Buy Allahabad Bank: Target Rs 304: Unicon

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Buy Allahabad Bank: Target Rs 304: Unicon


Allahabad Bank (ALBK) is on a strong growth trajectory and is expected to
outperform the Indian banking industry. Its strong distribution network and
vast customer base in CASA-rich states enables 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 would help the
bank earn better margins compared with other public sector banks. In addition,
ALBK is well positioned with good asset quality backed by provisioning of
more than 70% to achieve the business growth targets as per management
guidance. The stock trades at 0.9x and 0.7x its P/BV and at a P/E of 4.3x and 3.6x
for FY12E and FY13E respectively. At CMP, ALBK is attractively valued at 0.9x
its FY12E P/BV. BUY for a target price of INR 304 (1.3x FY12e P/BV).

Investment Rationale
• Business is expected to grow at a robust pace: ALBK's loans and deposits are
expected to grow at 24% and 21% in FY12E, which is higher than the expected
industry growth. The bank's CASA ratio is estimated to improve to 36.5% in
FY12 from 34% in FY10.
• Branch expansion to fuel growth: ALBK has a very strong presence in the
Eastern and Central parts of India, ~60% deposits coming from these two
regions. ALBK has 50 new licenses and plans to open another 100 branches
during FY11-12 in Western and Southern regions to expand its presence. This
will help it to have balanced geographical presence.
• Strong and efficient liabilities franchise will be a key driver: We foresee
minimum impact on ALBK's margins in the current interest rate scenario as
it has well-diversified liabilities franchise and is in a position to fund future
loan growth with optimum mix of low-cost deposits and term deposits.
• Best-in-class asset quality: ALBK's asset quality is comfortable with gross
and net NPAs at 1.7% and 0.6% respectively as on September 2010. Aggressive
write offs over the past few years have helped the bank steadily reduce gross
NPAs.

Concerns
1. Asset quality may deteriorate, 2. Sharp decline in credit growth may hamper
earnings growth

Outlook & Valuation
We expect earnings to grow at a CAGR of 24% over FY10-12E, led by improvement
in NII and healthy fee income growth. We believe, the market has not fully
recognized the bank's fundamental strengths and that it deserves a better rating.
At CMP, ALBK is attractively valued at 0.9x its FY12E P/BV. BUY for a target
price of INR 304 (1.3x FY12e P/BV).


Company Description
ALBK is a Kolkata-headquartered Public Sector Bank (PSB) with an asset size of
~INR1,217 bn and network of 2,286 branches. ALBK was nationalized in 1969
by GoI along with 13 other major commercial banks. The bank made an initial
public offering (IPO) in 2002 and a follow-on public issue in 2005. ALBK has a
pan-India presence with a strong foothold in eastern and northern India. ALBK's
total business touched INR 1,968 bn as on September 30, 2010, with deposits in
excess of INR 1,136 bn and advances of INR 832 bn. Its credit-deposit ratio stood
at 73% and is well capitalised with capital adequacy ratio (CAR) at 13.5% at end
Q2FY11 with healthy Tier-1 capital ratio of 8.4%.

Investment Rationale
Business is expected to grow at a robust pace
Gross bank credit of the banking industry is expected to grow ~20% in FY11, led
by healthy demand from domestic corporate, SME and retail segments. ALBK's
credit and deposits grew 36% YoY and 30% YoY in Q2FY11. Further, ALBK's
productive branch profile allows it to to increase low-cost deposits and lend to
high-yielding credit businesses. We expect ALBK's loan book and deposits to
grow by 24% and 21% in FY12E respectively.
ALBK has a well-diversified loan portfolio spread across the corporate, retail
and agriculture segments. The loan portfolio is expected to further tilt toward
mid-corporate, SME and retail loans. The SME loan book grew 77.4% in FY10
and contributed 32.8% to incremental loans. We expect strong growth in the
SME loan portfolio in FY11 & FY12 as the bank is aggressively taking various
strategic initiatives in this regard. Aggressive loan growth in this segment is
positively impacting yield on funds of the bank. Also, the large corporate
segment grew 23.1% YoY in FY10 and contributed 34.5% to net incremental loan
and we expect this trend to continue going forward. Under retail loans, the
bank is predominantly focusing on housing loans, trade and education loan
segments, which are high-yielding assets with relatively lower risk profile.


Branch expansion to fuel growth
ALBK has a very strong presence in the Eastern and Central parts of India and
by virtue of having a strong presence in these regions ALBK has ~60% of deposits
coming from these two regions. We expect deposits to grow by CAGR 22% from
FY09-13 and the CASA ratio to increase from 34.5% in FY10 to 36.5% by FY13E.
This will be achieved with expansion of branch network and 100% Core banking
solution (CBS). ALBK has 50 new licenses and plans to open another 100 branches
in FY11-12E in Western and Southern region to expand its presence. As on
September 30, 2010, the bank has 55% of its branches (1473 out of total 2286)
under Core banking solution (CBS) covering 89% of the bank's business. The
bank aims at completing 100% CBS rollout in future aiding it in improving the
core fee-based income. To foray in the international market, ALBK has set up an
overseas branch at Hong Kong and also plans to open representative offices
across the globe.


