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Allahabad Bank (ALBK) reported strong operating performance in Q3FY11 with 20%
Y-o-Y growth in PAT at INR 4.2 bn, well ahead of our estimate. Core operating profits
(excluding treasury gains) grew 49% Y-o-Y buoyed by 32% Y-o-Y advance growth
(6% Q-o-Q), 10bps sequential expansion in NIMs (to 3.44%) and stable asset quality
(with gross NPLs at 1.8%). Slippage, excluding agri waiver, came in at 1.4%
(annualized), ably curtailed by better recoveries/ upgrades and write-offs. The bank
has provided INR 520 mn in Q3FY11 (similar to Q2FY11) towards second pension
option determining overall liability at INR 7.8 bn; incremental gratuity liability was
arrived at INR 2.8 bn and it has provided INR 520mn in YTD FY11.
Growth momentum sustained; margins expand 10bps
Advance growth momentum was sustained with 6% Q-o-Q and 32% Y-o-Y
growth, to INR 868 bn. Strong growth was witnessed in the SME segment and
trade loans. Education and other SME segment supported retail loan growth and
personal loan came off 9% Q-o-Q. 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. NIMs expanded 10bps to 3.44%
driven by 23bps improvement in yield on advances (10.58%) and rise in funding
cost being capped at 16bps (5.93%). The bank has been continuously shedding
bulk deposits; accretion to retail TD has been strong (8% Q-o-Q growth) leading
to CASA ratio marginally coming off to 33.4% (from 34.7% in Q2FY11). Due to
increased pressure on deposit cost, we expect margins (calc) to come off 15-
20bps in FY12 (over FY11).
Slippage higher due to agri; recoveries the compensating factor
During the quarter, slippages came in at INR 3.6 bn (2.2% annualised), higher
than H1FY11 average of 1.5%. However, ~INR 1.3 bn came in from slippages in
the agri book and INR 900 mn from restructured pool. Key positives were higher
recoveries (both from NPLs and written off accounts), upgradation of INR 750
mn and write off of INR 1.5 bn, which curtailed the impact of slippages. Overall
GNPA and NNPA sustained at 1.8% and 0.6% respectively. Provisioning coverage
including technical write-offs stands strong at 80%.
Outlook and valuations: Core earnings to the fore; maintain ‘BUY’
Allahabad Bank has been surprising on margins since the past few quarters with
advance growth continuing at robust levels (30% plus). Moreover asset quality is
being contained supported by strong recoveries and upgradations. Pension
liability is similar to what it has indicated in previous quarter. We are maintaining
our earning estimates expecting it to report 28% CAGR in PAT with average
RoEs of ~24%. The stock is currently attractive at 1.1x FY12E book and 4.8x
earnings. We maintain ‘BUY/Sector Performer’ rating on the stock.
Other income declined, led by lower treasury income
During the quarter, core fee income grew 12% Y-o-Y (down 18% Q-o-Q) led by LC/BG
and forex income. Treasury profits were limited at INR 200 mn (compared to INR 1.3 bn
in Q3FY10 and INR 380 mn in Q2FY11). Recoveries however came in stronger at INR 644
mn.
Restructured portfolio down; slippage remains low
ALBK’s restructured asset pool (3.2% of loans) experienced a positive trend of upgrades,
coming off from INR 30.3 bn to INR 27.5 bn (during the quarter, there was decline of
INR 2.8 bn in the restructured portfolio). In Q3FY11, INR 940 mn slipped from the
restructured pool, taking the total slippages in this pool to 14%. Management sounded
confident on steady performance of the pool and likelihood of further upgrades, going
forward.
Other highlights
• During Q3FY11, the bank’s operating expense increased 43% Y-o-Y, led by 53%
increase in staff expenses. During the quarter, the bank has determined second
pension option liability at INR 7.8 bn and has provided INR 520 mn towards it
(similar to that provided in Q2FY11). It has also determined gratuity liability at INR
2.8 bn and has provided INR 520 mn in FY11 YTD.
• Tier 1 capital remains adequate at 8.14%.
Company Description
Allahabad Bank has a pan-India presence with the sixth largest network of 2,364
branches across India as on Q2FY11, and a strong presence in the eastern region. Nearly
70% of the bank’s branches are in Uttar Pradesh and eastern India. Its market share in
advances and deposits was at 2.2% and 2.3%, respectively; as on Sep 2010 its balance
sheet stood at ~INR 1.3tn. Incorporated in 1865 by European businessmen and
nationalized in 1969, Allahabad Bank is India’s oldest public sector bank. The
government of India (GoI) has a 55% stake in the bank, whereas, the foreign share
holding is a little above 18%.
Investment Thesis
Despite 17-18% plus RoE and reasonable CASA of 35% as on Q2FY11, the bank trades
at significant discount to its peers, mainly due to technological backwardness and poor
perception of its asset quality. In our view, the stock could continue to trade in a range
considering its concentration in eastern states which are economically backward as
compared to rest of the country and thus carry higher delinquency risk.
Key Risks
Asset quality: In this current scenario, there is a greater risk of NPA accretion for
Allahabad Bank than its peers, given its geographical spread and relatively weaker risk
management systems.
Maintaining Capital adequacy in this environment is a challenge.
