Assignment # 3

Banking & Insurance

Topic: CAMELS Rating of Andhra

Bank and Vijya Bank

Submitted To: Submitted By:

Mr. Abhishek Dutta Vikas Mahajan B50

Lecturer In L.I.M Ajay Kumar B52

Aaditya Choudhary B53
Renika Kirti B54
Chanchal Kakkar B55
RT 1801
Introduction about Vijaya Bank
Vijaya Bank has the highest number of branches in its home state Karnataka. During the
financial Year 2009-10, so far, the bank has opened 48 Branches. In line with the prevailing
trends, the bank has been giving greater thrust towards technological upgradation of its
operations.The bank has network of 1149 branches, 43 Extention Counters and 376 ATMs.
All 1149 branches,39 extention counters, 12 service branches are functioning on CBS platform,
and at 754 centers, covering 100 % of Bank's business. Realising your constantly evolving and
diverse needs, the bank has diversified too. Entering several new areas such as credit card,
merchant banking, hire purchase and leasing, and electronic remittance services.
1170 Branches / offices are under RTGS / NEFT. Vijaya Bank is one among the few banks in
the country to take up principal membership of VISA International and MasterCard International.
The driving force behind Vijaya Bank's every initiative has been its 11688 strong dedicated
workforce.

SUPPORT SYSTEMS & NEW BUSINESS INITIATIVES

• Total number of branches/offices under Core Banking Platform improved to 912,

covering over 97% of total business.
• 14 new ATMs operationalzed and networked during the quarter, taking the tally of ATMs
to 352.
• As at 31.12.2008, the Bank had 1065 Branches, spread over 28 States and 4 UTs.
• V- Payroll, an SB deposit scheme with attractive features was introduced targeted at the
salaried class.
• Facility of SMS alerts enabled under Internet banking.
• VIJAYA VIKAS Smart Card launched under IT enabled financial inclusion.
• Campaign for investment credit to the agriculture sector.

GUIDANCE - MARCH 2009

• To achieve more than 20% growth in business.

• To reach 1100 branch network by March 2009.
• Step up credit off take under retail and designated priority sectors,
• To set up online trading portal to provide stock trading facility to customers.
• Launch mobile banking services by March 2009.
• Rollover to Basel II framework within regulatory timeline.
• 100% CBS by March 2009.
 CAMELS Rating For Vijaya Bank

Capital Adequacy:

The bank’s capital adequacy remains stable; Basel II implementations are on track. The bank is
well capitalized among the public sector banks in India. As of 31 st March 2008, the bank's Tier 1
capital ratio stood at a fairly high 8.19% as compared to 6.58% a year earlier. The bank’s capital
adequacy is comfortable given that majority stake is held by Government of India (GoI). During
the financial year, the bank increased its equity capital by INR 13.59 billion by way of Qualified
Institutional Placement (QIP route) and also raised INR 6.55 billion through issue of Innovative
Perpetual Debt Instrument (IPDI). The bank’s capitalization levels are satisfactory, reflected by
bank’s capital ratio of 12.96% as on 31st March 2008. The bank’s Basel II preparations are on
track, and the impact of bank migration to Basel II implementation is expected to be minimal to
its capital ratio. Therefore, the bank is in a relatively comfortable position to maintain positive
trends in return on equity (ROE). The net worth of the bank stood at INR 86.28 billion as on 31st
March 2008 with a growth rate of 57% over the previous year.

Capital Adequacy Trend:

The bank’s capitalization levels have been steadily increasing over the years, the ratio remains
above the minimum capital requirement of 9%. During Q3 FY 09, the bank has recorded
comfortable capital adequacy ratio of 13.05% (under Basel I) and 13.39% (under Basel II).
Similarly, the bank’s Tier I capital ratio at 8.40% and 8.92%.

Asset Quality:

While the bank’s asset quality trends seem to be strong, the deteriorating macro economic
conditions might lead to change in the risk profile of its earning assets. The bank’s asset quality
remains strong and showed declining trends in NPAs (Non- Performing Assets) for past few years.
The bank has initiated substantial measures to augment recovery and contain NPAs. The percentage
of gross NPAs stood at 1.68% as on 31st March 2008 compared to 2.42% a year ago. The bank has
recovered INR 3.68 billion from written off assets. As on 31 st March 2008, the bank’s net NPAs
declined to 0.52% as against 0.96% a year ago. The bank’s net NPAs to total assets stood at 0.33%
and the net NPAs declined by 27.1% year-on-year to INR. 5.92 billion. The bank’s provision
coverage ratio has improved to 81.25% and it is comparable to its peer group. The bank has shown
remarkable focus on retail segment during the year 2007-08 through 20 Retail Hubs across the
country to facilitate the single window banking. As a result, the bank’s retail credit has improved to
INR 193.78 billion and constituted 21.07% of non food credit. The bank’s educational loan growth
stood at 42% as on 31st March 2008, hence the bank’s total priority advances account for 49.33% of
net bank credit as against stipulated benchmark of 40%.
Liquidity:

During FY08, the bank’s credit deposit ratio stood at 75.64%, which is 279 bps more than the
peers and it has significantly increased to 79.26% in Q3 FY 09. The enhanced credit deposit ratio
could be a liquidity concern.

