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Andhra Bank (ANDBAN) CMP Rs.100.35 Buy Above 100.50 Target Rs.110 Potential upside 10%. 3 months.

Quality business at reasonable valuations… 

Andhra Bank is a mid size PSU bank, having major presence in the southern part of India . The bank as of Q3FY10 has a total branch network of 1540 branches across the country.  The bank has been a consistent performer as it has grown its core business at a CAGR of 22% over FY07-FY09. Even in FY10 the bank has performed better than banking industry, as the core business of bank grew by 24% in Q3FY10. The bank also commands superior asset quality as GNPA as of Q3FY10 stood at 0.87%. The provision coverage also stood at 95% in the quarter. We believe the bank will be able to grow ahead of the industry going ahead and deliver higher return ratios. 

 * Core business growth above industry average

Andhra bank has grown above industry average rate as the total business of the bank has grown by 24% YoY as of Q3FY10. The advances and deposits grew by 23% YoY and 24% YoY respectively. The increasing exposure of the bank on MSME and retail lending has helped the bank to sustain its NIM’s at 3.35% (Q3FY10), this was partly due to repricing of high cost liabilities. Going ahead we expect the bank to grow at a CAGR of 22% over FY10- FY12E and maintain its margins at 3% levels. The bank has also opened 112 branches in 9MFY10 in north and west India , which will also help the bank to build a better low cost liability base.

 * Interest rate risks to the investment book relatively less.

As of Q3FY10 only 14% of the investment book of the bank lies in the AFS segment (Duration: 2.7 years). Low exposure to AFS segment will lead to low MTM losses for the bank in an environment where bond yields are under pressure owing to inflation and high government borrowing programme.

* Superior asset quality

The bank commands one of the best asset quality profile in the mid size PSB space. The GNPA and NNPA for Q3FY10 stood at 0.87% and 0.17% respectively. The provision coverage of the bank stands at 95% (including technical write offs). 
Financials:

At the CMP of Rs 100, the stock is trading at 1.1x and 1x its FY10E and FY11E ABV, respectively. We believe the bank will be able to grow its core business at 22% CAGR over FY10-FY12E with NIM’s at 3% levels without hurting its asset quality. We expect the bank to trade higher in terms of P/ABV multiple as it has been consistently generating ROE’s in the range of 18%-19%. We expect the bank to deliver atleast 10% returns over a period of 3 months.

technical analysis  ____________________________________________________

 
Technical outlook

Andhra Bank continues to be in an up trend since its March 2009 lows around Rs 38 levels. Recently stock has corrected from Rs 125 odd levels and found support near Rs 95 levels thereby retracing July-Oct’09 rally by 61.8% (Fibonacci ratio). It is also near value area of Rs 97 marked by 200 day EMA (exponential moving average) 14 period RSI has given a positive cross over on daily charts indicating positive momentum building in the stock