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Andhra Bank

Initiating Note
2010 Equirus All rights reserved Rating Information Price (`) Target Price (`) Target Date Target Set On Implied yrs of growth (ERE) Fair Value (ERE) (`) Fair Value (DDM) (`) In Benchmark Model Portfolio Position Stock Information Equity Cap (` Mn) Face Value (`) Free Float (%) Market Cap (` Mn) 52 Wk H/L (`) Avg Daily Volume (Mn) Avg Daily Value (` Mn) Bloomberg Code Ownership Promoters DII FII Public Price % Absolute Vs Industry Allahabad Bank Corporation Bk Recent 52% 19% 14% 15% 1M% 1% -13% 5% 11% 1Q 5.4 6.6 2Q 5.7 6.6 4,850 10 58.60% 78,570 170/94 18 231 ANDB IN Equity 3M % 52% 18% 15% 15% 3M% 21% -2% 40% 30% 3Q 5.7 6.6 12M % 52% 19% 13% 16% 12M% 60% 10% 96% 73% 4Q 5.0 6.6 Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104) 164 220 30th Sep11 28th Sep'10 10 319 249 BSE Banks

Regular Coverage

Absolute : LONG Relative : Overweight 33% upside in 12 months Financial Services


Consolidated Financials ` Mn YE Mar NII Operating Exp Employee Exp Other Income Provisions PAT Total Equity Gross Debt Cash, other ` Per Share Earnings Book Value Dividends FCFEPS P/E (x) P/B (x) ROE (%) Prov.& W/O NIM (%) RoA (%) FY10A 21,958 5,255 8,241 9,646 3,741 10,466 44,268 8,59,564 1,11,677 FY10A 21.7 91 5.0 127.5 7.5 1.8 25.88% 0.83% 3.21% 1.35% FY11E 29,462 5,912 10,302 9,164 4,677 12,752 54,105 10,68,38 6 1,37,869 FY11E 26.3 112 5.0 60.1 6.2 1.5 25.96% 0.81% 3.40% 1.38% FY12E 35,268 6,563 12,568 10,080 5,705 14,865 65,753 12,98,08 9 1,67,403 FY12E 30.5 136 5.5 67.3 5.3 1.2 24.64% 0.80% 3.30% 1.38% FY13E 42,639 7,219 15,082 11,290 6,846 17,763 80,191 15,52,8 52 2,01,67 8 FY13E 36.8 165 6.0 77.7 4.4 1.0 24.45% 0.77% 3.30% 1.38%

Banking on the best


We see a 33% upside in Andhra Bank (ANBK) over next 12 months and initiate coverage recommending LONG. At our target price of `220, ANBK will trade at 1.7x September 2011 BV, against current TTM P/B of 1.7x, and at Sep11 TTM P/E of 7.8x versus current TTM P/E of 7.21. We believe that ANBK commands valuations at 1.7x trailing book value (` 127)and 7.8x TTM EPS (` 28) for the following reasons:

Best in class RoA of ~1.39% translating to an impressive 26% RoE Best in class NIM of 3.21% to improve to 3.4% in FY11. Q1FY11 NIM -3.72% Best in class Asset Quality with 1% Gross NPA and .3% Net NPA Margins protected in an increasing interest rate environment with ~30% CASA

Indian PSU banks currently trade at average P/B ratio of 1.54x with average RoE at 21.4% and average Gross NPA at 2%. Average NIM for Indian PSU banks stands at 2.7% Industry high RoE with industry best NPAs should command premium: ANBKs FY10 RoE stands at 26% with current NPA of 1% and Net NPA of .3%. Given such impressive RoE and NPA numbers, we believe the bank is undervalued at 1.3x 1-year forward book value. ANBK has a 5 year loan CAGR of 26%. The banks cost-to-income ratio is down to 42% with 20% CAGR in business per employee and profit per employee over FY07-10. We expect asset quality to remain strong with Gross NPA at 1% and our expectations are in line with the management. Historical NIM at average of 3.15% provides comfort in an increasing interest-rate environment: ANBK has maintained its NIM between 3.4% and 2.86% over the last 4 years with Q1FY11 NIM at 3.72%. We expect NIM for FY11E to be 3.4% which is in line with management expectation. NIM and RoA for ANBK are among the top three Public Sector banks, with PNB and Indian Bank being the other two. 7% Current Account deposit and 22.6% Savings account deposit will allow NIMs to remain stable in an increasing interest rate scenario: With CASA at 29.6%, we forecast that an increase in interest rates will have minimal impact on NIM.ANBK has shed high cost deposits and has launched a CASA campaign to improve CASA share Key risks to business are an unexpected hike in interest rates leading to slower credit growth and higher NPAs. With restructured accounts at 5.3% of assets, there could be additional NPAs resulting from these loans. Any significant political upheaval in Andhra Pradesh may also affect business for the bank.