Profitability:

The bank’s has shown an excellent performance and its ROE is nearly 9% higher than that of
peers.
The bank reported a net income of INR. 0.09 billion (INR.12.71 billion in 2007) in 2008, which
translated into a healthy ROA of 1.25% and ROE of 28.44%, which is significantly higher than
peers average of
1.05% and 19.46%, respectively, for the year 2007-08. The Bank has reported 1.52% ROA for
the Q3 FY 09. The bank’s net interest income continues to account for the major part of
operating income. As on 31st March 2008, the bank’s net interest income accounted for 66.7%
(68.7% in 2007) of operating income and 33.3% (31.3% in 2007) by non-interest income.
Overall, the net interest margin has decreased to 3.11% in 2008 compared to 3.20% in 2007.
Historically the bank's performance was constrained by the large expenditures related to branch
expansion and ATMs development. However the bank’s cost to income ratio improved to
41.68% in FY 08 compared to 52.13% in the previous year. The bank's profitability stands at the
top end of the range of public sector banks in India. However, the bank’s strategic domestic
positioning and the supportive foreign market conditions that prevailed in recent years have
equally contributed to the bank’s profitability. In addition, the bank’s revenue and earnings
streams to be stable. The bank continued to focus on increasing the low cost deposits, enlarge the
customer base, improve the asset quality and augment the non-interest income.

Financials (INR Billion) 2007-08

Interest Income 123.55

Interest Expenses (81.26)
Net Interest Income 42.29
Fees & Commission 7.83
Trading Revenue 3.66
Other Income 9.67
Operating Income 63.45
Employee Expenses (16.57)
Other Operating Expenses (9.87)
Operating Profits 37.01
Provision for NPA (6.97)
Other Provisions & Contingencies (3.11)
Profit Before Tax 26.93
Tax (6.84)
Profit After Tax 20.09

Investment Portfolio:

The bank’s investment framework is well defined. The bank performed well with its investment
activities, the ratio of G-sec to total investment is at 89.71% as on 31st March 2008. The bank’s
high proportion of G-sec securities in the HTM category with low yield of 7.94% but profitable
overseas business helped the bank in a rising interest rate scenario prevailing in FY 08. As on 31 st
March 2008, the bank invested INR 338.06 billion in SLR securities, which is slightly higher
than statutory limit.

Risk Management:

The bank has a robust risk management system

The bank's risk management practices are appropriate for its size and the bank appears to have
the necessary risk management infrastructure such as ALM committee, Credit Risk Management
committee, and Operational Risk Management Committee. The board of directors of the bank
provides comprehensive guidelines and tools for risk taking and this approach has come to
characterize the overall risk culture of the bank. The bank’s risk appetite is limited and
conservative. The bank's liquidity management is well developed, which is typical for public
sector banks in India. The bank has implemented policies in order to be in compliance with the
board’s recent guidelines for the prevention of any credit fraud. The bank signed an agreement
with Hewlett Packard Ltd for credit management software. The bank is also in the process of
implementing a Basel II compliant internal rating classification system.

Significant Developments:

The bank has launched two new products namely Akshay Urja under retail trade category and
Star Dhanvantari Suvidha scheme & scheme for tax returns preparers under P&SE category to
overreach the bank’s customers’ requirements. The bank has formed Strategic Business Unit
(SBUs) based on customer segmentation to provide a good banking experience for its customers
and branches have been formed according to their business focus, i.e. resources center, profit
center, priority sector center and general banking center. On 15th July 2007, the bank has opened
a representative office to increase the number of overseas offices to 26 spread over 14 countries.
The bank has entered mutual fund tie-up arrangement with ING investment management and
Franklin Templeton Investment to market their mutual fund products to augment its fee income.

Rating Outlook:

This rating is based on CAMELTP framework, which is used to assess the bank’s financial health
and risk exposures. The rating assigned to Vijaya Bank is specific to the Innovative Perpetual
Debt Instruments (Capital Bond Series IV) issue of Rs. 400 crore or INR 4.0 billion. The rating
factored the Government of India ownership, high quality of risk weighted assets, stable low cost
deposit base, above average growth in profit, decline in the gross NPA, and favorable non-
interest income.

