Allahabad Bank: Strong asset growth to offset NIM compression:: Daiwa

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 We forecast strong loan
growth of 25%+ YoY for 1Q
FY12
 NIM compression is in line
with industry trends, though
not likely to fall below 3%
 Stock trading at an attractive
valuation of 1x FY12E PBR
 What's new
We expect 1Q FY12 to be a
reasonably good quarter for
Allahabad Bank, driven by strong
loan growth, which should
neutralise the negative impact of
NIM compression. We also expect
fresh NPLs to be much lower on a
quarter-on-quarter basis, while NPL
recoveries should be high, leading to
a low provisioning requirement.
 What's the impact
We expect the strong loan growth to
result in an improvement in the
loan-to-deposit ratio. Even after
factoring in NIM compression, we
expect net-interest-income growth
to be much higher than the industry
average for 1Q FY12.
We believe NIM compression was
marginal in 1Q FY12, as the bank
raised its prime lending rate and
base rate by 50bps each in May, the
positive impact of which would have
been felt in 1Q FY12. Also, the
capital infusion of Rs6.7bn received
from the Government of India in
March 2011 should have helped
reduce the NIM compression in 1Q
FY12. However, the NIM of 3.49%
for 4Q FY11 was the bank’s peak
level over the past 17 quarters, and
hence is likely to revert to its mean
level of around 3% in the medium
term. Management guides for a NIM
of around 3% for FY12.
During our recent discussion,
management said it did not expect
any significant accretion to NPLs for
loans below Rs5m which have yet to
be shifted to system-based
recognition for NPLs. Management
also expects recoveries and
upgradations to be strong in FY12.
 What we recommend
We forecast a strong 22% net-profit
CAGR from FY12-14 with an ROE of
20%+ over the same period. We
maintain our six-month target price
of Rs269, based on a target PBR of
1.4x on our FY12 BVPS forecast
(based on the Gordon Growth
Model). The key risk to our call
would be higher-than-expected fresh
formation of NPLs and lower-thanexpected
loan growth.
We have revised down our earnings
forecast for FY12 by 5.6%, as we now
conservatively factor in higher credit
costs than we did earlier, though our
EPS forecast is revised down by
11.4% due to the high equity dilution
in FY11.
 How we differ
Despite the high ROE of 20%+ that
the bank commands, the current
valuation, at a 1x FY12E PBR,
possibly reflects the market’s
concerns about asset quality and
NIM compression. While most
banks are likely to see NIM
compression, we believe Allahabad
Bank will surprise positively on the
asset-quality front, which would
help the stock to rerate from here.