Andhra Bank leads the pack with best in class numbers (FY10)

Consolidated Quarterly EPS forecast

`/Share
EPS (10A) EPS (11E)

September 28, 2010

Page 1 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Company Snapshot
How we differ from Consensus
Equirus EPS Pre-Tax Profit PAT FY11E FY12E FY11E FY12E FY11E FY12E 26.3 30.6 18,218 21,235 12,752 14,865 Consensus 24.57 28.77 16550 19220 11957 13893 % Diff 7% 6% 10% 10% 7% 7% Comment We expect advances and deposits to grow by 25% and 22% for FY11 and FY12 respectively. We have factored in a 0% and 12% increase in Other Income for FY11 and FY12 respectively. Our NIM expectations are 3.4% and respectively for FY11 and FY12 3.3% NII Growth NIM (%) Dividend Payout RoE Sensitivity to Key Variables NIM Cost-to-Income Bps change +10 +100 % Impact on FY11E EPS -5% -3%

ERE Valuations & Assumptions


Rf 8% Ke 14% FY11E 34.2% 3.40% 22.25% 25.9% Term. Growth 3% FY12E 19.7% 3.30% 20.99% 24.8% FY13-15E 16.0% 3.23% 23.52% 23.5% RoE at end of high growth period 23.1% FY16-20E 8.6% 3.20% 55.46% 22.9% FY20-25E -

Our Key Investment arguments: ANBK is undervalued at 1.7x trailing P/B and 1.3x 1 year forward P/B: At 26% RoE in FY10 and 3 year historical average RoE at 21% we believe the stock should trade at 1.7x book value of 127 per share. Best in class asset quality with ~1% NPA, >80% provision cover, cost-to-income ratio of 42%, and 26.2% 5 year CAGR in advances further justify the investment decision. 7% Current Account deposit and 22.6% Savings account deposit will lead to stable NIM of 3.3-3.4% in an increasing interest rate scenario: With 29.6% low cost deposits, we expect minimal impact on NIM. 5 year NIM averages 3.15%. Credit growth estimates are ~1.6x that of GDP growth: With 11-14% Nominal GDP growth we estimate 18-22% growth in credit. Over FY10-13E we expect ANBK to increase its advances book at a CAGR of 22% and Net Interest Income at a CAGR of 24.7%. We expect ANBKs credit advances to grow at CAGR of 22% over FY10-13E Risk to Our View Since ~52% of ANBKs business comes from Andhra Pradesh, we could see increase in NPA if the political situation vastly deteriorates due to the Telangana issue. However, business from Andhra Pradesh has remained stable through the Telangana issue with overall advances for ANBK growing at a CAGR of 28% over FY08-10. If the overall credit demand goes down, ANBKs growth will also suffer. However, the consensus on Indias GDP growth varies between 11-14% which should translate to ~18-22% growth in credit. Crisils credit growth estimates are at 20-22%.
Company CMP 162 230 693 Market Cap 78,570 1,01,530 99,410 EPS FY10 21.7 27.8 82.5 FY11E 26.3 31.46 87.7 FY12E 30.6 39.8 107.3 FY10 7.5 8.3 8.4

Years of strong growth Valuation as on date (`) Valuation as of 30th Sep'11

1 232 265

2 248 283

5 264 302

10 279 319

Based on Excess Return to Equity valuation, assuming 10 years of high growth, we arrive at a fair value of `279 and a target price for 30th Sep11 of ` 319

Company Description:
Andhra Bank (ANBK) is an Indian bank with nearly 52% of the business from the state of Andhra Pradesh. The bank has 1560 branches and 14,256 employees with advances exceeding 571 bn and deposits exceeding 743 bn and CASA deposit ratio of 29.57%. ANBK has had a history of relatively lower NPAs with Gross NPA ~1%, against industry average of ~2%. ANBK also has relatively higher RoE at ~26% against an industry average of 21%.

P/E FY11E 6.2 7.3 7.9 FY12E 5.3 5.8 6.5

BPS FY10 91.3 53.9 215.1

P/B FY11E 1.45 1.43 1.52 FY10 25.90% 20.90% 18.30%

RoE FY11E 25.90% 21.00% 19.60% FY12E 24.80% 21.00% 19.60%

Div Yield FY10 3.09% 2.50% 2.20% FY11E 3.09% 2.50% 2.20%

Andhra Bank Allahabad Bank Corporation Bk September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 2 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Investment Rationale
Best in class RoE and asset quality deserve premium
We analyzed 20 banks on the basis of FY10 RoE and our analysis reveals that ANBK has one of the highest RoE in the sector but the P/B ratio for the bank does not reflect the high RoE and is trading at a discount on a Price-to-Book to RoE metric. (Exhibit 1) We expect the bank to maintain its RoE at 25% over the next three years on the back of 25% CAGR in net interest income and sustained cost-to-income ratio of ~42%. ANBKs asset quality is amongst the best in its peer group (Exhibit 1). On an absolute scale the Net NPAs for ANBK have remained below .3% over FY05-10. Currently Gross NPA stands at 1% with Net NPA at .3%. The company has restructured advances amounting to ` 30364.5 Mn. 29 accounts pertaining to the textile industry amounting to ` 5640 Mn have been restructured and the bank does not foresee a slippage of these accounts into NPA with pick-up in exports to the Europe and the US. Standard assets under restructured assets amount to ` 29370 Mn With the RBIs 70% Provision Coverage Ratio (PCR) norm, ANBK has a relative advantage as a few other banks will continue to provide higher provisions leading to suppressed earnings. ANBKs PCR stands at 86% which is above RBIs requirement and coupled with its extremely low Gross NPAs, we expect an advantage in PAT, compared to its peers. Exhibit 1: Relative NIM, CASA and Asset Quality of select Indian banks, FY10
NIM Bank Allahabad Bank Andhra Bank Canara Bank Corporation Bank Punjab National Bank State Bank of India AVERAGE ANBK Ahead of Avg. by (%) (%) 2.8 3.2 2.7 2.7 3.3 2.7 2.9 11% CASA (%) 34.2 29.6 29.0 24.1 40.9 40.3 33.2 -10% Provision Cover (%) 76.2 92.8 42.3 77.0 89.0 62.4 73.3 27% Net NPA % 0.4 0.3 1.0 0.4 0.7 1.7 0.8 60% Gross NPA (%) 1.5 1.0 1.5 1.1 1.8 3.1 1.7 40% Restructured Asset(%) 4.7 5.3 3.4 2.7 6.6 2.5 4.2 -26%

