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Allahabad Bank (ALBK), established in 1865 by a group of Europeans, is
the oldest PSU bank in India. It is a mid-sized PSU bank with a total
asset size of Rs 1512.9bn as on March 31, 2011, in which the
Government of India (GOI) has 58% stake. The bank has a network of
2415 branches with major concentration in the Eastern parts of the
country mainly, West Bengal, Bihar and Uttar Pradesh.
Investment Rationale
Strong Growth Plans
ALBK plans to have a business of Rs 2.8 trillion which includes Rs 1.62
trillion in deposits and Rs 1.18 trillion in advances by FY12E end. As per
our estimates we expect the bank’s business to grow by 21.8% and
21.5% in FY12E and FY13E to Rs 2.75 trillion and Rs 3.34 trillion
respectively. We have estimated advances and deposits to grow at a
CAGR of 22% and 21.3% respectively over FY11-FY13E.
To Expand Branch Network to Increase Presence in South and West
India
ALBK had 2415 branches (all CBS linked) and 200 ATMs as on March
31, 2011. Going ahead, it plans to be aggressive with its branch
expansion and plans to open 155 branches and 500 ATMs in FY12E.
Most of these new branches are expected to be opened in CASA rich
locations in Southern and Western India including Kerala, Bangalore,
Hyderabad and states like Gujarat.
One of the Key Beneficiaries of Financia l Inclusion Opportunity
ALBK has a good presence in rural locations with 41.1% of branches in
rural areas, which is the highest amongst its peer group. With the
initiatives taken by GOI and RBI to increase financial inclusion in
unbanked locations in rural areas, we believe ALBK will be one of the
key beneficiaries of the financial inclusion opportunity, and thereby will
be able to grow its business at a higher rate in future.
Good Low Cost Deposit Franchise to Limit Fall in NIMs
ALBK has a relatively good deposit franchise with a CASA ratio of
33.5% as on March 31, 2011. Going ahead, with the interest rates
estimated to remain high, we have expected the CASA ratio to fall by
100bps in FY12, but still remain above 30%, which will limit the fall in
its Net Interest Margins (NIM). As per our conservative estimates, we
have estimated the NIMs to decline to 3.1% in FY12E from 3.3%
(3.38% was reported NIM in FY11) in FY11.
MSME to be Key Focus Area for Growth
Over FY09-FY11, the MSME segment has been the key driver of loan
growth. MSME advances grew by 77.4% and 47.2% in FY10 and FY11
respectively. As a result , proportion of MSME advances to total credit
increased to 15.4% in FY11 from 9.4% in FY09, which in turn resulted
in an improvement in margins. Going ahead also, ALBK’s key focus for
loan growth will continue to be the MSME loans. Besides this, the
management also plans to focus on priority lending in Eastern and
Northern areas including Uttar Pradesh, Jharkhand, Bihar and Madhya
Pradesh.
Comfortable Capital Adequacy
ALBK’s capital adequacy ratio remained comf ortable at 12.96%, with
Tier I Capital ratio at 8.57% as on March 31, 2011. Going ahead, the
bank has headroom of Rs 47bn available for raising innovative
perpetual debt and Upper Tier II Capital over the next 2 years. In case
of a decline in interest rates in future, the management plans to raise
Tier II Capital for growth.
Fee Income to Grow at Robust Pace
For improving upon its fee income, the management of ALBK plans to
take steps like increasing product base of third party product
distribution, introducing specific products for NRI / NRE clients,
increasing revenues from recently commenced syndication cell and
introducing bullion trading in FY12E. It is also looking for tie-ups with
educational institutes in order to collect fees and provide banking
services to the students in these institutes. ALBK currently ranks 4th
amongst PSU banks for having the highest fee income as percentage of
average assets at 0.6%.
Non Life Insurance Venture to Add Value
ALBK has 30% stake in Universal Sompo General Insurance Co. Ltd,
which commenced operations in early 2008 and has attained a market
share of 0.7% in the general insurance industry, with gross
underwritten premium of Rs 3bn during FY11. As this business grows in
future, it will add to the fee based income and support valuation of
ALBK in the long term.
Outlook and Valuations
We have estimated ALBK’s earnings to grow at a CAGR of 24.8% over
FY11-FY13E which will translate into a high RoAE of 21.8% in FY13E.
At a CMP of Rs 198, the stock is trading at an attractive valuation of
0.9x its FY13E Adj. Book Value of Rs 222. Considering the focus of the
bank on qualitative asset growth ahead, good deposit franchise, efforts
on ramping up fee income and its attractive valuation, we believe the
current level provides an ideal entry point. We have valued the bank at
1.15x its FY13E ABV, which gives us a FY13E target price of Rs 255. We
have an ‘Outperformer’ rating on the stock
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