Allahabad Bank : 2Q FY11 results review: strong loan growth drives earnings:: Daiwa

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What has changed?
• Allahabad Bank’s net-profit increase of 21% YoY and 16% QoQ for 2Q FY11 was
largely in line with our forecast. Loan growth was strong at 37% YoY. The net
interest margin (NIM) improved by 24 basis points QoQ to 3.34%.
Impact
• The net-profit rise of 21% YoY and 16% QoQ was driven by an increase in net
interest income of 61% YoY and 14% QoQ. However, non-interest income
declined by 15% YoY due to low treasury income, which fell by 77% YoY.
• Gross non-performing loans (NPLs) were Rs14.7bn, an increase of Rs3.3bn
QoQ, due mainly to higher fresh formation of NPLs of Rs4.5bn, even as
recoveries and upgradations were Rs0.8bn for 2Q FY11. Fresh formation of
NPLs from Agriculture debt relief stood at Rs2.2bn, which is one-off in nature.
Management forecasts fresh formation of NPLs of around Rs10bn for FY11.
• Deposit growth of 30% YoY lagged loan growth of 37% YoY. As a result, the
loan-to-deposit ratio improved by 317 basis points YoY to 73.4%.
• The NIM improved by 24 basis points QoQ to 3.34% for 2Q FY11.
Management expects the NIM to stabilise at around 3% for FY11.
Valuation
• We have revised up our net-profit forecast for FY11 by 10.3%, to reflect mainly
higher net interest income that we now forecast as loan growth remains robust,
along with a stable NIM. Based on our Gordon growth model, we now derive a
target PBR of 1.4x on our FY12 forecasts (rolled over from FY11). As such, we
have raised our six-month target price to Rs269 (from Rs229).
Catalysts and action
• We maintain our 1 (Buy) rating for Allahabad Bank. In our view, key shareprice
catalysts include fresh formation of NPLs lower than our expectations and
those of the market.