Growth in business certain with visible credit growth


We expect ANBK to grow better than the countrys credit growth on the back of 45-50% growth in retail segment. We believe that the country can sustain a credit growth to the tune of 18-22% over FY11-13E on the back of Nominal GDP growth in the range of 11-14%. We arrive at a credit growth multiple of 1.6x Nominal GDP given the trend in credit and GDP growth over the past decade. (Exhibit 2) Exhibit 2: Credit Growth v/s Nominal GDP Growth for India

Source: RBI, Equirus Estimates

ANBK has exhibited better than industry growth with advances growing at 29% and 27% during FY09 and FY10 respectively. (Exhibit 3) The high growth however has not come at the cost of fall in asset quality with Gross NPA maintained at ~1% and Net NPA at ~.3%. Retail credit currently stands at ` 88220 Mn and the bank expects retail credit to grow by 45-50% in FY11 on the back of healthy demand from home and gold loan segment. ANBK looks to focus on gold loans which yield 14.75% and the gold loan portfolio for ANBK has grown at 64.4% in the 12 month period from Q1FY10 to Q1FY11. We expect Andhra Bank to utilize its 1000+ branches in Andhra Pradesh and strong presence in other southern
Page 3 of 13

Source: Company, Equirus Estimates

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

states in India to meet the 45-50% growth target for retail credit. Together with gold loans, we also expect Education Loans and Home Loans to continue to grow with increasing purchasing ability and positive sentiments for the retail customer. Exhibit 3: 5 year growth in Advances and Deposits

Q1FY10. Yield on advances on the other hand has only marginally declined from 11.20% in Q1FY10 to 10.89% in Q1FY11. We expect the bank to continue to re-price its assets faster than its liabilities in an increasing interest rate environment. Exhibit 4: Historical CASA, NIM and Cost-to-Income for ANBK
FY07 CASA NIM Cost-to-Income 34.5% 3.40% 50.0% FY08 33.6% 2.86% 47.2% FY09 31.4% 3.03% 46.2% FY10 29.4% 3.21% 42.7%

Source: Company, Equirus Estimates

13.25% CAR with impending capital infusion gives enough room for growth in business
At 13.25% CAR without including Q1FY11 profit of ` 3200 Mn, the bank is well capitalized and well positioned to increase its deposits and advances. The bank has suggested that it has head-room available to accommodate close to Rs. 40,710 Mn of capital in its current structure. With Retained Earnings amounting to ` 9932 Mn for FY11 the Tier-I capital is also expected to remain at ~8%, including the respective quarters profit.
Source: Company

30% CASA deposit with a 3.15% average NIM over FY07-10 provide confidence in Net Interest Income Growth
Over FY07-10, RBI has varied its repo-rate between 4.75% and 9.00% and this has resulted in varying interest rates over this period. However, ANBK has maintained its NIM averaging at 3.15% over this period with the NIM dropping below 3% only in FY08. For Q1FY11 the company had an NIM of 3.72% and we expect it to sustain at ~3.4% for FY11. With rapid growth in non-CASA deposit, the CASA percentage has shrunk to 29.6% from 36.1% in FY05. However, the bank has initiated a CASA campaign to improve this share and reduce its cost of deposits. The Current Account percentage has been maintained at 7% with Savings Account at 22.6%. (Exhibit 4) The bank has shed and re-priced a significant portion of its high-cost deposits which has significantly reduced the Cost of deposits (CoD) to 5.49% for Q1FY11 from 6.77% in
September 28, 2010

ANBK plans to open 122 branches with 50 branches outside Andhra Pradesh. This should result in significant increase in both advances and deposits, with the added possibility of increasing CASA share as per the banks plans.

Growth in retail credit expected at 45-50% for FY11E


Retail credit currently stands at 88220 Mn and the bank expects retail credit to grow by 45-50% in FY11 on the back of healthy demand from home loan and gold loan segment. ANBK looks to focus on gold loans which yield 14.75% and the gold loan portfolio for ANBK has grown at 64.4% in the 12 month period from Q1FY10 to Q1FY11 (Exhibit 5). Currently retail home loan stands at ` 37270 Mn and non-agricultural gold loan contributes ` 13990 Mn towards a total retail credit of ` 88220 Mn or about 16% of total advances. Going forward, we expect Andhra Bank to continue to expand its gold loan franchise on the back of 1000+ branches in Andhra Pradesh and strong presence in other southern states of India. Given that 40% of Indias gold is believed to be in Southern India we see the branch network as an advantage over other banks. Education loans are expected to
Page 4 of 13

