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	Andhra Bank

Issue Summary

Type
Equity

Size
Rs 1.5 bn

Price
Rs 10

Face value
Rs 10 per share

Shares on offer
150 m

Issue Opens
12th February 2000

Issue Closes
23rd February 2000

Min. subscription
200 shares

Lead Managers
SBI Capital Markets and DSP Merrill Lynch, IDBI and UTI Securities.

Co-Lead
Managers
Bajaj Capital, Centrum Finance, KJMC Global and Tata Finance.

Listing
Hyderabad, Mumbai and National Stock Exchanges

Promoters
Government of India

Promoters post
issue holding
66.7

Background

Business

The bank has a total of 1,018 branches spread across the country. Present day banking being technology driven, the bank has 201 totally computerized branches and 158 partially computerized branches as on 8th December 2000. The bank also has recorded significant growth in the year FY00. Its net NPAs was 3.5% of the net advances as on 31st March 2000.
The total deposits of the bank stood at Rs 145 bn as against the Rs 104 bn during the previous year. The gross bank credit of the bank also increased from Rs 48 bn to Rs 59 bn, registering a growth rate of 22% in FY00. As on 30th September 2000, gross credit stood at Rs 62 bn, thus registering a growth rate of 26% on an annualised basis.

The share of the priority sector advances, as percentage to net bank credit was 45% as against a stipulated norm of 40%. The outstanding credit of the bank under priority sectors increased by 24%, i.e. Rs 23 bn in FY00.

Capital Adequacy Ratio (CAR)

(Rs m) FY98 FY99 FY00 2QFY01

Eligible Tier I Capital 3,975 4,609 5,494 6,070

Eligible Tier II Capital 185 257 1,836 2,641

Total Capital 4,159 4,866 7,330 8,711

Total risk adjusted assets 33,622 44,134 54,864 69,752

CAR 12.4% 11.0% 13.4% 12.5%

The bank has planned for a subsidiary of a primary dealer in Government securities with an Initial Capital of Rs 1 bn. The bank has applied to Reserve Bank of India (RBI) for setting up the subsidiary. The Bank targets a growth rate of 40% during 2000-2001 with a thrust on corporate finance, retail lending, education, housing, and personal banking loans. The bank is planning for networking 100 branches in top business centres in the country.
The main objectives of this public issue are:

To augment the capital base of the bank to meet its future capital adequacy requirements as stipulated by the RBI.
To augment the long-term resources of the bank
To meet the expenses of the issue.

Promoters

Dr. Bhogaraju Pattabhi Sitaramaiah founded the bank in 1923. The bank started its operations at Machilipatnam, a port town in Coastal Andhra and was nationalised in FY80.

Mr. B. Vasanthan is the Chairman & Managing Director of the Bank. He has started his career in April 1965 with Syndicate Bank and has occupied various posts in the bank. He has worked as Executive Director of Andhra Bank before being appointed as Chairman & Managing Director of the Bank from May 2000.

Sector

The banking sector has seen far-reaching changes in recent years. The RBI has, in keeping with the recommendations of the Narasimham Committee, raised the minimum Capital Adequacy Ratio (CAR) from the level of 8% to 9% with effect from March 31, 2000. The rise in CAR was accompanied by tightening of norms of non-performing assets, making profitability and competence of banks a hallmark at a time when banks are facing tight spread. Since the government freed the interest rates on deposits for over 15 years coupled with the withdrawal of restrictions regarding uniform rates for the same maturity period deposits, competition has really intensified in the Indian banking sector.

Reasons to apply

The net NPAs of the Bank are relatively low at 3.5% of the net advances as on 31st March 2000. This is also lower than the average NPA level of 7.9% for all the public sector banks. The bank is taking steps to reduce the NPA level through aggressive recovery drive, initiating proactive steps to arrest the slippage of NPAs combined with improved risk management practices. The net NPAs of the bank as on 30th September 2000 have decreased to 3.2%.

