Andhra Bank: Average

Score: Average

N. S. Vageesh

ANDHRA Bank plans to raise Rs 150 crore through its initial public offering at Rs 10 per share.

The offer is being made to augment its capital base. Although it is currently comfortable on the capital adequacy parameter with the ratio at 12.49 per cent of risk-adjusted assets, (compared to the regulatory minimum of 9 per cent), the bank is making a preemptive bid to raise resources to fund its expansion. This distinguishes it from other recent entrants such as Indian Overseas Bank and Vijaya Bank, who had exhausted other avenues and were unable to delay their public offers much longer.

Andhra Bank is preparing to increase its risk-weighted assets from around Rs 8,000 crore to Rs 10,000 crore in the next year. Besides, more head-room will be available on tier II also (around Rs 110 crore can be raised on this front after the public issue).

Although Andhra Bank's track record on the profitability is relatively better compared to recent entrants, it is mediocre if one factors in the Rs 591.32 crore of recapitalisation that the government has effected over the past decade. The government agreed to adjustment of accumulated losses of Rs 243.37 crore against capital in March 1999.

Incidentally, the government had written-off Rs 297.07 crore of capital against accumulated losses in the case of Vijaya Bank and around Rs 1000 crore in the case of Indian Overseas Bank. The government's share in Andhra Bank's share capital will be down to 66.66 per cent after the offer and the return of Rs 47.95 crore to the government.

The bank posted a net profit of Rs 120.59 crore on a total income of Rs 1,673.38 crore in 1999-2000. For the six months ended September 2000, the bank posted a net profit of Rs 63.78 crore on an income of Rs 985.15 crore. Given the management's stated intention of taking the entire cost of voluntary retirement scheme (VRS) of Rs 160 crore this year itself, it is unlikely that the bank will be able to post any profit this fiscal. Investors will have to factor in the possibility of a dip in profits affecting the bank's valuation in the short term.

Among the positives for the bank are its fair asset quality. Non-performing assets, which were 3.23 per cent of advances as of September 2000, compares favourably with a number of peers in the banking sector. With only 63 per cent of its business computerised, the bank still has some distance to go before it can face competition.

The implementation of the VRS scheme, which will see the exit of around 1,750 staff, could give a fillip to technology initiatives. Its 1,018 strong branch network is likely to see some degree of rationalisation as part of the process. These developments, by and large, augur well for public sector banks and may serve to revive some degree of interest in their scrips. Scrips of banks such as Syndicate Bank, Dena Bank, Indian Overseas Bank and Vijaya Bank have been quoting at close to or below par for the last several months.

Although Andhra Bank's financials seem better than these banks, investors need to take into account the slowdown in the economy and trade liberalisation, which will shortly follow. Both these developments could affect earnings and asset quality not only for Andhra Bank but for others as well, going forward to the next year. This could limit capital appreciation on investment.

There is also a consolidation wave in the private banks sector. This could spread to public sector banks too, post-VRS restructuring phase. The government is not, in principle, averse to the idea of such mergers. Although they may be in the realm of speculation now, mergers are a distinct possibility in the immediate future. Risk-averse investors can consider missing the IPO and entering the stock after the bank's results for 2001 are available.

Industry Class :Banking

Issue Type :Equity at Rs 10 per share

Issue Opens :February 14

Earliest closing :February 23

Lead Manager :SBI Caps

Listing :Hyderabad, BSE, NSE