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

do well on the account of more students pursuing specialized education in India and abroad, whereas gold loans are expected to continue to grow on the back of increasing share of organized players as compared to the unorganized players. Exhibit 5: ANBK Retail Credit (all figures in ` Mn)
Loan Housing Loans (Direct Finance) Non Agriculture Gold Loans Education Loans Other retail Credit Total Source: Company, Equirus Estimates FY10 34,820 13,830 16,470 24,080 89,200 Q1FY10 23,730 8,510 14,890 17,390 64,520 Q1FY11 37,270 13,990 16,520 20,440 88,220 Growth (Q111 / Q110) 57.06% 64.39% 10.95% 17.54% 36.73%

Forecast: Key Assumptions & Sensitivity


Andhra Banks NIM for FY10 stood at 3.21% and for Q1FY11 the NIM was 3.72%. The last 5 years average NIM has been 3.15%, and that the lowest NIMs was 2.86%% during FY08. We expect NIM for ANBK to be as below (Exhibit 7)

Exhibit 7: NIM expectation Parameter


Net Interest Margin (NIM)

FY10
3.21%

FY11
3.40%

FY12
3.30%

FY13
3.30%

FY14
3.2%

Source: Company, Equirus Estimates

Exhibit 8: Sensitivity for EPS on change in borrowing cost


Sensitivity to Key Variables Decrease in NIM Source: Company, Equirus Estimates Bps change +10 Impact on FY11E EPS -5%

Gold loan Andhra Bank has entered the gold loan market which will be processed through 1100 branches. Gold loan disbursal through ANBK to the companys existing customers will also come at low incremental costs. As per ANBK, high yields and low risk in this category has made them increasingly focus on gold loans. South India, where the bank has a strong presence, has 40% of Indias gold which suggests strong growth potential in this category. Housing loans have grown by 57% in Q1FY11 over Q1FY10. Given that the retail sector has higher yields for ANBK and the bank expects to grow retail credit at 50% in FY11, we expect yields from retail credit to increase profitability. Other Income for ANBK grew by 26% in FY10 over FY11. We expect other income growth to be commensurate with overall business growth. We have factored in conservative growth in other income at 7% CAGR over FY10-13E to factor impact on treasury income with change in bond rate yields.

ANBKs advances CAGR over FY06-FY10 has been 26.2% and we expect 25%, 22%, and 20% growth in advances over FY11E, FY12E and FY13E respectively. This is in tune with the expected credit growth estimates for the country we could see better credit growth with a peaceful resolution to the Telangana issue. We expect ANBK to continue to improve its cost-to-income ratio in line with the historical performance of ANBK and of other public sector banks. This improvement is expected as business per branch and business per employee improves due to higher scale of operations

Exhibit 9: Earnings at risk for ANBK


Change in interest rate Re-pricing up to 1 year (` Mn) 200.7 401.5 602.2 802.9

Exhibit 6: ANBK Capital coverage projections (all figures in ` Mn)


Key Parameters Book Value Assets FY11E 54,183 9,62,808 FY12E 65,927 11,74,625 FY13E 80,286 14,09,550 FY14E 95,036 16,20,983 FY15E 1,10,767 18,15,501

0.25% 0.50% 0.75% 1.00% Source: Company Annual report, FY10

Source: Company, Equirus Estimates

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 5 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Investment Risk & Concerns


We perceive the following system-wide changes to adversely affect ANBKs earnings and business growth Restructured loans, currently at 5.3%, could lead to higher NPAs in the coming years. The bank has 29 large accounts amounting to ` 5640 Mn in the textile sector and significant exposure in infrastructure (` 2270 Mn), power, iron and steel, commercial estate. The company is confident of recovery in the textile accounts on pick-up in exports to Europe and the US. Sustained downturn in the economy will lead to reduced credit demand and lower business growth. In the absence of any significant negative events impacting the Indian economy, we expect Indias credit growth to be between 18-22% over the next 5 years (FY11-FY15) with the countrys GDP expected to grow in the range of 11-14% in the same period. Any changes to the above estimates could hurt credit growth as well as repayment of advances. Any major political upheaval in Andhra Pradesh could lead to some slowdown in lending since ~52% of ANBKs business comes from Andhra Pradesh. Significant interest rate fluctuations may lead to volatility in treasury income. The current investment break-up stands as below which indicates that the treasury income should be lower for this year and we have factored in a 0% growth in other income for FY11E over FY10.

Corporate Governance
Andhra various Bank is an Indian bank with 51.5% government holding. The bank meets the requirements of the RBI with Overall CAR of 13.2% with ~8% Tier-I capital PSL lending of ~42% as compared to the 40% requirement by the RBI

The auditors have not come across any issues in the financial statements for the bank and the Balance Sheet, Profit and Loss Account and Cash Flow Statement comply with the applicable accounting standards. ANBK has seen a consistent decline in both Gross and Net NPA over the last 10 years. (Exhibit 11) Today ANBK has one of the best NPA numbers across the PSU bank sector. Exhibit 11: Movement in NPA over the years (`, Mn)
Description Net NPA to Net Adv (%) FY02 2.45 FY03 1.79 FY04 0.93 FY05 0.28 FY06 0.24 FY07 0.17 FY08 0.15 FY09 0.18 FY10 0.17

