Fitch Ratings India Assigns Ratings To Andhra Bank.

Business Editors

MUMBAI, India--(BUSINESS WIRE)--Sept. 16, 2002

Fitch Ratings India has assigned an 'AA+(ind)' National rating to the INR1.4 billion subordinated debt programme of Andhra Bank (AB). In addition, 'AAA(ind)' and 'F1+(ind)' National ratings have been assigned to the deposit and short-term borrowing programmes, respectively, of the bank, as well as Individual and Support ratings at 'C/D' and '4T', respectively. The Rating Outlook is Stable.

The ratings reflect the moderate size, majority government ownership and above-average financial profile of Andhra Bank (AB), which is amongst the 20 largest banks in India in terms of assets and has about 1.7% share of the total deposits in the banking system. The bank has traditionally lent to small and medium entities and the agricultural sector in the state of Andhra Pradesh in India. However, like most banks, it has identified retail banking as a key driver for the future, as a sector in which growth is high and delinquencies low, especially in the housing finance market.

AB's net non-performing loans (NPLs) to net loans ratio at 2.45% for end-FY 02 is one of the lowest amongst government banks, although the rapid growth in its loan portfolio (it has nearly trebled since FY98) at the same time that the economy has witnessed a prolonged slowdown may affect asset quality in future. While loans have historically been concentrated in Andhra Pradesh (currently 65%), the geographical risk is being diversified.

AB's total capital ratio of 12.59% (Tier-1 ratio: 8.8%) was above the regulatory minimum of 9%. Equity to asset ratio of 4.22% is low but is in line with that of peers. NPL coverage has been well above 50% since FY99 (at nearly 55% for end-FY02) and was relatively high by Indian standards. With the net NPLs to equity ratio at 27%, AB ranks amongst the more solvent government banks.

Fitch India further notes that AB's net interest margins have historically been lower than those of some of the better performing government banks primarily due to the high-cost term-deposits being used to fund growth in the past. The bank has been reducing its cost of deposits by increasing the share of low-cost savings and demand deposits and improving its margins further through increased share of retail and consumer loans where the yields are comparatively higher.

AB's extensive branch network within its home state and adjoining regions, coupled with high depositor confidence on account of its long history and being a government-owned bank, gives the bank access to a large and relatively stable deposit base. It reports high renewal rates for its deposits and the accretion has consistently exceeded the repayments.

Compared to India's private sector banks, AB has been slow in embracing technology, but is now investing in automation and networking its branches to improve its delivery capabilities. Despite pruning its staff strength in FY01 through a 'voluntary retirement scheme', AB's cost-to-income ratio continues to be above 50%. The contingent liabilities of Andhra Bank Financial Services Ltd. (100% subsidiary) could marginally affect AB's capital ratio if the claims were to devolve on the bank.

Contact: Vivek Srivastava; Ananda Bhoumik; R Jayakumar, Mumbai Tel: [phone] or Ambreesh Srivastava, Singapore [phone].

Fitch Ratings's Support and Individual Ratings for Banks

Fitch's Individual ratings assess how a bank would be viewed if it were entirely independent and could not rely on external support. Its Support ratings deal with the question of whether a bank would receive support from its owners or from the state if it were to get into difficulty. These ratings are not debt ratings but rather, respectively, an assessment of the intrinsic strength of a bank and of any level of outside support that may, or may not, be available to it.

Fitch's National ratings provide a relative measure of credit worthiness for rated entities in countries where the sovereign's foreign and local currency ratings are below 'AAA'. National ratings are not internationally comparable since the best relative risk within a country is rated 'AAA' and other credits are rated only relative to this risk. They are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India.

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