Allahabad Bank - Initiating coverage (Keynote Capitals)

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 Initiating Coverage report on Allahabad Bank Ltd.

Allahabad Bank Ltd, a public sector bank is headquartered in Kolkata since 1923 with an asset size of ~`1217bn and network of 2286 branches as of Mar-10, has a pan-Indian presence with a strong foothold in eastern and northern India.  The bank was nationalized in 1969 by GOI along with 13 other major commercial banks. It has a strong and experienced team headed by Mr. J P Dua, CMD, which reinforces confidence in the bank’s ability to deliver balanced growth and is expected to outperform the Indian banking industry. The bank’s wholly-owned subsidiary namely, AllBank Finance Ltd (ABFL) is into investment banking and other corporate fee-based activities. The bank entered into Insurance joint venture namely,  Universal Sompo General Insurance with Indian Overseas Bank, Karnataka Bank Limited, Dabur Investments and Sompo Japan Insurance Inc.

Executive Summary

·       Healthy growth in business: The bank reported healthy growth in business driven by 21.8% yoy growth in advances and 24.8% in deposits leading to the improvement in CD ratio and margins.

·       Improved and Stabilized Deposit Mobilization: Higher share of CASA on the liability side and further branch expansion enables the bank to earn better CASA per branch and thereby leading to better profitability.

·       Diversified Loan portfolio: The loan book is well-diversified and spread across the corporate, retail and agriculture segments and is expected to grow above 25% in FY11, much above RBI target of 20%.

·       Efficient Asset-liability management leading to improvement in margins: The maturity pattern of the bank’s deposits as of FY10 indicates that half of its deposits are pegged for the long term (more than one year) and excess liquidity is deployed in low-yielding short term securities. Hence, assets-liability position states that the margins will be sustained around 3% in future i.e. above industry average and most of its peers

·       Strong Asset Quality: The asset quality of the bank is comfortable and has maintained consistency and reduced the gross and net NPA ratios.

·       Comfortable CAR, high ROE to sustain future growth prospects: The bank is well capitalized and in a position to meet lending targets in coming years. ROE and ROA will increase gradually in coming years because of strong growth in business and core operating performance.

·       Well maintained cost leading to improvement in productivity ratios: Better cost efficiency measures in place, branch expansion and thereby increasing profitability has lead to the enhancement of the branch and employee productivity ratios.

Valuations:

The bank's total business, distribution network and vast customer base in CASA-rich states enable it to leverage significant business opportunities in the current rising interest rate scenario. This along with a balanced loan portfolio and high proportion of low-cost funds will help the bank to earn better margins compared to its peers. And it is well positioned with good asset quality backed by provisioning of more than 70%. Considering the above factors, we initiate coverage on the stock arriving at a target price of `250 per share for the period of one year, with a ‘Buy’ recommendation. At CMP of `208.10, the stock is trading at 1.7x FY10 price to adjusted book and is expected to trade at 1.5xFY11E and 1.2xFY12E price to adjusted book.