Favorable rating factors:

• Government of India ownership

• Higher operating profits
• Healthy earning assets
• Comfortable capital adequacy ratio
• Optimum cost structure
• Robust credit growth
• Well diversified overseas operations

Unfavorable ratings factors:

• High credit deposit ratio

• Higher real estate exposure

In this rating we get to know that the continuing financial crises in India should affect the
banking industry performance in near future, therefore, Vijaya Bank’s revenues and earnings
could suffer in the near term. However, the bank’s well-diversified nature of its business
portfolios, the strength of its activities in India’s retail and corporate banking, the better credit
quality of its global banking activities, its solid capitalization and good asset quality, will help the
bank to withstand such pressures.

Key Ratios (As on 31st March 2008)

Operating Ratios

Cost of Deposits 5.23% 5.93%

Cost of Borrowings 7.83% 5.38%
Cost of Funds 5.07% 6.07%
Return on Funds 7.96% 8.48%
Spread 2.89% 2.41%
NIM 3.11% 2.83%

Earnings (as % of Assets) FY2008

Interest Income 6.91% 7.30%

Interest Expense 4.54% 4.95%
Net Interest Income 2.36% 2.35%
Loan Loss provision 0.39% 0.35%
Non-Interest income 1.18% 1.21%
Non-Interest Expense 2.05% 2.20%
PBT 1.50% 1.35%
Taxes 0.38% 0.40%
PAT 1.12% 0.96%

Profitability

Return on Assets (ROA) 1.25% 1.05%

Return on Equity (ROE) 28.44% 19.46%

Asset Quality (As % of Advances)

Gross NPA 1.68% 2.02%

Net NPA 0.52% 0.53%
Real Estate Loans 12.30% 6.80%
Term Loans 38.73% 47.85%

Capital Adequacy

Tier 1 8.19% 7.77%

Total Capital 12.95% 12.91%
Leverage 22.41 19.40

Liquidity

CASA 36% 35%

Credit Deposit Ratio 75.64% 72.85%

Market Statistics (March 31,2008)

Price to Book Value 1.51 1.41

PE Ratio 6.74 10.01

Common Size Profit & Loss Statement (% of Total Income)

Financials 31-Mar-08 2007 2006 2005 2004

I. Total Income (INR Billion) 144.72 104.99 82.13 71.87 75.88

Interest Income 85.37% 85.11% 85.58% 83.92% 76.38%
Non-Interest Income 14.63% 14.89% 14.42% 16.08% 23.62%

II. Expenditure
Interest on Deposits 48.77% 43.89% 42.59% 43.64% 41.46%
Interest on Borrowings 3.88% 5.17% 4.41% 4.23% 3.39%
Other Interest 3.49% 3.28% 6.53% 4.93% 2.53%
Employee Expenses 11.45% 15.37% 16.17% 17.58% 15.45%
Other Operating Expenses 3.54% 4.87% 5.26% 5.56% 4.95%
Other Provisions & Contingencies 10.31% 12.81% 13.88% 17.65% 14.45%
Taxes 4.67% 3.90% 2.61% 1.68% 4.51%

III. Profit (INR Billion) 20.09 16.65 9.21 3.40 10.07

Net Profit for the Year 13.88% 10.70% 8.54% 4.73% 13.26%
Dividend Pay-out Ratio 10.66% 15.57% 21.47% 29.82% 14.78%
Earnings Per Share (In Rs.) 37.53 22.48 13.95 6.70 20.27
Book Value per Share (In Rs.) 167.83 117.71 98.88 88.07 78.57
No. of O/S Shares (In Million.) 525.91 488.14 488.14 488.14 488.14

Common Size Balance Sheet (% of Total Assets)

Financials 31-Mar-08 31-Mar-07 31-Mar-06 31-Mar-05 31-Mar-04

Liabilities

Capital 0.29% 0.34% 0.43% 0.51% 0.58%

Reserves & Surplus 5.63% 3.81% 4.00% 4.19% 4.15%
Subordinated Debts 2.77% 3.36% 2.94% 2.47% 2.60%
Deposits (INR Billion) 1500.12 1198.82 939.32 788.21 714.82
Demand Deposits 6.97% 6.60% 6.60% 6.42% 6.88%
Savings Bank Deposits 18.70% 20.63% 22.70% 22.25% 21.28%
Term Deposits 58.21% 57.30% 54.37% 54.32% 56.07%
Borrowings in India 1.83% 2.91% 1.38% 2.56% 1.12%
Borrowings Outside India 2.19% 1.76% 3.87% 3.72% 3.64%
Other Liabilities & Provisions 3.42% 3.29% 3.71% 3.56% 3.67%

TOTAL LIABILITIES (INR Billion) 1788.30 1418.17 1122.74 949.78 848.60

Assets
Cash & with RBI Balances 6.57% 5.07% 4.98% 4.09% 4.99%
Inter-Banks / Call Money 3.34% 7.20% 5.22% 3.79% 5.10%
Investments 23.38% 25.03% 28.31% 30.05% 32.01%
Advances (INR Billion) 1134.76 851.16 651.74 560.13 458.56
(i) Working Capital Loans 29.92% 28.86% 28.90% 28.78% 28.08%
(ii)Term Loans 24.58% 23.41% 21.91% 22.20% 21.07%
Fixed Assets 1.36% 0.56% 0.72% 0.85% 0.94%
Other Assets 1.91% 2.12% 2.73% 2.54% 2.93%