Movement of NPAs (Gross) Opening Balance Additions during the year Reductions during the year Closing balance Movement of Net NPAs Opening Balance 2190 182 0 2372 2372 0 310 2063 2063 0 862 1201 1201 0 711 490 490 35 0 525 525 0 52 473 473 65 0 537 537 255 0 792 792 165 0 957 4701 2086 1545 5241 5241 2370 1804 5807 5807 2946 2599 6154 6154 1502 3247 4409 4409 1533 1573 4369 4369 2437 2836 3970 3970 2015 2261 3724 3724 1975 2018 3681 3681 3999 2802 4879

Exhibit 10: ANBK Investment Profile for Q1FY11 (` Mn) Particulars


Net Investment Held to Maturity Available for Sale Held for Trading SLR (%) Source: ANBK Analyst Presentation, Q1FY11

Jun-09
178,646 142,456 34,789 1,401 25.53

Jun-10
219,701 192,048 27,630 23 25.98

Additions during the year Reductions during the year Closing balance Movement of Provisions Opening Balance Provisions during the yr Writeoff/writeback of prov Closing balance Source: Company

2488 1005 651 2842

2842 1843 955 3730

3730 2586 1383 4933

4933 124 1167 3890

3890 400 480 3810

3810 926 1301 3435

3435 987 1184 3238

3287 1722 2009 3000

2883 3052 2017 3919

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 6 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Company Description
ANBK is an Indian PSU bank with the Government of India holding 51.5% stake in the company. The banks Gross Deposits stood at 747,000 Mn at the end of Q1FY11 with 29.6% CASA deposits. The banks Gross Advances stood at Rs. 565,050 Mn at the end of Q1FY11 and a break-up of this is presented below (Exhibit 12). ANBK is well capitalized at 13.25% CRAR as per BASEL-II guidelines. Exhibit 12: Break up of credit to various segments for PSU banks, FY10 Gross Advances (Domestic Non Food) Corporate Advances MSME Advances Retail Credit Agricultural Advances Other Sectors Total ANBK 51.9% 15.3% 15.4% 15.5% 1.8% 100.0% CORPBK 36.90% 10.30% 20.60% 10.40% 21.80% 100.0% PNB 39.68% 10.75% 10.40% 16.18% 22.98% 100.0% ALBK 33.83% 12.20% 22.35% 16.17% 15.44% 100.0%

Priority Sector Lending (PSL) for Indian banks is mandated at 40% and Andhra Bank meets this requirement with yields ranging from 7-13% for these loans. (Exhibit 14) Exhibit 13: Break up of credit to various segments as part of PSL for ANBK (Rs. Mn) Category Agriculture Small enterprises Micro credit Education loans Housing loans Total
Source: Company

Q1FY10 9173 5006 397 1648 2789 19013

Q1FY11 8875 5346 390 1652 2940 19203

Exhibit 14: ANBK NIM and RoE movement v/s Repo Rate movement

Source: Respective Company Presentations, Equirus Estimates

Close to 52% of the banks business comes from the state of Andhra Pradesh where the bank has 1019 branches out of a total 1560 branches. The bank employs 14256 employees as of Q1FY11. ANBK has witnessed strong growth is MSME (47%) and Retail Credit (37%) in Q1FY11 over Q1FY10 and expects to grow its retail book by 45-50% on the back of healthy demand from gold loan and home loan segment. The bank also expects agriculture advances to grow by 25% in FY11 and continues to focus on this sector as NPAs for this segment are the lowest at just 0.28% of total advances. ANBKs restructured accounts constitute 5.3% of its total assets with 60818 accounts summing up to Rs.30364.5 Mn. Of these Rs.19370 Mn comes from 102 accounts pertaining to corporate/major industries. There are 29 accounts pertaining to textiles (Rs.5640 Mn), 6 accounts pertaining to infrastructure (Rs. 2270 Mn) with power, iron and steel, commercial real estate, and educational institutions forming the rest. The bank expects textile exports to Europe and the US to pick up and does not foresee any slippage of these accounts into NPA during the current financial year. Out of the total restructured assets worth Rs. 30364.5 Mn, Rs. 29370 Mn are classified as standard assets.

Source: RBI, Company, Equirus Estimates

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 7 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

The Telangana issue: If the Telangana issue were to disrupt life and business in Andhra Pradesh going forward, there could be a rise in defaults coming from various segments as well as decline in credit growth in the state. This will pose problems for ANBK as 50% of its business comes from the state of Andhra Pradesh. We take comfort in the fact that 50% of Andhra Banks business comes from other states. Also the bank is growing its MSME and Retail book aggressively since retail and MSME clients are unlikely to migrate to other states we do not expect the credit demand from these segments to drop. For corporate and mid-corporate advances the growth has been ~20% against overall credit growth of 27% for the bank and we expect this demand to pick up after the resolution of the Telangana issue. As per a recent report released by the RBI, the profit per employee, return on advances adjusted to Cost of Funds, Return on Assets, CRAR and Net NPA ratio are all better than the group average for nationalized banks. The management expects NIM for the bank to be above 3.5% for FY11E with Gross NPA expected to remain at ~1%. The exposure to various sectors is as below (Exhibit 15). We do not see any discomfort with the exposure portfolio. The exposure to real estate sector as on 31st March 2010 is Rs. 52874.7 Mn which has reduced from Rs. 56731.7 Mn for 31st March 2009. Exhibit 15: Exposure to various sectors as on 30th June 2010 Sector Power Construction & Contractors Housing Loans Iron & Steel Textiles NBFC Commercial Real Estate Rice Mill Engineering Petroleum Products Source: ANBK Analyst Presentation, Q1FY11 Actual Exposure 117910 46740 37480 35380 24620 23560 22620 14940 14230 11760 Exposure as % of Advances 21% 8% 7% 6% 4% 4% 4% 3% 3% 2%