Non performing assets

(Rs m) FY98 FY99 FY00 2QFY01

Gross advances 34,628 47,771 58,346 62,107

Gross NPAs 3,413 4,502 4,568 4,487

% of gross NPAs to gross advances 9.9% 9.4% 7.8% 7.2%

Net advances 3,215 4,524 5,574 5,944

Net NPAs 94 193 194 192

% of net NPAs to net advances 2.9% 4.3% 3.5% 3.2%

Apart from conventional lending and borrowing, the bank has other diversified business, which include credit cards, housing finance (through Andhra Bank Housing Finance Limited) and merchant banking.

The bank has branch network of 1018 branches well spread across the country of which, 384 are rural branches, 285 are semi-urban branches, 225 urban branches and 124 metropolitan branches. It also has specialised branches totaling 21 to cater other services like agriculture, small-scale industries, industrial finance and high tech branches.

The bank's capital adequacy ratio was 12.5% as on September 30, 2000, as against the minimum requirement of 9% as specified by RBI.

Reasons not to apply

The Indian banking sector is undergoing large-scale consolidation, wherein bigger banks are merging or acquiring smaller banks to command better economies of scale and to increase their retail presence. Moreover, private sector banks are generally more aggressive and have more control over decision-making process than public sector undertaking. This is apparent from the fact that the market share of private banks have gone up considerably than state owned banks. Therefore, the intensity of competition is very high because private banks have upper hand in terms of value added services.

As on 30th September 2000, there were 324 cases involving writ petitions filed by employees, suits and consumer cases with an aggregate claim of Rs 3.4 bn. Out of these, the contingent liabilities were above Rs 10 million in 10 cases. Moreover, various proceedings against the bank involving income tax liabilities of Rs 387 m are also pending in appeal with IT authorities.

Going forward, keeping in mind the competition in perspective, interest spread i.e. difference between cost of deposits and yield on advances, would become thinner and thinner.

Financial Performance

(Rs bn)	FY98	FY99	FY00

Interest earned	9.2	10.5	14.4

Other Income	1.2	1.5	2.3

Total Income	10.3	12.0	16.7

Interest expenditure	6.1	7.2	10.3

Other expenditure	2.7	3.3	3.6

EBDIT	3.1	3.4	4.2

OPM (%)	33.9%	31.9%	28.8%

Provisions	0.8	0.7	1.7

Net profit	0.8	0.9	1.2

NPM (%)	8.2%	8.7%	8.4%

Issued shares (bn)	0.3	0.3	0.3

EPS (Rs)	2.2	2.6	3.5

P/E (x)	4.6	3.8	2.9

Key Ratios

% of Net NPA / Net advances	2.9%	4.3%	3.5%

Credit / Deposit ratio	NA	43.0%	39.0%

Yield on Advances (%)	12.7	12.6	12.3

Cost of deposits (%)	8.1	8.3	8.7

Interest Spread (%)	4.6	4.4	3.6

Funding

N. A.

Shareholding

Particulars	Pre-Offer	Post-Offer
Govt. of India	100.00	66.7
Public	-	33.3
Total	100.0	100.0

	The Indian banking sector is undergoing large-scale consolidation, wherein bigger banks are merging or acquiring smaller banks to command better economies of scale and to increase their retail presence. Moreover, private sector banks are generally more aggressive and have more control over decision-making process than public sector undertaking. This is apparent from the fact that the market share of private banks have gone up considerably than state owned banks. Therefore, the intensity of competition is very high because private banks have upper hand in terms of value added services.
	As on 30th September 2000, there were 324 cases involving writ petitions filed by employees, suits and consumer cases with an aggregate claim of Rs 3.4 bn. Out of these, the contingent liabilities were above Rs 10 million in 10 cases. Moreover, various proceedings against the bank involving income tax liabilities of Rs 387 m are also pending in appeal with IT authorities.
	Going forward, keeping in mind the competition in perspective, interest spread i.e. difference between cost of deposits and yield on advances, would become thinner and thinner.