Buy Allahabad Bank; target of Rs 266: SPA Research

“Allahabad Bank (ALB) is one of the oldest PSU banks (Govt. holding 58%) in India having a pan India network of 2478 branches, with major concentration in the Eastern part of the country mainly, West Bengal, Bihar and Uttar Pradesh. The bank has grown its business at a CAGR of 23.8% in the last five years to INR 2255 bn in FY11 and its balance sheet size stood at INR 1683 bn as on Dec 2011.”

“ALB's strategy of focusing more on quality of credit and shifting product mix in favour of high yielding MSME and retail segment will drive its growth. We expect ALB's total business to be ~INR 3779 bn in FY14E, thereby registering a CAGR of 18.3% over FY12E- 14E, led by 18.5% growth in deposits and 18.0% surge in advances. ALB has one of the lowest cost of deposits (CoD) among its peers due to its relatively good deposit franchise. It has been reducing its reliance on bulk deposits (reduced from 28.0% in FY08 to 12.9% in 9MFY12) and stressing on CASA deposit mobilization (CAGR of 18% over FY06-11, although CASA ratio declined by 580 bps during the same period), thereby ensuring lower CoD and providing cushion to NIM. NIM stood at historic high of 3.7% in Q3FY12 as it has efficiently reprised some of its advances and reduced low yielding short term loans. Going forward we expect NIMs to stabilize at ~3.5% over the next two years.”

“Although ALB's restructured book stood at INR 38230 mn as on Dec 11, only INR 2590 mn slipped into NPA, thereby indicating higher recoveries and strong asset quality. ALB has negligible presence to stressed sectors such as aviation and telecommunication. Power sector accounts for 13.05% of the total book, with SEB exposure at ~9%. The bank is currently not seeing stress in its power sector exposures and most of the power sector loans are to operating power plants. We remain particularly confident over its SEB exposure as these are on escrow basis, which mitigates risk.”

“Allahabad Bank being one of the most efficient PSBs is well positioned to capture the up-tick in credit growth on the back of its strong fundamentals. We expect ALB to grow its NII & Net profit at a CAGR of 15.2% & 12.5% respectively over FY12E-FY14E. At the current price of INR 185, the stock is trading at inexpensive valuations of 0.9x FY13E & 0.8x FY14E ABV. Further ALB also offers a dividend yield of 4.3% (on FY12E dividend). We recommend a BUY on the stock using an average of 1.2x FY14E P/ABV & three stage residual-income valuation method, to arrive at a target price of INR 266, implying 1.1x FY14E ABV, an upside of 43%, over a period of 18 months,” says SPA Research report.    

Public holding more than 90% in Indian cos

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