While the scrip has benefited from the recent rally in the banking stocks that remained buoyant on hopes of excellent returns, the investor fancy was also helped by a perky financial performance of the bank, its sound fundamentals and a pro-active management. The focus of the management can be seen through in the results of FY 03. For eg, the annual report 2001-02 stated - "the bank is proposing to reach a total business figure of Rs 32,500 crore during 2002-03 and is also aiming to bring down net NPAs further down from the existing 2.45 per cent."
The bank has been able to achieve both. Its total business grew at 15.8 per cent to Rs 33,000 crore (thanks to an above industry average growth of 14 per cent in deposits and 19 per cent growth in advances), while the net NPAs were brought down at 1.79 per cent.
The slippage ratio too has come down to 2.51 per cent (2.9 per cent) underlining the banks commitment to rein in NPAs. Historically, too, Andhra Banks NPAs have been significantly lower than the industry average.
Coming back to the results, the bank has reported a 99 per cent growth in profits for the year ended March 2003 at Rs 403 crore. Its a no-brainer that a significant proportion of the rise in profits is attributable to profits from trading and sale of government securities. In fact, as much as Rs 200 crore profit on account of sale of investments was booked during the last quarter while for entire year 2002-03, the treasury income stood at Rs 394 crore.
The question to be asked now is - given the general consensus that interest rates have more or less bottomed out, will the bank be able to maintain its profitability given its overwhelming dependence on treasury income
Well, while it may be difficult to replicate such huge treasury profits in the year ahead, there is still some steam left and scope for improvement in 2003-04. The yield on investments for the year ended March 2003 was 9.78 per cent as against the yield on government securities that currently stands below 6 per cent. This indicates the extent of unrealised gains on the banks government securities portfolio. These gains can come in handy for profit growth in 2003-04.
The bank will have also have to make it up through efficient liability management and while profit on sale of investment may go down, trading profits are likely to go up owing to increased interest rate volatility.
Apart from trading, the retail sector could be another driver for growth and is expected to grow at 40 per cent. Andhra Bank has merged its housing subsidiary with itself during 2002-03 so as to consolidate the housing finance business.
The bank more than doubled its housing finance disbursements at Rs 1,233 crore during 2002-03 and these are expected to rise further. The Government debt buyback programme is also expected to generate profits as the bank has a portfolio worth Rs 427 crore eligible for the buyback. Thus, barring the probability of incremental growth in NPAs, bottomline should remain northbound.
There are concerns too. Yields are declining sharply. The yield on advances and that on investments stood at 11.64 per cent (12.03) and 9.78 per cent (11.92 per cent) respectively.
But its cost of deposits (CoD) at 7.12 per cent (8.2 per cent) is declining at a faster pace than the yield on advances, thus negating the adverse impact. As long as the fall in CoD is steeper than in yields, it is a happy augury for the bank as it will continue to prop up its net interest margin.