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Allahabad Bank (ALBK) reported PAT of INR 2.6 bn, lower than our estimate of INR
3.1 bn, as it made higher retirement provisions. This, coupled with higher credit
costs, offset the positive impact from steady core revenues and margin improvement
by 5bps (against expected decline). Business growth continued to remain strong with
loan book growth of 31%. Higher–than-expected slippages, at 4.5%, were a negative
surprise.
Growth momentum sustained; margins expand 5bps
Advance growth momentum was sustained with 9% Q-o-Q and 31% Y-o-Y
growth, to INR 945.7 bn. Strong growth was witnessed in the SME segment and
trade loans. Education and other SME segment supported retail loan growth;
personal loan came off 20% Q-o-Q. Infrastructure credit remains the mainstay of
credit consumption in the corporate segment and currently forms nearly 19% of
the overall book. Against expectation of a decline, margins expanded 5bps to
3.49%, driven by 13bps improvement in yield on advances (10.7%) and rise in
funding cost capped at 6bps (6.01%). The bank has been continuously shedding
bulk deposits; accretion to retail TD has been strong (up 14% Q-o-Q). CASA
ratio has remained stable at 33.5%. Owing to increased pressure on deposit
cost, we expect margins (calc.) to come off 30ps in FY12 (over FY11).
Asset quality hiccup: Slippage higher due to agri portfolio
During the quarter, slippages jumped to INR 8.1 bn (4.5% annualised), higher
than H1FY11 average of 1.5%. Around INR 5 bn of slippages came from the agri
portfolio, specifically from drought prones districts in UP, West Bengal etc.
Overall, increase in GNPL was restricted to 7% due to higher write-offs of INR
5.3 bn. Provisioning coverage, including technical write-offs stands strong at
76%; it, however, came off 400bps during the quarter. Credit cost in the quarter
was high at 140bps.
Outlook and valuations: Attractive; maintain ‘BUY’
ALBK has been surprising on margins since the past few quarters with advances
growth continuing at robust levels (30% plus). Asset quality performance was,
however, disappointing. With large part of the retirement cost behind us, we
expect earnings growth of 25% CAGR over FY11-13. The stock is currently
attractive at 1.1x FY12E book and 5.4x for an average ROE of ~20%. We
maintain ‘BUY/Sector Performer’ recommendation/rating on the stock.
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 PAT of INR 2.6 bn, lower than our estimate of INR
3.1 bn, as it made higher retirement provisions. This, coupled with higher credit
costs, offset the positive impact from steady core revenues and margin improvement
by 5bps (against expected decline). Business growth continued to remain strong with
loan book growth of 31%. Higher–than-expected slippages, at 4.5%, were a negative
surprise.
Growth momentum sustained; margins expand 5bps
Advance growth momentum was sustained with 9% Q-o-Q and 31% Y-o-Y
growth, to INR 945.7 bn. Strong growth was witnessed in the SME segment and
trade loans. Education and other SME segment supported retail loan growth;
personal loan came off 20% Q-o-Q. Infrastructure credit remains the mainstay of
credit consumption in the corporate segment and currently forms nearly 19% of
the overall book. Against expectation of a decline, margins expanded 5bps to
3.49%, driven by 13bps improvement in yield on advances (10.7%) and rise in
funding cost capped at 6bps (6.01%). The bank has been continuously shedding
bulk deposits; accretion to retail TD has been strong (up 14% Q-o-Q). CASA
ratio has remained stable at 33.5%. Owing to increased pressure on deposit
cost, we expect margins (calc.) to come off 30ps in FY12 (over FY11).
Asset quality hiccup: Slippage higher due to agri portfolio
During the quarter, slippages jumped to INR 8.1 bn (4.5% annualised), higher
than H1FY11 average of 1.5%. Around INR 5 bn of slippages came from the agri
portfolio, specifically from drought prones districts in UP, West Bengal etc.
Overall, increase in GNPL was restricted to 7% due to higher write-offs of INR
5.3 bn. Provisioning coverage, including technical write-offs stands strong at
76%; it, however, came off 400bps during the quarter. Credit cost in the quarter
was high at 140bps.
Outlook and valuations: Attractive; maintain ‘BUY’
ALBK has been surprising on margins since the past few quarters with advances
growth continuing at robust levels (30% plus). Asset quality performance was,
however, disappointing. With large part of the retirement cost behind us, we
expect earnings growth of 25% CAGR over FY11-13. The stock is currently
attractive at 1.1x FY12E book and 5.4x for an average ROE of ~20%. We
maintain ‘BUY/Sector Performer’ recommendation/rating on the stock.
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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