TOTAL ASSETS (INR Billion) 1788.30 1418.17 1122.74 954.62 848.60

Introduction to Andhra Bank

Andhra Bank was registered on 20 November 1923 and commenced business on 28 November
1923 with a paid up capital of Rs 1.00 lakh and an authorised capital of Rs 10.00 lakhs. The Bank
crossed many milestone and the Bank's Total Business as on 30.06.2008 stood at Rs.83,256
Crores with a Clientele base over 1.74 Crores. The Bank is rendering services through 2139
Business Delivery Channels consisting of 1371 branches, 66 Extension Counters, 38 Satellite
Offices and 664 ATMs spread over 21 States and 2 Union Territories as at the end of June, 2008.
All Branches are 100% computerized, 1186 units viz., 1101 Branches, 68 Extension Counters, 15
Service Centres networked under Cluster Banking solution and providing "Any Branch
Banking(ABB)". Real Time Gross Settlement (RTGS) Facility and National Electronic Fund
Transfer (NEFT) facility has been introduced in 723 Branches. To provide value-added services
to Customers, the Bank has set up its own 664 ATMs as on 30.06.2008. Of which 03 Mobile
ATMs and two with Biometric access. Besides, ATM sharing arrangements with several Banks
including SBI group, IDBI Bank, UTI Bank, HDFC Bank, Indian Bank and others under
National Financial Network Switch covering 24856 ATMs.

Bank is migrating to "Centralized Core Banking Solution". 118 Branches have already migrated
to CBS. It is proposed to cover 550 branches by September 2009. This will benefit the customers,
who will have access to banking and financial services anytime, anywhere through multiple
delivery channels. Andhra Bank is a pioneer in introducing Credit Cards in the country in 1981.

CAMELS Rating For Andhra Bank

Brickwork Ratings has assigned BWR A+ (Pronounced BWR A+) to Andhra Pradesh State
Financial Corporation (APSFC) proposed fixed deposit programme for Rs. 180 Crore or INR 1.8
billion. The rating reflects several factors including, majority ownership of the Government of
Andhra Pradesh, favorable operating spread and returns, lower NPA, highly diversified loan
portfolio, adequate capital ratio, and good management practices. In the present turmoil of
financial crisis, the government ownership is a comforting factor. While APSFC’s cost of funds
at 8.91% is lower than that of peers, APSFC has shown higher returns at 15.15% and higher
spread of 6.24%. APSFC’s Net NPA at 4.27% is quite reasonable compared to its peers with Net
NPAs level of 21.01%. This has significantly lowered its loan loss provision from INR1.08
Billion in 2006-07 to INR 0.317 Billion giving greater operating flexibility to APSFC. In
addition, APSFC’s Return Over Assets (ROA), at 5.49% compares very well with its peers at
2.10%. APSFC’s return has been more from interest income, which is at 12.28% compared to its
peers who are at 10.71%. Moreover, corporation has highly diversified loan portfolio distributed
across the industry, which is a key factor in mitigating industry risk.

Profile:
APSFC has been one of successful SFCs in India with default free track record for five decades

Andhra Pradesh State Financial Corporation was established on 1st November, 1956 under the
State Financial Corporation Act (1951) with the merger of Andhra Financial Corporation and
Hyderabad Financial Corporation. APSFC has a default free repayment track record with its
creditors for over five decades and has achieved good performance in key operational areas of
sanctions, disbursements and recoveries that facilitate its preeminence among all State Financial
Corporations in India. APSFC provides credit in the form of Term Loans / Working Capital Term
Loans to Micro, Small and Medium Enterprises (MSME). The Board of APSFC has professional
directors nominated by SIDBI, LIC, Andhra Pradesh state Government, co-opted by the board
and elected by shareholders. APSFC has a Tripartite MoU with SIDBI and the State Government
to revive its operations. The state government is a majority shareholder with a stake of 85.85
percent followed by SIDBI that has 14.02 percent stake.

Shareholding Pattern

Shareholders Stake %

State Government 85.85

SIDBI 14.02

LIC of India 0.11

 Individuals, Co-Op.Banks, PF Trusts 0.02
etc.

The government ownership is a significant comforting factor at times of financial crisis.

Business Outlook:
APSFC is well positioned to sustain itself on a meaningful scale

APSFC’s total Income has increased by 43.03% to reach INR 2.27 Billion as on 31st March 2008
from INR.1.58 Billion during the previous year, due to improvement in recoveries of written-off
loans as well as high interest income. The net interest income increased to INR 0.91 Billion
during 2007-08 as against INR 0.56 Billion in the previous year. The increase in net income
during 2007-08 enabled APSFC to wipe out the entire accumulated loss of INR 0.84 Billion as
on 31st March 2007. Its operational profit also increased to INR 0.15 Billion as on 31 st March
2008 from INR 0.0815 Billion during the previous year. It may however be noted that over Rs 20
Crores of APSFC’s increased profits were due to switch over from cash to accrual system of
accounting in the FY 2008-09.

