Allahabad Bank- Improving franchise at inexpensive valuations; initiate with OUTPERFORM:: Standard Chartered Research,

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Allahabad Bank
Improving franchise at inexpensive valuations; initiate with OUTPERFORM


 We initiate coverage with OUTPERFORM and price
target of Rs270 based on 1.4x FY12E P/BV.
 At the current valuation of 1.2x FY12E P/BV, Allahabad
Bank trades at a discount to other bank stocks.
 While the bank has a high proportion of savings
deposits at 27% of total deposits, it trades at a discount
to other banks due to its weaker technology platform
and perception that its loans carry higher NPL risks.
 We expect the stock to trade higher given likely good
earnings performance and with slippages under control.



Good improvement in key metrics, less threat of CASA
– Allahabad Bank has shown good improvement in key
metrics over the past two years. NIM has improved from
2.3% in 2Q FY10 to 3.4% in 3Q FY11. RoA has improved to
1.2% in 3Q FY11 from 0.9% in FY09. Slippages, a
parameter constantly monitored by investors, were 1.9% of
lagged loans, lower than 2.5%-2.9% for Union Bank, PNB
and SBI. Its CD ratio at 72% is not unusually high.
Valuation: Re-rating likely with consistent earnings
delivery – We value the bank at 1.4x FY12E P/BV, higher
than the current multiple of 1.2x as we expect it to continue
to deliver strong core operating performance. We expect
earnings to grow 20% over FY11-13E against 18% over
FY08-10. While Allahabad Bank has delivered a strong
operating performance over the past few quarters, the stock
trades at a discount to other large stocks, as investor
perception about its asset quality is poor given the bank’s
focus on the eastern states, which are not as economically
advanced as the rest of India. We believe valuations will
catch up given its consistent core earnings growth.
Key risks – Allahabad Bank has a higher proportion of
MTM bonds (34% of total) than other banks, which is a risk
in a rising rate environment. For every 50bps rise in rates,
net profit will decline by 7%. The bank’s cost to income ratio
is also relatively high. A high proportion of small sector
loans (25% of total) make the bank’s asset quality more
vulnerable to an economic downturn.


Company profile
Allahabad Bank is a public sector bank with 2,403 domestic branches. Close to three-fourths of
its branches are in eastern India and the state of Uttar Pradesh. The government of India holds
55% of the bank’s total equity, which has increased to 56% following the recent capital infusion.
Management team
Chairman and Managing Director: J.P. Dua
Took charge in December 2009, before which he served as Executive Director of the bank. He
was earlier the General Manager (Corporate Credit) of Oriental Bank of Commerce.
Executive Director: Debabrata Sarkar
Executive Director of Allahabad Bank since December 2009, Debabrata Sarkar had earlier
served as General Manager of Bank of Baroda.
Executive Director: M.R. Nayak
Appointed Executive Director of Allahabad Bank from Corporation Bank, which he joined in 1971
and worked in various capacities at Bangalore, Mumbai and New Delhi