Buy Allahabad Bank; target Rs 260: Sushil Finance

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Buy Allahabad Bank; target Rs 260: Sushil Finance

Sushil Finance is bullish on Allahabad Bank and has recommended buy rating on the stock with a target price of Rs 260 in its November 30, 2011 research report.

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Sushil Finance is bullish on Allahabad Bank and has recommended buy rating on the stock with a target price of Rs 260 in its November 30, 2011 research report.

"Allahabad Bank, during Q2FY12, its NII grew by a robust 36% YoY and stood at Rs.13.2 bn on the back of a decent 18% YoY growth in its Advances. Its Deposits grew by 25% YoY, while its term deposits grew by 27% YoY and CASA grew by 10.3% YoY. Its CASA share in total deposits declined by 423 bps YoY and 156 bps QoQ, now forming 30.6% of its total deposits. The Bank shed certain low yielding short term loans to the tune of Rs.45-50 bn and now reduced to only Rs.30 bn (3.1% of Advances) which also resulted in lower credit-deposit ratio of 68.2% i.e a fall by 405 bps YoY and 584 bps QoQ. Its non-interest income was muted and de-grew by 10% YoY on lower treasury & fee income. Its operating expenses grew by 24% YoY, mainly on higher employee expenses (33% YoY increase) on branch expansion & extra provisions on employee pension & gratuity (as a buffer for future requirements). Its Cost to Income ratio stood at 41.8% in Q2FY12 as compared to 40.4% in Q2FY11. The Bank's total provisions in Q2FY12 increased by 52% YoY to Rs.4.11 bn, largely on account of higher provisions on investment depreciation (Rs.824 mn in Q2FY12 as against Rs.36 mn in Q2FY11) while its loan loss provisions stood at Rs.3.01 bn, an increase of 52% YoY. As a result, its PBT grew by 5% YoY and stood at Rs.5.37 bn. The Bank's lower tax provisions on exemption benefits on some items in the quarter resulted a net profit growth of 21%, standing at Rs.4.9 bn for Q2FY12."

"In Q2FY12, its NIMs stood at 3.68% expanding by 34 bps YoY and 28 bps QoQ, mainly due to efficient re-pricing of its Advances and shedding low yielding short term loans while cost of deposits moved up marginally. The Bank has guided +3% NIMs in FY12, while we expect its NIMs to stabilize at 3.5% given higher spreads between Advances & Deposits. We also feel cost of funds will be stable in H2FY12 and no sharp increase in yields expected in the challenging scenario. Hence, we expect NIMs to improve by 13 bps YoY (3.38% in FY11) to 3.51% in FY12E."

"The Bank witnessed fresh slippages of Rs.5.2 bn (Rs.6.7 bn in H1FY12) with +50% being contributed on account of migration of "Rs.0.5 mn & below" ticket size loans to system based NPA recognition. However, robust recoveries & upgradation of Rs.1.6 bn and higher write-offs of Rs.2.5 bn helped contain Gross NPAs. The incremental slippage ratio stood at 0.5% (+2% annualized) in Q2FY12. The Bank is hopeful to get its slippage rate back to normal in the range of 1.3%-1.4% and has now completely migrated to 100% system based NPA recognition, hence negative surprises from this count may not be expected going forward. In absolute terms, Gross NPLs increased by 17% YoY & 7% QoQ to Rs.17.2 bn and Net NPLs increased by 45% YoY & 13% QoQ to Rs.6.6 bn. In percentage terms, Gross NPLs stood at 1.77% i.e. stable YoY but an increase of 15 bps QoQ, while Net NPLs stood at 0.69% i.e. an increase of 10 bps YOY and 9 bps QoQ in Q2FY12. The Bank's restructured loan portfolio stood at 3% of advances at Rs.29.41 bn. Its provision coverage ratio remained high at 79.6% (incl. technical write-offs) and CAR stood at a healthy 13.0%, with a Tier-I ratio of 8.9%."

"Allahabad Bank has managed to grow at a decent pace in the past few years and maintain a high quality asset profile. Moreover, considering its strong NII performance in H1FY12 & continuing high margins, we have increased our NII estimates for FY12E & FY13E. However, in light of challenging credit offtake conditions, increasing credit risk, higher investment depreciation provisioning & higher than expected operating expenses, we have reduced our FY12 & FY13 APAT estimates. We now expect its Advance & Deposit to grow by 18.9% & 15.2% in FY12E and 17.9% & 15.2% in FY13E, while its Net Profit to grow by 10% in FY12E & by 16% in FY13E. The Bank currently trades at an attractive valuation of 0.8x FY13E ABV & 3.9x FY13E Earnings. We believe the stock can trade at 1.3x P/ABV given its strong deposit franchise, decent asset quality & sustainable ROE of around 19%. We maintain our "BUY" rating on the stock with a revised price target of Rs 260," says Sushil Finance research report.

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