Allahabad Bank: Buy


The bank's strategies to increase low-cost deposits and reduce dependence on whole-sale deposits have started yielding results .




As the bank becomes 100 per cent CBS-enabled, fee-income may improve.

M.V.S Santosh Kumar

Investors can consider accumulating the Allahabad Bank stock, which is a defensive pick in the banking space. The bank has posted higher-than-industry credit growth so far this fiscal with lower slippages, thereby increasing its market share in advances. The Allahabad Bank stock is trading at a significant valuation discount to its peers.

At current market price of Rs 133, the stock is trading at a price earnings multiple of nearly 5 times on estimated FY10 earnings and a price to FY10 adjusted book value (estimated) of 0.88.

The bank had formulated strategies to increase low cost deposits and reduce dependence on whole-sale deposits while improving yields and fee income. These have started yielding results, with the bank witnessing sharp improvement in operating efficiency (cost-income ratio of 38 per cent for September 2009 against 49 per cent a year ago) and asset quality (net Non Performing Assets (NPA) of 0.35 per cent). Fee income as a proportion of operating expenses has also increased from 31 per cent to 42 per cent for the half year ended September 30, 2009. Fee income may get further fillip as the bank becomes 100 per cent core banking solutions (CBS)-enabled.

Strong loan growth

Allahabad Bankhas high concentration in the North and Eastern parts of India. The bank has a strong presence in rural and semi urban areas (accounting for 60 per cent of the network). The low-cost deposit base improved to 36 per cent as of September 30, 2009.

The loan book grew at a compounded rate of 29 per cent during the period 2004-09 while net profit growth was inconsistent and grew at an annual rate of 9 per cent. Credit growth as of September stood at 17.7 per cent against the industry credit growth of 12 per cent.

The loan growth of the bank was primarily driven by the small and medium enterprises and corporate advances. While the credit growth this year may be moderate, we expect credit growth to pick up beyond this fiscal.

The low rate of profit growth during the last few years was a function of higher cost of funds, provisioning for NPAs and depreciation. Two of these three issues have been sorted out by the bank. One, the bank has been reducing its dependence on high-cost wholesale deposits. The proportion of wholesale deposits to total deposits has come down from 25.5 per cent to 12 per cent on a year. Two, the bank has made adequate provisions for NPAs (79 per cent).

In addition the bank has also re-priced assets and improved yields on advances. The net interest margin (NIM) of the bank has improved from 2.62 to 2.88 per cent in a year, with net interest income growing 28 per cent. Allahabad Bank's net profit for the half-year ended September 2009, grew by 370 per cent over the same period last year with write-backs and treasury gains bolstering profits (it took write-offs last year).

There is still scope for improvement in the NIM of the bank as a larger proportion of high cost deposits get re-priced at a lower rate.

Overall, from here on, the net profit growth for the bank would get support from improving credit offtake and better margins, even as it may face some pressure on its treasury portfolio.

Asset Quality

Allahabad Bank is the one of the few banks to witness a fall in its gross NPA ratio from 1.81 to 1.73 per cent , from March to September 2009. The improvement in provision coverage to 79 per cent from 59 per cent helped the bank reduce the net NPAs significantly.

Well-capitalised

Despite government holding 55 per cent in the bank which is close to the mandatory 51 per cent, the bank is currently comfortably placed in terms of capital adequacy ratio (CRAR) (14.9 per cent) with core capital contributing more than 9 per cent. The bank also has additional head room to raise more than Rs 1,800 crore, which, along with the internal accruals, would be enough to fund a loan growth of 20 per cent for the next few months and yet maintain CRAR at over 12 per cent. The Indian government is also set to recapitalise public sector banks for which Allahabad Bank is a likely candidate.

Some concerns

Allahabad Bank has a very high proportion of government securities in its investment portfolio. While some profit booking may have been done in the December quarter, the bank may have to provide for the mark-to market losses, as gilt yields touch a 15-month high.

During the first half of this year, Allahabad Bank converted a proportion of its securities in the available-for-sale category to held-to-maturity, thereby shielding itself from a spike in yields to some extent. Only Rs 4,065 crore of government securities are now exposed to market yields. However, the duration of the investment portfolio is on the higher side, leading to concerns of treasury losses. The bank's non-gilt securities are in the form of liquid mutual funds and certificates of deposit which are not as vulnerable to interest rate spikes