Strong and efficient liabilities franchise will be a key driver
In the coming quarters, ALBK is expected to improve its operating performance
with a strong distribution network. In the rising interest rate scenario, banks
face increased pressure on cost of deposits that intensifies when the banking
system is witnessing high credit disbursement. However, ALBK's cost of
deposits is expected to decline due to higher proportion of low cost deposits
and well-placed liabilities franchises. ALBK has raised its lending rates (the
base rate has risen by 50 basis points to 9% and the prime lending rate (PLR)
has gone up by 75 basis points) and deposit rates in line with the other banks.
According to the management, 95% of the bank's loan portfolio is linked to the
BPLR and the base rate and has the ability to fund future loan growth with an
optimum mix of low-cost deposits and term deposits to cushion the margins.
Currently, incremental credit deposit ratio of the banking system is ~70% which
indicates relatively strong demand in credit disbursement compared with
deposit mobilization. We expect this trend to continue in FY11-12E supported
by the economic growth of the country.


Strong asset quality & Investment portfolio
As of September 2010, ALBK's asset quality is comfortable with gross and net
NPA ratios of 1.7% and 0.5% respectively and Provision coverage stands at 81%
(above RBI's prescribed guideline of 70%). Aggressive write offs over the past
few years have helped the bank steadily reduce gross NPAs from 9.25% in March
2004 to 1.7% in September 2010. Going forward, the bank's management has
guided for higher recoveries and upgradations which would lead to a decline in
its NPAs. Assuming a slippage of 1.9% in FY11 and that of 1.6% in FY12, we
expect the NPAs to remain stable in FY11 and decline in FY12. As on Q2FY11, the
bank has ~83% of its SLR investments in the HTM category and is cushioned at
8.09%, hence, we do not expect the bank to get impacted significantly if bond
yields suddenly spike up.


ALBK is well capitalized to support growth
The government has allocated INR 6.7 Bn to ALBK as per the latest round of
capital infusion plans. However, the mode of capital infusion and timing are yet
to be decided. We believe, the capital infusion announced by the government
will support a strong growth in the bank's advances. At end Q2FY11, CAR
stood at 13.49% and tier I ratio was 8.41%. Going ahead, we expect improvement
in the ALBK's core fee businesses such as commission, fee and brokerage as a
result of continued focus on improving fee-based income. The bank's ROE and
ROAA is expected to improve to ~20% & ~1.2% in FY13E respectively, as a result
of strong growth in business and core operating performance.


Concerns
Asset quality may deteriorate
The bank has restructured substantial corporate and SME loans under RBI's
special dispensation. These loans may slip into NPA categories, elevating the
bank's credit risk.
Sharp decline in credit growth may hamper earnings growth
Credit disbursement by the banking system has recovered remarkably in the
current fiscal year. If credit growth does not pick up along with the overall
banking industry, ALBK's profitability may suffer.


Financials Analysis
We expect ALBK to post CAGR 31% growth over FY09-13E in bottom line, driven
by a CAGR 21% FY09-13E in total assets, healthy NIMs, superior fee income. We
expect improvement in CASA which we believe has the potential to surprise
positively. We expect Net Interest Income to grow by CAGR 27%, while operating
profit to grow CAGR 24% FY09-13E respectively.
NIMs
Bank's thrust to garner more share of CASA deposits in its total deposits will help
it to enhance its NIMs. This will largely be helped by lower cost of deposits ~5.5%
in FY13E and lead to an expansion in NIMs to 3.5% in FY13E from 2.6% in FY10.
Operating Costs as percentage of assets
Operating costs as a percentage of total assets are likely to trend higher on back of
investments made in expanding branch network and staff. Further, higher focus
on retail assets would also increase bank's overhead costs. However, in future
these investments will result in higher profits for ALBK.


Peer Comparison
At CMP of INR 225, the stock trades at P/BV of 0.9x as compared to 1-1.1x its peers.
Also, ALBK is posting a better ROE of 22.92% in comparison to 15-21% of its peers,
except for UCO bank which has ROE of 23.8%.


Valuation
With vast and diversified distribution network and customer base, ALBK is in a
position 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. Given the strong
buoyancy in the earnings led by improved margins, robust business growth,
superior return ratios and relatively better asset quality, we expect Allahabad
Bank to trade at a higher valuation. The valuation chart show that ALBK has
traded above 1x P/BV over the past few years. At CMP, ALBK is attractively valued
at 0.9x its FY12E P/BV. BUY for a target price of INR 304 (1.3x FY12e P/BV).