Bank’s cost to income ratio is one of the highest in the PSU space.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Allahabad Bank (ALBK) reported strong operating performance in Q3FY11 with 20%
Y-o-Y growth in PAT at INR 4.2 bn, well ahead of our estimate. Core operating profits
(excluding treasury gains) grew 49% Y-o-Y buoyed by 32% Y-o-Y advance growth
(6% Q-o-Q), 10bps sequential expansion in NIMs (to 3.44%) and stable asset quality
(with gross NPLs at 1.8%). Slippage, excluding agri waiver, came in at 1.4%
(annualized), ably curtailed by better recoveries/ upgrades and write-offs. The bank
has provided INR 520 mn in Q3FY11 (similar to Q2FY11) towards second pension
option determining overall liability at INR 7.8 bn; incremental gratuity liability was
arrived at INR 2.8 bn and it has provided INR 520mn in YTD FY11.
Growth momentum sustained; margins expand 10bps
Advance growth momentum was sustained with 6% Q-o-Q and 32% Y-o-Y
growth, to INR 868 bn. Strong growth was witnessed in the SME segment and
trade loans. Education and other SME segment supported retail loan growth and
personal loan came off 9% Q-o-Q. 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. NIMs expanded 10bps to 3.44%
driven by 23bps improvement in yield on advances (10.58%) and rise in funding
cost being capped at 16bps (5.93%). The bank has been continuously shedding
bulk deposits; accretion to retail TD has been strong (8% Q-o-Q growth) leading
to CASA ratio marginally coming off to 33.4% (from 34.7% in Q2FY11). Due to
increased pressure on deposit cost, we expect margins (calc) to come off 15-
20bps in FY12 (over FY11).
Slippage higher due to agri; recoveries the compensating factor
During the quarter, slippages came in at INR 3.6 bn (2.2% annualised), higher
than H1FY11 average of 1.5%. However, ~INR 1.3 bn came in from slippages in
the agri book and INR 900 mn from restructured pool. Key positives were higher
recoveries (both from NPLs and written off accounts), upgradation of INR 750
mn and write off of INR 1.5 bn, which curtailed the impact of slippages. Overall
GNPA and NNPA sustained at 1.8% and 0.6% respectively. Provisioning coverage
including technical write-offs stands strong at 80%.
Outlook and valuations: Core earnings to the fore; maintain ‘BUY’
Allahabad Bank has been surprising on margins since the past few quarters with
advance growth continuing at robust levels (30% plus). Moreover asset quality is
being contained supported by strong recoveries and upgradations. Pension
liability is similar to what it has indicated in previous quarter. We are maintaining
our earning estimates expecting it to report 28% CAGR in PAT with average
RoEs of ~24%. The stock is currently attractive at 1.1x FY12E book and 4.8x
earnings. We maintain ‘BUY/Sector Performer’ rating on the stock.
Other income declined, led by lower treasury income
During the quarter, core fee income grew 12% Y-o-Y (down 18% Q-o-Q) led by LC/BG
and forex income. Treasury profits were limited at INR 200 mn (compared to INR 1.3 bn
in Q3FY10 and INR 380 mn in Q2FY11). Recoveries however came in stronger at INR 644
mn.
Restructured portfolio down; slippage remains low
ALBK’s restructured asset pool (3.2% of loans) experienced a positive trend of upgrades,
coming off from INR 30.3 bn to INR 27.5 bn (during the quarter, there was decline of
INR 2.8 bn in the restructured portfolio). In Q3FY11, INR 940 mn slipped from the
restructured pool, taking the total slippages in this pool to 14%. Management sounded
confident on steady performance of the pool and likelihood of further upgrades, going
forward.
Other highlights
• During Q3FY11, the bank’s operating expense increased 43% Y-o-Y, led by 53%
increase in staff expenses. During the quarter, the bank has determined second
pension option liability at INR 7.8 bn and has provided INR 520 mn towards it
(similar to that provided in Q2FY11). It has also determined gratuity liability at INR
2.8 bn and has provided INR 520 mn in FY11 YTD.
• Tier 1 capital remains adequate at 8.14%.
Company Description
Allahabad Bank has a pan-India presence with the sixth largest network of 2,364
branches across India as on Q2FY11, and a strong presence in the eastern region. Nearly
70% of the bank’s branches are in Uttar Pradesh and eastern India. Its market share in
advances and deposits was at 2.2% and 2.3%, respectively; as on Sep 2010 its balance
sheet stood at ~INR 1.3tn. Incorporated in 1865 by European businessmen and
nationalized in 1969, Allahabad Bank is India’s oldest public sector bank. The
government of India (GoI) has a 55% stake in the bank, whereas, the foreign share
holding is a little above 18%.
Investment Thesis
Despite 17-18% plus RoE and reasonable CASA of 35% as on Q2FY11, the bank trades
at significant discount to its peers, mainly due to technological backwardness and poor
perception of its asset quality. In our view, the stock could continue to trade in a range
considering its concentration in eastern states which are economically backward as
compared to rest of the country and thus carry higher delinquency risk.
Key Risks
Asset quality: In this current scenario, there is a greater risk of NPA accretion for
Allahabad Bank than its peers, given its geographical spread and relatively weaker risk
management systems.
Maintaining Capital adequacy in this environment is a challenge.
Bank’s cost to income ratio is one of the highest in the PSU space.
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