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 8 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Valuation
Our methodology for valuing ANBK is the excess return to equity approach with the following parameters: Cost of Equity 14%: Given that ANBK is a government owned bank with the performance linked closely to the overall credit demand growth in the country and therefore the GDP of the country, we believe that ANBKs growth and margins will be dependent on the overall economic performance of the country. Strong Growth Period 5 years: We believe ANBK will demonstrate 19% CAGR in advances over the next 5 years with a 19% CAGR in deposits over the same period. Indias credit growth is expected to be 18-22% for FY11 and has averaged 1.6x GDP growth over FY07-10. We foresee an average Nominal GDP growth of ~12% to be very likely and therefore arrive at a 19% CAGR in credit demand. Stable Growth Rate 3%: We believe ANBK will be able to sustain a perpetual 3% growth beyond FY15. Exhibit 13: TTM P/E ratio v/s 2-year forward EPS growth

We arrive at a current fair value of ` 279 and a 30th Sep 2011 target price of ` 319 based on our valuation method for the stock. However, we are assigning a P/B based target price of ` 220 for Sep11 which is a 30% discount to our ERE fair value. At the target level the stock will trade at 1.7x September 2011 Book Value. Exhibit 12: P/B, P/E, RoE, EPS Growth and Market Cap of Indian PSU banks
Bank Andhra Bank Allahabad Bank Oriental Bank Corporation Bank Punjab National Bank State Bank of India Market Cap 79,855 103,768 112,492 96,276 406,393 1,968,526 P/B (Trailing) 1.7 1.7 1.5 1.7 2.3 2.3 RoE (FY10) 26.0% 22.2% 16.5% 21.9% 26.6% 14.8% P/E (Trailing) 7.2 8.3 9.2 7.7 9.8 16.8 EPS Growth (FY10 / FY09) 60% 57% 27% 31% 26% 0%

Exhibit 14: TTM P/B ratio v/s 2-year forward RoE

Source: Company, Equirus Estimates

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 9 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Consolidated Quarterly Earnings Forecast


` in Mn
Net Interest Income Operating and Other Expenses Employee Expenses Pre-Provision Income Provision & Write Off Other Income Profit Before Taxes Tax Reported PAT Extraordinary Income Adj. Net Profit EPS (Rs) Key Drivers NIM Cost to Income CASA Other Income/NII Sequential Growth (%) Net Interest Income Employee Expenses Other Income PBT EPS Yearly Growth (%) Net Interest Income Employee Expenses Other Income PBT EPS Margin (%) NIM Pre-Provision Income Margin Provision and Write Off % PAT 3.2% 25% -1% 58% 3.2% 43% 11% 53% 3.2% 44% 17% 47% 3.2% 39% 34% 37% 3.7% 41% 7% 43% 3.4% 46% 19% 43% 3.4% 46% 19% 43% 3.4% 46% 19% 43% 3.3% 46% 16% 42% 3.3% 46% 16% 42% 3.3% 46% 16% 42% 3.3% 46% 16% 42% 3.2% 39% 17% 48% 3.4% 45% 16% 43% 3.3% 46% 16% 42% 3.3% 48% 16% 42% 67% 36% -13% 30% 23% 43% 44% 8% 15% 16% 26% 26% 12% 18% 16% 12% 2% -6% 49% 32% 20% 9% 30% 16% 16% 20% 27% 7% 17% 17% 20% 27% 7% 17% 17% 20% 27% 7% 17% 17% 34% 25% 0% 27% 21% 20% 22% 12% 17% 17% 21% 20% 10% 19% 19% 17% -19% -2% 12% 5% 13% 15% -4% -2% 0% 13% 24% 20% -21% -13% 12% 18% -23% 50% 33% 0% -14% 21% -1% -1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 20% 27% 7% 17% 17% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 3.2% 42.7% 30.0% 53.9% 3.2% 42.7% 30.0% 45.3% 3.2% 42.7% 30.0% 38.5% 3.2% 42.7% 30.0% 41.0% 3.7% 41.5% 30.0% 28.3% 3.4% 41.5% 30.0% 34.2% 3.4% 41.5% 30.0% 34.2% 3.4% 41.5% 30.0% 34.2% 3.3% 41.5% 30.0% 30.6% 3.3% 41.5% 30.0% 30.6% 3.3% 41.5% 30.0% 30.6% 3.3% 41.5% 30.0% 30.6% 3.21% 42.7% 30.0% 43.9% 3.40% 41.5% 30.0% 32.7% 3.30% 41.5% 30.0% 30.6% 3.30% 40.9% 30.0% 27.9% 1Q10 4,414 1,201 2,114 1,099 -32 2,381 3,512 950 2,562 0 2,562 5.4 2Q10 5,147 1,235 1,715 2,196 578 2,332 3,950 1,210 2,740 0 2,740 5.7 3Q10 5,825 1,277 1,973 2,576 964 2,242 3,854 1,100 2,754 0 2,754 5.7 4Q10 6,562 1,543 2,440 2,581 2,229 2,691 3,050 640 2,410 0 2,410 5.0 1Q11 7,362 1,471 2,870 3,022 520 2,080 4,582 1,380 3,202 0 3,202 6.6 2Q11E 7,366 1,481 2,477 3,409 1,386 2,522 4,545 1,362 3,183 0 3,183 6.6 3Q11E 7,366 1,481 2,477 3,409 1,386 2,522 4,545 1,362 3,183 0 3,183 6.6 4Q11E 7,366 1,481 2,477 3,409 1,386 2,522 4,545 1,362 3,183 0 3,183 6.6 1Q12E 8,817 1,641 3,142 4,034 1,426 2,701 5,309 1,593 3,716 0 3,716 7.7 2Q12E 8,817 1,641 3,142 4,034 1,426 2,701 5,309 1,593 3,716 0 3,716 7.7 3Q12E 8,817 1,641 3,142 4,034 1,426 2,701 5,309 1,593 3,716 0 3,716 7.7 4Q12E 8,817 1,641 3,142 4,034 1,426 2,701 5,309 1,593 3,716 0 3,716 7.7 FY10 21,958 5,255 8,241 8,461 3,741 9,646 14,366 3,900 10,466 0 10,466 21.7 FY11E 29,462 5,912 10,302 13,248 4,677 9,646 18,218 5,465 12,752 0 12,752 26.3 FY12E 35,268 6,563 12,568 16,137 5,705 10,804 21,235 6,371 14,865 0 14,865 30.6 FY13E 42,639 7,219 15,082 20,338 6,846 11,884 25,376 7,613 17,763 0 17,763 36.6

