undertaken an aggressive expansion

Relative Performance
200 150 100 50 0

process to increase its retail clientele.

Key Figures (Standalone) Quarterly Data Q1'10 Q4'10 Q1'11 YoY % QoQ% (Figures in Rs mn, except per share data) Net Interest Income Net Operating Income Pre-Prov Optng. Profit 4,414 6,794 3,480 2,562 6,562 9,253 5,272 2,403 7,362 66.8% 9,444 39.0% 5,104 46.7% 3,204 25.1% FY09 FY10 YoY % 34.9% 32.1% 40.5% 60.1% 40.5% 60.2% 20.9%

12.2% 16,269 21,947 2.1% 23,923 31,594 (3.2%) 12,880 18,098 33.4% (3.1%) 33.5% 7.3% 6,531 10,458 46.2% 42.7% 3.03% 3.21% 0.18% 0.17% 26.5 13.5 75.2 37.3 21.6 90.9

May-10

Aug-10

Nov-09

Apr-10

Jun-10

Sep-09

Jan-10

Feb-10

Jul-10

Sep-10

Oct-09

Dec-09

Mar-10

Net Profit Cost/Optng. Inc.(%) NIM Net NPA ratio Per Share Data (Rs.) PPP per share Diluted EPS BVPS

Andhra Bank

Rebased BSE Index

48.8% 43.0% 46.0% 2.85% 3.44% 3.72% 0.14% 0.17% 0.30% 7.2 5.3 80.5 10.9 5.0 90.9

10.5 46.8% 6.6 25.2% 97.5 21.2%

Please see the end of the report for disclaimer and disclosures.

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ANDHRA BANK RESEARCH

EQUITY RESEARCH September 17, 2010 The Bank is significantly expanding its presence in rural India, as it aims to cover 1,144 villages by March 2012. The Bank has added 112 branches between Q1'10 and Q1'11, taking its total branch network to 1560 as of 30 June 2010 and plans to add a total of 120 branches in FY11. This will have a positive impact on the Bank's NIM in the near term. Asset quality to remain stable: Though there was yoy deterioration in the asset quality of the Bank as indicated by its gross NPA ratio, which increased from 0.80% in Q110 to 1.01% in Q111, the asset quality of the Bank is still among the best in the industry. The Bank recently classified a Rs. 0.4 bn loan given to Paramount Airways as a NPA and this will adversely impact the asset quality of the Bank. However, the Corporate and the Micro, Small and Medium Enterprises (MSME) sectors together account for 77.6% of the total restructured loans of the Bank and given the improving macroeconomic scenario, we expect a lower slippage ratio from these categories. Therefore, we expect the asset quality to remain stable in the near term. Healthy growth in advances: Advances grew at a healthy pace of 27.2% yoy to Rs. 571.4 bn. We expect advances to grow at a healthy pace in the coming quarters, driven by credit demand from the Corporate and MidCorporate sectors, which constitute a majority of the Bank's loan book with a 51.9% share as on 30 June 2010. The Bank is also attempting to expand its retail loan book, which constitutes 15.4% of the Bank's loan book, by focusing on the Housing Loan and Gold segments, which constitute 42% and 16%, respectively, of the Bank's retail loan book as on 30 June 2010. The Bank is also setting up a banking subsidiary in Malaysia in a joint venture with Bank of Baroda and Indian Overseas Bank, which will enable the Bank to further expand its clientele, taking advantage of the substantial Indian diaspora living in the country. The Bank has a healthy capital adequacy ratio of 13.25% and recently raised Rs. 5 bn via certificate of deposits. This will enable the Bank to undertake aggressive credit expansion in the coming quarters.

Please see the end of the report for disclaimer and disclosures.

