Allahabad Bank: ‘Resilient Play’

CMP Rs125, Target Rs182, Upside 45.5%

Loan growth to accelerate in H2; book quality remains healthy

Allahabad Bank’s loan growth is anticipated to accelerate in H2 driven by seasonality in agri/SME/PSL portfolio and substantial unutilized sanctions/working capital limits. Given the bank’s low credit market share at ~2.3% and strong presence (2,400+ branches), management is confident of higher-than-system asset growth in FY12/13. Neither margins nor asset quality has shown stress in recent quarters defying concerns around bank’s robust grown in the past two years. We build 18.5% CAGR in advances over FY11-13E. Infra loan book (~20% of advances) is healthy with bank having exposure to more resilient SEBs and road/power projects. Further, risk mitigation is in place (escrow banker) for some SEB loans.

Strong liability franchise to support NIM at higher level 

Low share (12.5%) of bulk deposits and healthy CASA (31%) makes Allahabad Bank’s liability profile better than most mid/large PSU Banks. Exhibiting resilience, NIM has improved significantly (~140bps) over the past fifteen quarters notwithstanding two interest rate cycle in the interim. Though CASA has come-off recently, substantial branch expansion and reversal of rate cycle is expected to drive improvement. Timely and commensurate lending rate hikes and portfolio re-balancing have driven NIM to historic high of 3.7% in Q2 FY12. With further liquidity tightening to have minimal impact, NIM would remain near 3.5% in the medium term.

Asset quality has held-up well; risk comparatively lower

Excluding the impact of system migration, slippage ratio of Allahabad Bank stood at near 1% in H1 FY12; better than most peers and substantially lower than 2% witnessed in past two years. By the year-end, GNPL ratio is expected to improve (current 1.8%) aided by benign slippages (~1.3% in H2), continuance of robust recoveries/upgradations and strong credit expansion. Unlike some peers, bank increased recurring LLP in recent quarters notwithstanding higher investment provisioning; also reflected in PCR sustained at elevated 80%. With one of the lowest (amongst PSBs) restructured assets and NNPL/Networth ratios, we believe that asset quality risk is comparatively lower for Allahabad Bank. 

Current valuation doesn’t factor resilient operating profile 

Allahabad Bank nicely fits into our bottom-up stock selection criteria for PSU banks with attractive valuation vis-à-vis strong RoA delivery, healthy capitalization and lower asset quality risk. Despite factoring increase in LLP, earnings CAGR is estimated at brisk 20% over FY11-13. At 0.6x FY13E P/adj.BV, valuation is unlikely to see a sharp de-rating. Further, it would be misleading to go by previous cycle valuation trajectory as the operating profile of Allahabad Bank has improved substantially. Initiate coverage with BUY rating and 9-month price target of Rs182 implying 45% upside.