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 10 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Consolidated Financials
P&L Net Interest Income Operating and Other Expenses Employee Expenses Pre-Provision Income Provision & Write Off Other Income Profit Before Taxes Tax Reported PAT Extraordinary Income Adj. Net Profit EPS (Rs) DPS (Rs) CEPS (Rs) FCFEPS (Rs) NII Growth PAT Growth (%) EPS Growth (%) Tax Rate (%) FY10 21,958 5,255 8,241 8,461 3,741 9,646 14,366 3,900 10,466 0 10,466 21.7 5.0 21.7 38.2 35% 60% 61% 27% FY11E 29,462 5,912 10,302 13,248 4,677 9,646 18,218 5,465 12,752 0 12,752 26.3 5.0 26.3 145.7 34% 22% 21% 30% FY12E 35,268 6,563 12,568 16,137 5,705 10,804 21,235 6,371 14,865 0 14,865 30.6 5.5 30.6 60.7 20% 17% 17% 30% FY13E 42,639 7,219 15,082 20,338 6,846 11,884 25,376 7,613 17,763 0 17,763 36.6 6.0 36.6 70.1 21% 19% 19% 30% Balance Sheet Equity Capital Reserve Networth Deposits Borrowing Total Liabilities Net Block Advances Adv. Growth (%) Investment Inv Growth (%) Provisions Cash Total Assets LDR BVPS Asset/Equity BVPS Growth DPS Dividend Gr. (%) Deferred Secn Inc FY10 4,850 39,418 44,268 7,76,761 58,524 9,03,832 3,376 5,61,135 27% 2,09,111 23% 3,741 1,11,677 9,03,832 72% 91 17.40 20.95% 5.0 11% 0 FY11E 4,850 49,333 54,183 9,70,952 73,156 11,22,569 3,576 7,01,419 25% 2,61,389 25% 4,677 1,37,652 11,22,569 72% 112 17.77 22.40% 5.0 0% 0 FY12E 4,850 61,077 65,927 11,84,561 89,250 13,64,017 3,776 8,55,731 22% 3,18,894 22% 5,705 1,67,082 13,64,017 72% 136 17.82 21.67% 5.5 10% 0 16,33,138 72% 166 17.56 21.78% 6.0 9% 0 16,33,138 3,976 10,26,877 20% 3,82,673 20% 6,846 2,01,078 FY13E 4,850 75,436 80,286 14,21,473 1,07,100 Cash Flow Retained Income Dividend Exp. Cash Profit Change in WC Operating C/F Capex Change in Invest Investing C/F Change in Loan Change in Eq Cap Financing C/F Cash Generation RoE (%) RoIC (%) Div Yield (%) Div Payout (%) P/E P/BV FY10 7,629 2,837 10,466
-1,19,742 -1,09,276

FY11E 9,915 2,837 12,752


-1,40,284 -1,27,531

FY12E 11,744 3,121 14,865


-1,54,312 -1,39,447

FY13E 14,359 3,404 17,763


-1,71,146 -1,53,383

-1,348 -52,478 -52,478 2,11,092 0 2,08,295 58,802 26% 1% 3.1% 27% 7.51 1.77

-200 -57,706 -57,706 2,08,821 0 2,05,984 25,975 26% 1% 3.1% 22% 6.16 1.45

-200 -63,979 -63,979 2,29,704 0 2,26,583 29,430 25% 1% 3.4% 21% 5.29 1.19

-200 -57,601 -57,601 2,54,762 0 2,51,358 33,996 24% 1% 3.7% 19% 4.42 0.98

TTM P/B (RHS) vs. 2 yr forward RoE (RHS)

TTM P/E (RHS) vs. 2 yr forward EPS growth(RHS)