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ANDHRA BANK RESEARCH

EQUITY RESEARCH Result Highlights For the quarter ended 30 June 2010, Andhra Bank reported net profit of Rs. 3.2 bn, indicating a healthy growth of 25.1% yoy. This is attributable to its robust growth in NII, which grew 66.8% yoy to Rs. 7.4 bn. The robust growth in NII was due to the healthy growth in advances and the Bank's NIM. Advances grew 27.2% yoy to Rs. 571.4 bn and the NIM rose to 3.72% in Q1'11, as against 2.85% in Q1'10. The sharp rise in the NIM was due to a decline in the Bank's cost of funds, which fell by 94 bps yoy, whereas the yield on funds declined marginally by 10 bps yoy. The Bank's other income declined by 12.6% yoy to Rs. 2.1 bn in Q1'11. This was due to a decline in the profit on the sale of investments, which fell 63.0% yoy to Rs. 0.5 bn. However, the Bank's other income from core operations, consisting predominantly of feebased income, rose 48.9% yoy to Rs. 1.4 bn. There was yoy deterioration in the Bank's asset quality as indicated by its gross NPA ratio, which increased from 0.80% in Q110 to 1.01% in Q111. The net NPA ratio also increased from 0.14% in Q110 to 0.30% in Q111. Total restructured accounts stood at Rs. 30.4 bn in Q1'11, which represents about 5.3% of the Bank's loan book. The provision coverage ratio stood at 85.9% in Q1'11, as against the RBI's mandatory requirement of reaching 70% by 30 September 2010. There was a robust growth in advances in Q111, which increased 27.2% yoy to Rs. 571.4 bn. The Corporate and Mid-corporate sectors constitute a majority of the Bank's loan book with 51.9% share, followed by Agriculture (15.5%) and Retail Credit (15.4%). The Bank's loan book is well-diversified across industries with the largest exposure towards the Power sector, which accounted for 20.9% of the Bank's loan book in Q1'11. The credit-to-deposit ratio rose to 76.9% in Q1'11, as against 74.0% in Q1'10; advances grew by 27.2% yoy, as compared to deposits that grew 22.6% yoy. The Banks deposits grew at a healthy pace of 22.6% yoy to Rs. 747.0 bn in Q1'11. The Bank's CASA deposits grew at a healthy pace of Please see the end of the report for disclaimer and disclosures. -3September 17, 2010

ANDHRA BANK RESEARCH

EQUITY RESEARCH September 17, 2010 18.5% yoy to Rs. 220.9 bn in Q1'11. The Bank's CASA ratio declined marginally yoy from 30.6% in Q1'10 to 29.6% in Q1'11; however, the CASA ratio improved by 14 bps on a sequential basis. The basic and diluted EPS for Q1'11 increased to Rs. 6.6, up from Rs. 5.3 in Q1'11. The Bank's CAR declined yoy, but is still at a healthy level of 13.3% in Q1'11, versus 14.8% in Q1'10. The Tier-I capital ratio stood at 7.8% in Q1'11, as compared to 9.1% in Q1'10.

Valuation We have valued Andhra Bank using the sum-of-the-parts (SOTP) methodology. The standalone Bank has been valued by using the threestage Discounted Equity Cash Flow model. Our fair value estimate of the standalone bank is Rs. 196.4, assuming a 17.0% cost of equity and a 9.4% terminal growth rate. Our final SOTP valuation of Rs. 196.6 provides an upside potential of 17.8% from the current market price of Rs. 167.0. Hence, we give a Buy rating to the stock.

Sensitivity Analysis of the Estimate of the Standalone entity

196.39

8.4% 8.9% 9.4% 9.9% 10.4%

16.0% 216 220 226 232 240

Cost of Equity (%) 16.5% 17.0% 202 190 206 193 210 196 215 200 221 205

17.5% 179 182 184 187 191

18.0% 170 172 174 176 178

Please see the end of the report for disclaimer and disclosures.