Economic Structure of Andhra Pradesh

Andhra Pradesh is the fourth largest state in India in terms of area and fifth largest in terms of
population. It has the fourth highest Net State Domestic Product (NSDP) amongst Indian states.
The state's GSDP (at current prices) grew 16.10% during (FY'07-08) as compared to 14.04%
during the previous year. The Agriculture sector has registered growth rate of 10.08% as against
4.50% at national level. The industry has grown by 9.88% as against the national average of
8.5%. Andhra Pradesh government is paying special attention to improve agricultural growth
rate. To achieve this state has announced initiatives in the area of agriculture, irrigation and water
conservation. In the education sector, the state has placed emphasis on imparting computer-aided
education. AP's social infrastructure is among the average in the country. Social indicators such
as birth rate, death rate, infant mortality rate, life expectancy are marginally better than the
national average. The present Government is also trying to improve the industrial climate by
attracting knowledge based industries (including IT, Pharmaceuticals, Life Science companies) to
the state and has taken initiatives by announcing favorable industrial policies, formation of seed
fund for industrial development and setting up of different Special Economic Zones (SEZ). The
recent Satyam fraud case could be an embarrassment and the state should be vigilant in future
and promote corporate governance in the state companies. Andhra saw the emergence of regional
parties akin to its neighbors. One of countries dominant parties snatched the power back. The
state is now poised for elections with three regional outfits in the fray. The resultant governance,
on one hand might bring in more consensus in decision making and on the other might also cause
delayed decisions.

State Government Finances:

The GSDP at current prices for the year 2007-08 stood at INR 3125 Billion registering a growth
of 16.10 percent over previous year. The Revenue Receipts as percentage of GSDP have
increased in 2007-08 to 18 per cent as compared to 2004-07 (average) of 15 per cent. Sales taxes
are the most important tax revenue of the States contributing almost half of the total (59.7%) own
tax receipts. The revenue increase was due to bullish economy, FDI and FII inflows, resultant
jobs in IT and other industries, buoyant real estate sector etc. The buoyancy helped the state to
mobilize funds through sale of land (disinvestment). In 2008-09, AP budgeted INR 120 Billion
under non-debt capital receipts. The state will now face recession brought over both from foreign
and domestic excesses and the revenue growth in future is expected to decline.

While the states own tax revenues are 56% of revenue receipts, and growing, they are about 10
percentage points lower than neighboring states like Maharashtra, Karnataka and Tamil Nadu.
Sales Taxes contribute over 36% of revenue receipts and comparable to most industrialized
states. The state excise revenues are just 7.4% of the revenue receipts and the state has the
potential to increase these revenues.

The state’s Own Non-Tax revenue as percentage of GSDP for 2007-08 was 2.2 percent, well
above the neighbouring states ratios (Karnataka: 0.8%, Maharashtra: 1%, Orissa: 1.9% & Tamil
Nadu: 1.1%). The composition of the non-tax revenue is primarily interest receipts and not user
fees.

While Andhra Pradesh state government has generated a Revenue Surplus of INR 4.51 Billion.
Yet the figure is lower than the Revenue Surpluses of other states such as Karnataka - INR 29.81
Billion, Maharashtra – INR 27.6 Billion, Orissa - INR 16.82 Billionand Tamil Nadu - INR 9.18
Billion. However, the state will find it difficult to show substantial surplus in the coming years of
recession.

The Andhra Pradesh government has also been successful in reducing the GFD-GSDP ratio to
target of 3 percent. The Debt-GSDP ratio for Andhra Pradesh is 37.5 percent, which is above the
recommended level of 30.8 percent.

The state’s own tax revenues were budgeted at INR 378.66 Billion. The state will experience
shortfall in the revenues of vehicle taxes, stamps and registration as well as sales taxes, due to
recession. The state’s non-discretionary expenditure is over INR 400 Billion that includes – over
INR 202.34 Billion in general services – salaries, pension, interest payments, about INR 25
Billion power subsidy, INR 100 Billion in teachers’ salaries, INR 30 Billion in salaries in health
sector. While the state spends 33% of revenue receipts each in social and economic services, the
non-plan component of this expenditure is over 15% each. The total non-plan component of
economic and social services works out to be over INR 240 Billion.

While the state will face pressure on its finances in the recession years, the states economic base
will see it through with discipline in controlling non-plan expenditure.

