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ALLAHABAD BANK
PRICE: RS.216
RECOMMENDATION: BUY
TARGET PRICE: RS.260
FY12E P/E: 5.6X; P/ABV: 1.1X
Correction overdone; upgrade to BUY
Allahabad Bank (ALB) has corrected sharply in last one month (~18%) with
the revelation of 'bribe-for-loan-scam' by CBI and rising concern over
microfinance & 2G/3G lending by the banks (especially PSU banks). We
believe, the correction in stock price is overdone and hence we upgrade the
stock to BUY from ACCUMULATE earlier with ~20% upside from the current
level.
We opine that healthy CASA mix is likely to provide cushion to ALB in tight
liquidity environment. At the end of Q2FY11, its CASA mix stood at 34.7%
of total deposits. ALB has also been successful in maintaining the share of
CASA deposits at ~35% of its total deposits during last 5 quarters.
ALB reported NIM at 3.31% for Q2FY11, better than our expectations. It
expanded 74 bps YoY and 26 bps QoQ on the back of 12 bps improvement
(YoY) in blended yield on assets along with 62 bps decline (YoY) in cost of
funds.
Loan book grew 29.3% CAGR during FY04-10; expect it to moderate slightly
to 22.4% CAGR during FY10-12E. We believe ALB's loan growth would trail
the deposit growth as its C/D ratio is already hovering ~73% at the end of
Q2FY11.
ALB witnessed sharp increase in slippage (2.5% annualized) during Q2FY11
on account of Rs.2.2 bn worth of agriculture loan under debt relief scheme
slipping into NPA. Excluding this, slippage ratio would moderate to 1.3%.
Sharp spike in slippage during Q2FY11 has also led to rise in credit costs -
1.24% during Q2FY11 as against 0.39% in Q1FY11.
We have slightly tweaked our earning estimates for FY11E & FY12E and
upgrade the stock to BUY from ACCUMULATE earlier with a target price of
Rs.260 (Rs.264 earlier) on back of its recent price correction. At the target
price, stock is likely to trade at 1.35x of its FY12E adjusted book value.
Corrected sharply in last one month; upgrade to BUY as correction
is overdone, in our view.
Allahabad Bank (ALB) has corrected sharply in last one month (~18%) with the revelation of 'bribe-for-loan-scam' by CBI and rising concern over microfinance & 2G/3G
lending by the banks (especially PSU banks).
We believe, the correction in stock price is overdone and hence we upgrade the
stock to BUY from ACCUMULATE earlier with ~20% upside from the current level.
Healthy CASA mix at ~35%; likely to support the margin in rising
rate environment
We opine that healthy CASA mix is likely to provide cushion to ALB in tight liquidity
environment. At the end of Q2FY11, its CASA mix stood at 34.7% of total deposits.
ALB has also been successful in maintaining the share of CASA deposits at ~35% of
its total deposits during last 5 quarters.
CASA mix also witnessed QoQ improvement from 34.2% at the end of Q1FY11 to
34.7% at the end of Q2FY11 which came on the back of strong CASA growth
(6.4% QoQ) as against moderate growth in term deposits (4.1% QoQ).
We are forecasting CASA share to remain at 34-35% levels during FY11-12E and
this is likely to help the bank in sustaining healthy NIM, going forward.
NIM improved both QoQ as well as YoY to 3.31% in Q2FY11; however we expect it to contract slightly in H2FY11
ALB reported NIM at 3.31% for Q2FY11, better than our expectations. It expanded
74 bps YoY and 26 bps QoQ on the back of 12 bps improvement (YoY) in blended
yield on assets along with 62 bps decline (YoY) in cost of funds.
Blended yield on assets improved from 8.92% in Q2FY10 to 9.04% in Q2FY11 despite reduction in both yield on advances (10.84% in Q2FY10 to 10.35% in Q2FY11)
as well as yield on investments (7.1% in Q2FY10 to 6.93% in Q2FY11) on back of
strong growth in loan book vis-à-vis investment book.