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ANDHRA BANK RESEARCH

EQUITY RESEARCH September 17, 2010

Income Statement
(Yr. ending Mar. 31)
Interest Income Interest Expense Net Interest Income YoY Growth (%) Other Income Total Net Income YoY Growth (%) Operating Expense Pre-Provisioning Profit Provisions and Contingencies Profit Before Tax Tax Net Profit YoY Growth (%)

Key Ratios
FY09
53,746 37,477 16,269 21.4% 7,654 23,923 21.7% 11,043 12,880 3,900 8,981 2,450 6,531 13.5%

FY10
63,729 41,781 21,947 34.9% 9,646 31,594 32.1% 13,495 18,098 3,740 14,358 3,900 10,458 60.1%

FY11E
81,599 53,340 28,259 28.8% 12,036 40,295 27.5% 16,213 24,082 4,817 19,265 5,784 13,480 28.9%

FY12E
102,838 67,000 35,837 26.8% 14,522 50,359 25.0% 18,867 31,492 7,299 24,193 7,258 16,935 25.6% Performance ratio (%) Return on avg. assets Return on avg. net worth Valuation ratios (x) P/PPP P/E P/B P/ABV Per share data (INR) Shares outstanding (mn) EPS Book value per share Adj. book value per share

FY09

FY10

FY11E

FY12E

485 13.46 75.20 75.20

485 21.56 90.93 90.93

485 27.79 113.16 113.16

485 34.92 130.62 130.62

6.3x 12.4x 2.2x 2.2x

4.5x 7.7x 1.8x 1.8x

3.4x 6.0x 1.5x 1.5x

2.6x 4.8x 1.3x 1.3x

1.1% 18.9%

1.4% 26.0%

1.3% 27.2%

1.5% 30.8%

Balance Sheet
Cash and due from Banks Investments YoY Growth (%) Advances YoY Growth (%) Fixed Assets (Net) Other Assets Total Assets 52,875 169,111 13.5% 441,393 28.9% 3,353 17,960 684,692 111,677 208,810 23.5% 561,135 27.1% 3,557 18,246 903,424 117,108 261,188 25.1% 711,012 26.7% 4,854 24,897 1,119,059 124,205 318,117 21.8% 865,984 21.8% 6,417 30,323 1,345,047 Balance Sheet ratios (%) Advances growth Deposits growth Advances to deposit Investment (% of deposit) Investment (% of asset) Liquid assets (% of assets) Other Assets (% of deposit) Borrowings (% of advances) Customer Deposits YoY Growth (%) Borrowings YoY Growth (%) Other Liabilities Total Liabilities 593,900 20.1% 33,512 467.5% 20,810 648,222 776,882 30.8% 58,524 74.6% 23,917 859,324 967,363 24.5% 67,715 15.7% 29,096 1,064,174 1,178,210 21.8% 76,584 13.1% 26,901 1,281,694 Operating ratios (%) Operating cost to operaing income Operating cost to net income Operating cost to avg. assets Share Capital Reserves & Surplus Total Equity & Liabilities 4,850 31,620 684,692 4,850 39,250 903,424 4,850 50,035 1,119,059 4,850 58,502 1,345,047 Source: Bank data, Indiabulls research Note: Some ratios are as per Indiabulls definitions and may not match figures declared by the Bank. The numbers provided here are standalone. 46.2% 169.1% 1.8% 42.7% 129.0% 1.7% 40.2% 120.3% 1.6% 37.5% 111.4% 1.5% Other Liabilities (% of growth) Capital Adequacy ratio 28.9% 20.1% 74.3% 28.5% 24.7% 7.1% 3.0% 7.6% -37.2% 13.2% 27.1% 30.8% 72.2% 26.9% 23.1% 7.4% 2.3% 10.4% 14.9% 13.9% 26.7% 24.5% 73.5% 27.0% 23.3% 6.3% 2.6% 9.5% 21.7% 13.9% 21.8% 21.8% 73.5% 27.0% 23.7% 5.7% 2.6% 8.8% -7.5% 13.2%

Please see the end of the report for disclaimer and disclosures.

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ANDHRA BANK RESEARCH

EQUITY RESEARCH September 17, 2010

Disclaimer
This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.

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