Capital Adequacy:
APSFC capital adequacy ratio is better than its peers’ average

APSFC has reported total capital adequacy ratio of 15.8% as on 31st March 2008 as compared to
6.5% for the same period a year ago. The added capital infusion was via Government’s capital
infusion to the extent of INR 1.08 Billion, in the form of 271 acres of land. The capital adequacy
is better than 15.26% of its peers. RBI recommends a minimum of 10% capital adequacy for the
Non Banking Financial Corporations and State Financial Corporations.

APSFC significantly reduced its leverage to 6.3 as on 31st March 2008 as compared to 15.3 for
the same period a year ago. It is slightly lower than that of its peers.

Asset Quality:
APSFC’s asset quality trends remain stable compared to its peer group

APSFC’s asset quality remains strong and showed improving trends during 2007-08. The
Standard assets reached INR 13.8 Billion as on 31-March 2008 from the previous level of INR
10.62 Billion. The Sub-standard assets, doubtful and loss category loans were brought down.
APSFC was able to collect over INR 0.77 Billion NPAs that were provided as provision for
NPAs earlier. The Net NPAs as a percentage of loans and advances came down to 4.27 per cent
as on 31st March 2008 from 25.78 per cent as on 31st March 2004. APSFC’s NPA are 4.27%
compared to 21.01% of its peers. APSFC had to make only 1.94% loan loss provision this year
since a large portion was provided for last year.

Profitability:
APSFC’s ROA has been significantly higher than that of peers.

APSFC’s total income is INR 2.27 Billion, 88% of which is interest income. Its operating profit
went up 84% from INR 0.0815 Billion to INR 0.15 Billion. In addition, the Net profit grew
229% from INR 0.27 Billion in the year 2006-07 to INR 0.895 Billion in FY 07-08. APSFC’s
ROA at 5.49% is higher than 2.1% of peers. APSFC operating profits have grown and the
corporation has kept administrative expenses in check.
Management of Risk:
APSFC’s risk management system is adequate in relation to the peer group.

APSFC has developed risk management framework to manage risks at portfolio level and
individual borrower’s level. For this purpose, APSFC has developed risk-rating models that
apply to all the term loans, additional term loans and working capital term loans. To manage
operational risks, APSFC has established procedures for conducting business at Head Office and
branch level. The Internal Audit Department examines these on a regular basis.

Credit risk is the major risk faced by APSFC. To manage these risks, APSFC has developed
procedures and models for due diligence of the loan proposals and evaluation of the projects.
APSFC has defined exposure limits for different types of borrowers, industries, sensitive sectors
in order to mitigate risks at portfolio level.

Loan Portfolio (Industry-wise):

APSFC’s loan portfolio is very well diversified.

APSFC’s term loan sanctioned (Effective) during F.Y. 2007-08 amounted to INR 9.12 Billion
recording a growth of 45.56% over previous year while disbursements increased to INR 6.63
Billion from INR 5.23 Billion registering a rise of 26.76% over the previous year. Corporation
sanctioned loans in different industries like food, textiles, metal, non-metal, medical, leather
industry etc. APSFC has exposure of 16% in medical loans, 14% to metal industry units, and
over 8% to leather and chemical industry. In addition, INR 1.09 Billion was sanctioned for
services industry, which includes hotels and road transport units. Food products, textile, wood
products, non-metallic and other industry loans amount to INR 4.15 Billion.The chart below
indicates that the loans sanctioned & disbursed are well diversified and distributed among
different industries.

INDUS TRY - W IS E CL A S S IFICA TIO N O F TERM L O A NS S A NCTIO NED ( EFFECTIV E) ,

DIS B URS ED DU RING THE Y EA R 2 0 0 7 - 2 0 0 8 ( Dis b u r s e d A m o u n t IN R 6 .6 2 B illio n )
5%
Fo o d p r o d u c ts
3%
Te x tile s
5%

8% W o o d p r o d u c ts
38%
L e a th e r & Ch e m ic a l
6% p r o d u c ts
No n - M e ta llic M in e r a l
p r o d u c ts
12% M e ta l In d u s tr y

M e d ic a l lo a n s
9% 14%
S e r v ic e s

O th e r In d u s tr ie s
Significant Developments:
Last few years, APSFC has not only been able to cut its cost but also has been able to increase its
asset base. APSFC offered VRS to 200 employees, which led to decrease in employee expense as
a percentage of total revenue from 14.75% in FY-07 to 12.98% in FY-08. In addition to above, it
has also moved towards technological upgradation. Moreover, APSFC has been able to prepay its
expensive bonds and restructure the balance sheet at lower interest cost. On the other hand,
APSFC has been able to bring more equity in terms of land valued at INR 10.9 Billion. The
Government of Andhra Pradesh has granted 271 acres of land near Hyderabad to propel
industrial development in the region. APSFC is looking forward to have a new office at the
coming up financial district in Hyderabad, APSFC has been appointed the nodal agency of the
Government of Andhra Pradesh to distribute subsidy sanctioned by the Industries department.
This mechanism helps APSFC with a free float of Rs 70 Crore any time.