However, during the same period cost of funds declined 62 bps from 6.39% in
Q2FY10 to 5.77% in Q2FY11 on back of 56 bps decline in cost of deposits (6.30%
in Q2FY10 to 5.74% in Q2FY11) and 164 bps decline in cost of borrowings (8.01%
in Q2FY10 to 6.37% in Q2FY11).
Loan book grew 29.3% CAGR during FY04-10; expect it to moderate slightly to 22.4% CAGR during FY10-12E
The bank's gross loan book grew 29.3% CAGR during FY04-10 and reached to
Rs.831.8 bn at the end of Q2FY11 (36.8% YoY; 9.9% QoQ).
The strong growth momentum in loan book during Q2FY11 has come on the back of
robust growth in MSE (55.9% YoY; 9.7% QoQ) and retail segments (34.0% YoY;
9.9% QoQ). During the same period, agriculture also grew 25.5% YoY (4.1% QoQ).
Retail book saw strong disbursement which grew from Rs.10.75 bn in H1FY10 to
Rs.19.21 bn in H1FY11, a growth of 79%. In retail segment, trade book almost
doubled from Rs.4.91 bn in Q2FY10 to Rs.9.27 bn in Q2FY11.
We are forecasting loan book to grow at 22.4% CAGR during FY10-12E. We believe
ALB's loan growth would trail the deposit growth as its C/D ratio is already hovering
~73% at the end of Q2FY11. We are modeling C/D ratio to stabilize around 70%
during FY11-12E.
Expect lower non-interest income during FY11 on back of moderate treasury gains
Non-interest income declined 14.8% from Rs.4.05 bn in Q2FY10 to Rs.3.45 bn in
Q2FY11 on back of lower trading profit which declined 77.4% from Rs.1.68 bn in
Q2FY10 to Rs.0.38 bn in Q2FY11. We are forecasting lower treasury profit for FY11
at Rs.2.48 bn as against Rs.5.77 bn achieved during FY10.
During Q2FY11, fee income grew moderately at 17.1% to Rs.2.13 bn as against
Rs.1.82 bn during Q2FY10. We are also modeling moderate growth in fee income
(14.1%) to Rs.7.41 bn during FY11
Spike in slippage (2.5% annualized) on account of agri loan under
debt relief scheme
ALB witnessed sharp increase in slippage (2.5% annualized) during Q2FY11 on account of Rs.2.2 bn worth of agriculture loan under debt relief scheme slipping into
NPA. Excluding this slippage ratio would moderate to 1.3%. Sharp spike in slippage
during Q2FY11 has also led to rise in credit costs - 1.24% during Q2FY11 as against
0.39% in Q1FY11.
In absolute terms, gross NPA and net NPA increased sharply - gross NPA rose 35.9%
and 29.0% YoY and QoQ, respectively; net NPA rose 119.1% and 48.0% YoY and
QoQ.
Gross NPA as a proportion of gross advances increased to 1.77% at the end of
Q2FY11 as compared to 1.50% at the end of Q1FY11. Similarly, net NPA as a proportion of net advances rose to 0.56% at the end of Q2FY11 as compared 0.41% at
the end of Q1FY11.
Cumulative restructured book stands at Rs.30.28 bn at the end of Q2FY11 (3.6% of
gross advances), which is in line with the industry average. Out of this, Rs.2.97 bn
has already slipped into NPA.
Valuations and recommendation
At the current market price of Rs.216, the stock is trading at 5.6x its FY12E earnings
and 1.1x its FY12E ABV. We have slightly tweaked our earning estimates for FY11E
& FY12E and now expect net profit for FY11E and FY12E to be 13.92 bn and
Rs.17.27 bn, respectively.
This would result into an EPS of Rs.31.2 and Rs.38.7 for FY11E and FY12E, respectively. Adjusted book value for FY11E and FY12E is estimated to be Rs.160.2 and
Rs.190.9, respectively
We are upgrading the stock to BUY from ACCUMULATE earlier with a target price
of Rs.260 (Rs.264 earlier) on back of its recent price correction. At the target price,
stock is likely to trade at 1.35x of its FY12E adjusted book value.
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