Three Metrics For Andhra Bank (NSE:ANDHRABANK) You Should Know

As a small cap stock, with a market capitalisation of ₹42.38b, operating in the financial services industry in IN, ANDHRABANK is a complex investment. Since banks profit from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting their cash flow. Post-GFC recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Andhra Bank to vulnerabilities. A bank’s financial position may rapidly deteriorate in an adverse macro event such as political instability which is why it is crucial to understand how well it manages its risks. Poor liquidity and high leverage could place Andhra Bank in a precarious position at the face of macro headwinds. We can gauge the bank’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now. View out our latest analysis for Andhra Bank

NSEI:ANDHRABANK Historical Debt June 21st 18
NSEI:ANDHRABANK Historical Debt June 21st 18

Is ANDHRABANK’s Leverage Level Appropriate?

Banks with high leverage are exposed to higher risks around its ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, Andhra Bank leverage level of 22.5x is very safe and substantially below the maximum limit of 20x. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. If the bank needs to firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position. The bank has very little headroom to increase its debt level as it may ratchet up interest cost and further deteriorate its financial position.

How Should We Measure ANDHRABANK’s Liquidity?

Handing Money Transparent Since loans are relatively illiquid, we should know how much of the bank’s total assets are comprised of these loans. Usually, they should not be higher than 70% of total assets, which is the case for Andhra Bank’s ratio at 60.58%. At this level of loan, the bank has preserved a sensible level between maintaining liquidity and generating interest income from the loan.

Does ANDHRABANK Have Liquidity Mismatch?

ANDHRABANK profits by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often cannot be readily realized, however, customer deposits are liabilities which must be repaid on-demand and in short notice. The discrepancy between loan assets and deposit liabilities threatens the bank’s financial position. If an adverse event occurs, it may not be well-placed to repay its depositors immediately. Relative to the prudent industry loan to deposit level of 90%, Andhra Bank’s ratio of over 71.64%is appropriately lower, which positions the bank cautiously in terms of liquidity as it has not disproportionately lent out its deposits and has retained an apt level of deposits.

Next Steps:

Even though the bank has upheld a high level of liquidity, its elevated level of debt compared to its equity may impact its ability to pay back its large group of debtors in times of adverse conditions. Weak leverage risk management increases the risk of Andhra Bank as an investment for shareholders. Today, we’ve only explored one aspect of Andhra Bank. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three essential aspects you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for ANDHRABANK’s future growth? Take a look at our free research report of analyst consensus for ANDHRABANK’s outlook.
  2. Historical Performance: What has ANDHRABANK’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.