Rating Outlook:
Brickwork issuer ratings are based on CAMEL-TP Framework, which is used to assess the
APSFC’s financial health and risk exposures. The rating reflects APSFC’s ownership structure
that is supported by the Government of Andhra Pradesh, its diversified loan portfolio, its asset
quality as well as its capital adequacy. The ratings factored the quality of assets, significant return
on assets, reduction in net NPA and adequate capital. However, managing risk associated with its
credit and loan portfolio is a key challenge in the present turmoil of financial crisis and changing
economic conditions. APSFC’s identification of certain projects in sunrise industries like drugs,
pharmaceuticals, agro and food processing, tourism will help them increase their portfolio.

Annexure I:

Andhra Pradesh State Financial Corporation - Common Size Profit & Loss Statement (% of Total Income)

Financials 31-Mar-08 31-Mar-07 31-Mar-06 31-Mar-05 31-Mar-04

I. Total Income (INR Billion) 2.26 1.58 1.38 1.30 1.43

Interest Income 88.25% 91.28% 93.82% 92.49% 91.28%

Non-Interest Income 11.75% 8.72% 6.18% 7.50% 8.71%

II. Expenditure

Interest on Deposits 2.10% 3.06% 4.09% 2.91% 0.43%

Interest on Borrowings 45.61% 52.43% 59.24% 73.69% 74.37%

Financial Charges 0.25% 0.48% 0.17% 0.40% 0.26%

Employee Expenses 12.98% 14.75% 14.66% 13.71% 17.02%

Administrative Expenses 1.98% 2.92% 2.90% 2.78% 2.64%

Depreciation 0.33% 0.49% 0.62% 0.78% 0.96%

Bad Debts Written off 30.13% 20.72% 12.63% 0.39% 0.08%

III. Profit

Operating Profit (INR Billion) 0.15 .0815 .0783 .069 .0601

Operating Profit As % 6.61% 5.14% 5.65% 5.31% 4.20%

Provision for NPAs written Back (INR Billion) 0.7713 0.242 0.2747 0.0508 0.0442

Provision for NPAs written Back as % 34.00% 15.25% 19.83% 3.90% 3.09%

Net Profit for the Year (INR Billion) 0.8951 0.2721 0.2458 0.1314 0.101

Net Profit for the Year as % 39.46% 17.16% 17.75% 10.10% 7.06%

Andhra Pradesh State Financial Corporation - Common Size Balance Sheet (% of Total Assets)

Financials (INR Billion) 31-Mar-08 31-Mar-07 31-Mar-06 31-Mar-05 31-Mar-04

Liabilities

Capital 14.37% 10.96% 12.11% 8.85% 8.58%

Reserves & Surplus 1.45% 1.52% 1.57% 1.69% 1.68%

Deposits 3.24% 3.28% 5.70% 5.95% 2.78%

SLR Bonds(guaranteed by Govt. of AP) 8.21% 12.70% 14.59% 22.57% 41.09%

Non SLR Bonds 9.73% 0.00% 0.00% 0.00% 0.00%

Borrowing from SIDBI 45.77% 48.17% 50.09% 46.06% 39.21%

Medium Term Loan – SIDBI 3.13% 5.48% 7.63% 6.29% 0.04%

Tem Loans from Banks (guaranteed by Govt. of AP) 4.14% 6.38% 0.00% 0.00% 0.00%

Current Liabilities & Provisions 9.96% 11.50% 8.31% 8.60% 6.63%

TOTAL LIABILITIES (INR Billion) 18.40 14.19 12.84 11.92 12.00

Assets

Cash & Bank Balances 8.60% 7.14% 7.02% 4.60% 5.94%

Investments 2.23% 0.08% 0.04% 0.05% 0.00%

Loans & Advances 78.33% 81.67% 78.84% 78.17% 75.81%

Fixed Assets 7.09% 1.46% 1.62% 1.67% 1.69%

Current Assets 3.74% 3.70% 3.91% 4.23% 4.24%

P&L Account 0.00% 5.94% 8.57% 11.29% 12.31%

TOTAL ASSETS (INR Billion) 18.40 14.19 12.84 11.92 12.00

Annexure II:

