Emkay Global Financial Services has recommended `Accumulate` on Allahabad Bank with a price target of Rs 200 as against the current market price (CMP) of Rs 156 in its report dated Jan. 30, 2012. The broking house gave the following rationale:
Consistent performer; higher restructuring slight negative:
ALBK` NII came in at Rs 13.8 billion, growth of 31.3% yoy, ahead of our/street expectations. The growth was driven by 5bps expansion in NIM`s to 3.7% vs our expectations of 20bps contraction. The resilience in NIMs over M9FY12 has been outperforming our expectations every quarter. Other income also stood strong at Rs 3.5 billion (35.4%YoY) aided by robust fees and recoveries. Further aided by lower tax rate of just 7.9%, net profit came in at Rs 5.6 billion beating our as well street expectation by a huge margin. While the advance growth was robust at 4.9% q-o-q, deposit grew by relatively lower 2.3%q-o-q. Resultantly CD ratio improved by 175bps q-o-q to 69.1%. With slippages capped at Rs6billion and stable recoveries/ upgradation at Rs1.7billion, asset quality remained broadly stable with GNPA/ NNPA at 1.9% and 0.8%. Restructuring at Rs10.5billion (1% of advances) was however slight negative. ALBK (Q,N,C,F)* has provided at >100% of net incremental slippages unlike many of its peers which have seen sharp deterioration in provisioning policies.
Strong traction in Corp/ Agri drives advance growth:
ALBK`s advances grew by a healthy 5%q-o-q to Rs 1 tn aided by strong traction in Corporate and Agri advances. While corporate book grew by strong 6.7%q-o-q, Agri book also grew equally strong at 6.3%q-o-q.
CASA profile stable aided by relatively better growth in savings deposit:
Consistent addition in the branch network further aided by significant addition of saving
account holders in West Bengal, helped to grow saving deposit by 3%q-o-q. Moreover with a relatively lower growth in term deposit at 2.3%q-o-q, CASA share remain stable at 30.6%.
Higher trading gains and recovery drives other income:
The non-interest income grew by a healthy 12.7% q-o-q to Rs3.5billion helped by three fold increase in trading gains and higher recovery. Fee income remained stable during the quarter at Rs 2.1 billion.
Tax refund further aided net profit growth:
Strong operating performance further aided by lower tax rate (7.9%) resulted in strong 35% y-o-y growth in net profit to Rs 5.1 billion. The bank has paid excess tax of Rs 4.5 billion in FY10/11, which it has partially written back during the quarter. The remaining portion will be written back over next one or two quarters.
Asset quality broadly stable; Restructured assets rise significantly:
The slippages during the quarter stood at Rs 5.9 billion, marginally higher than Rs 5.3 billion in Q2FY12. A large part of the slippages (60%) accrued in Priority sector lending, with one big account (footwear manufacture) of Rs 1.2 billion also slipping during the quarter. ALBK does not have any exposure to GTL or Kingfisher.
However on the flip side the bank added Rs 10.5 billion (1% of Advances) to its restructured book during the quarter, taking the outstanding restructured book to Rs 38.2 billion (3.8% of Advances). The restructuring was scattered across sectors, Iron & steel (Rs 1.8 billion), Infra (Rs 2.2 billion), Pharma (Rs 1.5 billion) and textiles (Rs 1.5 billion). However there was no restructuring SEB`s during the quarter. The bank exposure to power sector remains higher at 13.2% of the total book, with Distribution companies exposure at close to 6%.
Though, ALBK has not restructured any of the SEB accounts during M9FY11, we have built in additional standard assets restructuring provisions of Rs1billion to our FY13E numbers.
But aggressive provisions for NPA`s is a big comfort:
We continue to draw comfort from the fact that ALBK continues to provide aggressively for the NPLs. While for M9FY12, ALBK`s net slippages were at 0.7% of the advances, it has already taken a charge of 0.8% to the P&L. Amongst the large to mid size PSU banks we have found such aggressive practices with only BOB and PNB
Valuations and view:
The bank has shown steady performance over the last 8-9 quarters with strong operating growth and stable asset quality. The resilience in NIMs in the range of 3.4-3.7% has far outperformed our initial expectation. We draw comfort from the fact that the bank has been making aggressive provisioning on NPA`s, as it has provided more than 100% on the incremental slippages over 9MFY12. We have upgraded our numbers for FY12E/13E by 17.7/12.2% largely to take into account lower tax rates. The risk to remains from the restructuring of SEBs also is now built into our numbers.
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