ALLAHABAD BANK Momentum continues:: Edelweiss

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Allahabad Bank (ALBK) reported strong earnings of INR 4 bn in Q2FY11 (58.4%
growth in core operating profit), well ahead of our estimate of (INR 3.6 bn). This
growth was driven by robust traction in core income growth; NIMs improved 24bps
Q-o-Q, aided by ~200bps rise in CD ratio. The bank used strong core earnings to
provide for retirement benefits and NPL provisions. PAT growth of 21% yoy was also
supported by lower tax provisions of 21% during the quarter. Slippage, excluding
agri waiver, came in at 1.5%- annualized, ably curtailed by better recoveries/
upgrades.
􀂄 Business momentum continues; margin upside a key positive
ALBK reported robust pick up in advances for the quarter at 8.4% Q-o-Q and
35% Y-o-Y, to INR 820.9 bn. Strong growth was witnessed in the SME segment
and trade loans, while retail growth was led by housing. Infrastructure credit
remains the mainstay of credit consumption in the corporate segment, and
currently forms nearly 20% of the overall book. Management is confident of
achieving an above-industry growth rate of 25% in loan book in FY11E.
Key highlight during the quarter was the 24bps Q-o-Q improvement in margins
(to 3.34%), driven by better investment yields and improved CD ratio, which
compensated for the 11bps rise in cost of funds. Migration of investment in liquid
mutual funds into high yielding assets also contributed to the margin uptick.
􀂄 Slippage a tad higher; higher recoveries the compensating factor
During the quarter, slippages came in at INR 4.5 bn (3% annualised), higher
than the Q1 run rate of 70 bps. However, ~INR 2.2 bn came in from slippages in
the agri book. Key positives were higher recoveries (both from NPLs and written
off accounts) and an upgrade of INR 2 bn, which curtailed the impact of
slippages. Overall GNPA and NNPA increased to 1.8% and 0.6% from 1.5% and
0.4% in Q4FY10, respectively. The restructured book currently stands at 3.7%,
below industry average. Provisioning coverage including technical write-offs
stands strong at 81%.
􀂄 Outlook and valuations: Core earnings to the fore; maintain ‘BUY’
Driven by strong advance growth and better-than-expected margin performance,
we are revising our earnings estimate by ~4% for FY11. Led by strong advance
growth of 27% CAGR over FY10-12E and stable margins, we expect the bank to
report 28% CAGR in earnings with average RoEs of ~24%. The stock is currently
attractive at 1.3x FY12E book and 5.5x earnings. We maintain ‘BUY’ on the
stock and rate it ‘Sector Outperformer’ on relative returns.