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 11 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Historical Financials Historical Consolidated Financials P&L FY07 FY08 FY09 FY10
Interest Inc Interest Exp Net Int. Inc. Personnel Exp. Operating Exp Pre. Prov. Inc. Provision Other Income PBT Tax Net Income Adj. Net Inc. EPS (Rs) DPS (Rs) CEPS (Rs) FCFE (Rs) 33,153 18,976 14,177 5,489 3,847 4,842 1,462 4,468 7,848 2,470 5,378 5,378 11.09 5.0 50.21 -0.29 42,899 28,694 14,205 5,094 4,349 4,761 1,399 5,855 9,217 3,420 5,797 5,797 12.07 4.0 12.07 -15.99 53,746 37,467 16,279 6,241 4,803 5,235 3,901 7,654 8,988 2,450 6,538 6,538 13.48 4.5 13.48 -1.00 63,729 41,771 21,958 8,241 5,255 8,461 3,741 9,646 14,366 3,900 10,466 10,466 21.67 5.0 21.67 38.21

Balance Sheet

FY07

FY08

FY09

FY10

Cash Flow

FY07

FY08

FY09

FY10

Equity Cap Reserve Net Worth Deposits Debt Minority Int. Total Liab. Cash & Bal. Advances Investment Curr. Assets Total Assets CASA %

4,850 26,740 31,590 4,14,514 4,44,184 0 4,75,774 40,242 2,78,891 1,43,233 3,19,132 4,75,774 34.5

4,850 27,742 32,592 4,94,262 5,33,689 0 5,66,281 56,943 3,42,384 1,49,230 3,99,327 5,66,281 33.6

4,850 31,749 36,599 5,93,789 6,48,472 0 6,85,072 52,875 4,41,393 1,69,382 4,94,268 6,85,072 31.4

4,850 39,418 44,268 7,76,761 8,59,564 0 9,03,832 1,11,677 5,61,135 2,09,111 6,72,812 9,03,832 29.4

PAT Deposits Inc. Borrowings Inc. Advances Inc. Investments Inc. Operating C/F Investing C/F Financing C/F Cash & Equiv. Cash Generation

5,378 75,319 -250 57,885 28,781 -5729.43 -549.57 -4873.28 40241.75 -11152.28

5,797 79,747 -1,430 63,493 5,997 13800.75 -882.02 3782.68 56943.16 16701.41

6,538 99,527 27,607 99,009 20,151 -5277.99 -1972.56 3182.41 52875.01 -4068.14

10,466 1,82,973 25,012 1,19,742 39,729 55200.02 -1218.11 4819.64 111676.57 58801.55

RoE (%) Div Payout (%)

20% 34%

27% 33%

30% 33%

29% 23%

Int. Inc. Growth NII Growth EPS Growth (%) PAT Growth PATM (%) Tax Rate (%)

16% 31%

29% 0% 9% 8% 14% 37%

25% 15% 12% 13% 12% 27%

19% 35% 61% 60% 16% 27%

Net D/E Net NPAs Total CAR Tier I Tier II

7.09 0.17 11.33 9.98 1.35

8.3 0.15 11.61 8.54 3.07

8.6 0.18 13.22 8.67 4.55

6.4 0.17 13.93 8.18 5.75

P/E P/BV

14.61 2.49

13.42 2.41

12.02 2.15

7.48 1.77

September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 12 of 13

ANDHRA BANK

Absolute LONG

Relative Overweight

30% Upside in 12 months

Equirus Securities
Bhavin Shah Equity Sales Piyush Chande Viral Trivedi Vaibhav Agarwal Darshit Dealer Nilesh Ashish Shah E-mail piyush@equirus.com viral@equirus.com vaibhav@equirus.com darshitshah@equirus.com E-mail nilesh@equirus.com ashishshah@equirus.com CEO 91-22-26530607 91-22-26530607 91-22-26530632 91-22-26530607 91-79-40504005 91-79-40504003 91-79-40504003 91-79-40504004 bhavin@equirus.com Research Abhijith Vara Ashutosh Tiwari Devam Modi Jaykumar Doshi Manoj Behera Maulik Patel Sourav Agarawal Viraj Mehta Vivek Jhunjhunwala Sector/Industry Shipping & Port, Auto Ancillaries Metal & Mining Power IT Media & Telecom Oil and Gas, Strategy Auto & Auto Ancillaries Cement, Mid Caps Financial Organisations Email abhijith@equirus.com ashutosh@equirus.com devam@equirus.com jaykumar@equirus.com manojbehera@equirus.com maulik@equirus.com souravagarwal@equirus.com viraj@equirus.com vivek@equirus.com 91-79-40504040 91-79-40504050 91-79-40504002 91-79-40504017 91-79-40504016 91-79-40504007 91-79-40504021 91-79-40504019 91-79-40504015 91-79-40504006 91-79-40504014

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Rating & Coverage Definitions:

Absolute Rating LONG : >= 15% upside over investment horizon SHORT: >=5% downside over investment horizon Disclaimers: This document has been prepared by Equirus Securities Pvt. Ltd, (Equirus). Equirus and its group companies are a full-service investment banking firm NEUTRAL: Trading range of -4% to +14% Relative Rating OVERWEIGHT: Likely to outperform the benchmark by at least 5% over investment horizon NEUTRAL: likely to perform in line with the benchmark UNDERWEIGHT: likely to underperform the benchmark by at least 5% over investment horizon

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September 28, 2010

Analyst: Vivek Jhunjhunwala vivek@equirus.com (+91-8128694104)

Page 13 of 13