Hold Allahabad Bank; target of Rs 62: Edelweiss

Edelweis's research report on Allahabad Bank

Allahabad Bank (ALBK) reported Q2FY17 PAT of INR 650 mn, marginally lower than our estimate, on muted revenue momentum despite some respite in asset quality pain. Incremental stress accretion took a breather with slippages at <4% (versus past 3 quarters’ >10% run rate). However, revenue momentum continued to be tepid with NII slipping >16% YoY (on below-industry loan growth and weak NIM), which, in turn, strained core profitability. On the operational front, we anticipate ALBK’s competitive prowess to be severely impacted given diversion towards clean up coupled with capital constraints (which may not be forthcoming for midsize PSU banks). Hence, we expect ALBK’s operating profitability to remain under pressure. Maintain ‘HOLD’.

Apart from high asset quality stress, mid-size PSU banks are hampered on the operational front as well. We perceive clear demarcation between large and mid-size PSU banks and expect pressure on the latter to continue. Given increasing BASEL III requirement and limited capital support from government, dilution risk is imminent at weak multiples, which will be detrimental to shareholders’ returns (refer our report Banking: Beginning of end to stress, March 28, 2016). ALBK is trading at 0.7x FY18E P/BV (post dilution). We maintain ‘HOLD/SU’ with target price of INR 62.