Allahabad Bank Robust performance; strong BUY: Rs 250 Target: Emkay

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Allahabad Bank

Robust performance; maintain strong BUY

BUY

CMP: Rs 202                                        Target Price: Rs 250

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n     ALBK results inline with expectation with NII at Rs10.5bn and net profit at Rs4.2bn

n     The NII for Q3FY11 has grown by 55.7%yoy to Rs10.5bn driven by 31% yoy (4.6% qoq) growth in advances and 14bps expansion in NIMs to 3.4%

n     The asset quality remained largely stable with GNPA and NNPA at 1.8% and 0.6%. Slippages controlled at Rs3.5bn (Rs4.5bn in Q2FY11) including few one-offs

n     Valuations attractive at 1.4x FY11E/1.1x FY12E ABV. We maintain our BUY rating with price target of Rs250 (at 1.3x FY12E ABV). Remains our top pick in mid-sized PSU banks

NII grew in line with estimates…

ALBK’s NII for Q3FY11 has grown by 55.7%yoy to Rs10.5bn driven by 31% yoy (4.6%

qoq) growth in advances and 14bps expansion in NIMs to 3.4%.

… as better yields help more than mitigate rising costs

The NIM’s expanded by 14bps qoq to 3.4% as the yield on advances expanded by a

higher 23bps, while cost of funds increased by 16bpsqoq.

NIMs can be maintained in Q4FY11

With not very high CD ratio of 71% and having raised BPLR and Base rate by 50bps

once again in December 2010, we believe that ALBK’s NIMs will be maintained at

current level even in Q4FY11. For FY12, we have already built in 20bps contraction in

NIMs.

Advances growth remain robust; but will come down in Q4FY11
The advances growth was strong at 32.2% yoy and 5.8% qoq primarily driven by SME and
corporate advances, which grew by strong 8.5%qoq and 7.1%qoq respectively.
However, we believe that the advances growth on yoy basis is likely to come down to ~26-
27% for FY11 due to unfavourable base effect. In Q4FY10, ALBK’s advances had shown a
growth of 11% qoq.

CASA mix drops as bank raised term deposits aggressively
The CASA mix declined by 144bps to 33.3% in Q3FY11 as the bank raised term deposits
aggressively during the quarter, a growth of 8.8%qoq,

Lower fee income due to volatility in processing fees
While the fee income for Q3FY11 has dipped by almost 24% qoq on account of lumpy
nature of the processing fees collected on the loans sanctioned. The fees have also
declined partially because of the waiver of processing on the home loans in Q3FY11.
However, for M9FY11, the core fees have grown by ~15% yoy and total other income
excluding the trading gains has grown by robust 17% yoy.

Core earnings growth robust 48.5% yoy
While lower other income resulted in just 21.2% yoy growth in operating profit (lower than
NII growth), the core operating profit has grown by sharper 48.5% yoy. The sharp growth in
the core operating profit was despite providing Rs520mn for the pension liabilities. The
bank will be providing in total Rs7.8bn for second pension liabilities

Lower slippages reduce need for high provisions
The bank’s overall provisioning was lower by 4% yoy despite investment depreciation of
Rs358mn. For M9FY11, ALBK has provided at ~80% on the net incremental slippages.
Very high provisions done in Q2FY11 have helped the bank to reduce credit costs to 0.2%
in Q3FY11.

Ex-agri slippages remain under control
The slippages during the quarter were at Rs3.6bn for the quarter or 1.6% on annualised
basis. However a large part of it i.e Rs1.3bn was on account of Agri NPA, adjusted for
which the slippage rate was under control at 1.1% (annualized)

Capital adequacy remains comfortable
ALBK’s CAR remained comfortable at 12.8% with tier I CAR of 8.1%. The management has
also asked for Rs10bn of innovative perpetual debt capital from the government which will
boost the tier I and total CAR by 130bps.
Valuations and view
While we have already taken a hit of 20bps in NIMs next year, the savings on account of
lower provisions requirement and improvement in cost structure will help maintain the RoAs
at 1.2%. We have marginally tweaked our numbers for FY11/12E to take into account
marginally lower other income. We believe that ALBK’s current valuations of 1.4x FY11E
ABV and 1.1x FY12E ABV are extremely attractive looking at average 22% RoAs for FY11-
12E. We maintain strong BUY with TP of Rs250 (1.3x FY12E).