Andhra Pradesh State Financial Corporation - Key Ratios

Year 31-Mar-08 31-Mar-07 31-Mar-06 31-Mar-05 31-Mar-04

1. Operating Ratios

Cost of Deposits 8.98% 8.11% 7.87% 7.25% 1.84%

Cost of Borrowings 8.85% 8.48% 9.00% 10.31% 11.03%

Cost of Funds 8.91% 8.29% 8.44% 8.78% 6.43%

Return on Funds 15.15% 13.32% 13.36% 13.05% 28.70%

Spread (Difference RF-CF) 6.24% 5.03% 4.92% 4.27% 22.26%

NIM 5.89% 2.07% 5.08% 7.57% 12.51%

2. Earnings (As % of Assets)

Interest Income 12.28% 10.71% 10.49% 10.05% 10.88%

Interest Expense 6.64% 6.51% 7.08% 8.32% 8.91%

Net Interest Income 5.64% 4.20% 3.41% 1.73% 1.96%

Loan Loss provision 1.94% 8.05% 10.74% 13.41% N/A

Bad Debt Written Off 4.19% 2.43% 1.41% 0.04% 0.01%

Non-Interest income 1.64% 1.02% 0.69% 0.81% 1.04%

Non-Interest Expense 6.32% 4.56% 3.45% 1.92% 2.47%

PBIT 0.92% 0.60% 0.63% 0.58% 0.50%

3. Profitability

ROA 5.49% 2.01% 1.98% 1.10% 0.84%

ROE 41.51% 220.23% -165.30% -33.31% -11.87%

Net worth (INR Billion) 2.1566 0.1236 -0.1487 -0.3945 -0.8508

4. Asset Quality (As % of Advances)

Net NPA (INR Billion) 0.6161 0.9698 1.6312 2.0504 2.3464

NPA as % of Loans & Advances 4.27% 8.37% 16.11% 21.99% 25.78%

5. Capital Adequacy

Leverage 6.3 15.3 19.6 -132.5 -48.7

CAR 15.8% 6.5% 5.1% -0.8% -2.1%

(1 INR Billion = Rs. 100 Crores)

Annexure III:

Andhra Pradesh State Financial Corporation - Key Ratio Comparison with Peers

Year - Mar – 2008 APSFC Peers

1. Operating Ratios

Cost of Deposits 8.98% 9.77%

Cost of Borrowings 8.85% 8.77%

Cost of Funds 8.91% 9.27%

Return on Funds 15.15% 15.03%

Spread (Difference RF-CF) 6.24% 5.76%

NIM 5.89% 5.81%

2. Earnings (As % of Assets)

Interest Income 12.28% 10.37%

Interest Expense 6.64% 7.26%

Net Interest Income 5.64% 3.11%

Loan Loss provision 1.94% 7.11%

Bad Debt Written Off 4.19% 0.10%

Non-Interest income 1.64% 2.22%

Non-Interest Expense 6.32% 4.11%

PBIT 0.92% 3.02%

3. Profitability

ROA 5.49% 2.10%

ROE 41.51% 18.26%

Net worth (INR Billion) 2.15 2.08

4. Asset Quality (As % of Advances)

Net NPA (INR Billion) 0.6161 1.8140

NPA as % of loan & Advances 4.27% 21.01%

5. Capital Adequacy

Leverage 6.3 6.71

CAR 15.8% 15.26%

(1 INR Billion = Rs. 100 Crores)

Annexure IV: State Finances 2007-08

Andhra Peers
2007-2008 Revised Estimates Pradesh (average)

GSDP (INR Billion) 3125 2975

Revenue Receipts (INR Billion) 561 444

of which:

State's Own Tax Revenue as % of RR 56% 57%

of which:

(a) Sales Tax 36.65% 32.61%

(b) State Excise 7.35% 7.37%

(c) Taxes on Vehicles 3.37% 3.36%

(d) Taxes on Goods and Passengers 0.14% 2.25%

(e) Taxes and Duties on Electricity 0.31% 1.56%

(f) Entertainment Tax 0.13% 0.16%

(g) Other Taxes and Duties 0.32% 0.60%

Capital Receipts (INR Billion) 229.43 57.22

Total Receipts (INR Billion) 790.69 501.54

Non-Plan Expenditure (INR Billion) 466.24 383.32

Plan Expenditure (INR Billion) 329.75 155.83

Total Expenditure (INR Billion) 795.99 539.15

 Select Committed Expenditures as Ratio to Revenue
Expenditure

Interest Payments / Revenue Expenditure 15.50% 7.93%

Administrative Services / Revenue Expenditure 7.70% 3.67%

Pension / Revenue Expenditure 8.50% 4.67%

Total Committed Expenditure / Revenue Expenditure 31.70% 16.26%

Revenue Deficit(-)/Surplus(+)(INR Billion) 4.51 20.85

Gross Fiscal Deficit (INR Billion) -92.37 -62.32

Tax / GSDP 10.05% 9.39%

Revenue Deficit / GSDP 0.35% 12.67%

GFD / GSDP -2.96% -2.08%

Outstanding Debt / GSDP 37.50% 30.13%

Interest Payments / RR 15.37% 15.29%

(1 INR Billion = Rs. 100 Crores)

BIBLIOGRAPHY
http://en.wikipedia.org/wiki/Andhra_Bank

www.financial-literacy.in

www.brickworkratings.com

http://vijayabank.com/vijaya/vijaya/internet-en/menus/we-at-vijaya-
bank/overview.html