Buy Allahabad Bank; target of Rs 121: FinQuest Securities

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Broking house, FinQuest Securities is bullish on Allahabad Bank and has recommended buy rating on the stock with a 12 month target of Rs 121.

FinQuest Securities report on Allahabad Bank:

Allahabad Bank (ABL) is on the road to recovery with rising core income, stable margins and improving asset quality. With the banks increasing focus on mobilizing low cost deposits and increasing retail lending by leveraging on its vast branch network.

Investment Argument

• ABL is one of the oldest PSU banks with a rich banking experience of over 140 years to become one of the leading banks in the country today. It has a large network of over 2,000 branches and 149 extension counters catering to various classes of the Indian society. The bank is well placed to leverage on this advantage to expand its business volumes.
• Core operations are slowly starting to increase driven by good business growth. The bank's C/D ratio in FY2006 stood at 60% which is a significant improvement over 49% in FY2002. We conservatively expect the banks advances and deposits to witness a CAGR of 28.3% and 19.8% (FY2006-09E) respectively.
• The bank has been successful in cleaning up its balance sheet in the past 2-3 years. ABL has streamlined its operations to bring down its NPA level by better risk management, reducing incremental delinquencies and aggressive recoveries. As a result the banks Net NPA ratio reduced to 0.8% in FY2006 as compared to 10.7% in FY2002.  We expect this to further decline to 0.4% by FY2009E.
• ABL is focusing on expanding its retail business with the help of Retail boutiques at all its branches and thus targeting to keep its spreads intact in a rising interest rate scenario. It is also one of the late entrants to adopt technology but is soon catching up.

Valuations

With strong business growth, improving margins and improved asset quality have put the bank on a road to recovery. We believe that currently the stock is attractively valued at P/Adj BV of 0.9x and 0.7x its Adj BV of Rs 102 and Rs 121 for FY08E and FY2009E respectively. We Initiate Coverage on the stock with a BUY rating and a target price of Rs 121 with a 12 month perspective, implying an upside potential of 34% from CMP of Rs 90.