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AN investment in the stock of Andhra Bank can be considered at the prevailing price. The stock is trading at a price-to-earnings multiple (PEM) of nearly eight times its earnings for the 12-month period ended December 2004. The earnings for this period includes some non-recurring expenses and the PEM is overstated to that extent.

Andhra Bank is comfortably placed in terms of both capital adequacy and the proportion of bad loans. The bank thus has relatively greater flexibility to increase balance sheet size in pursuit of profit growth. These factors also place the bank in a position to maintain growth in dividends.

Andhra Bank is one of the smaller public sector banks with a regional focus. Most of its branches are located with in Andhra Pradesh. The bank has been growing rapidly and is also one of the most profitable banks in the country with a return on net worth in excess of 20 per cent in each of the past five years.

The bank's growth potential as well as relatively clean portfolio of advances should also allow the bank to raise capital on favourable terms. Capital mobilisation would become necessary to accommodate growth and changes in regulations relating to minimum capital requirements. Investments can be considered with a long-term perspective.

Suresh Krishnamurthy

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