>ALLAHABAD BANK (RELIANCE EQUITIES)

Deserves a look

We recently met Mr KR Kamath, Chairman and Managing Director of Allahabad Bank. With the share price overhang about top management out of the way and business restructuring underway, we believe core profitability is set to improve and, hence, a re-rating is warranted. The stock should trade up to 0.9–1x FY11E book from 0.7x currently, narrowing the discount to its peers to ~25% from 45%.

■ Stability at the top
Mr R P Singh of Punjab & Sind Bank is taking over as CMD of PNB. This puts speculation about Mr. Kamath (current CMD of Allahabad Bank) moving to PNB at rest. Hence, the restructuring initiated by him at Allahabad Bank will continue.

■ Restructuring under way
Since taking over as the CMD in August 2008, Mr Kamath has been responsible for initiating steps that should lead to enhancing the bank’s operating and financial performance. Balance-sheet restructuring both on the liabilities and the asset side will aid margin improvement. Fee income is set to gather traction, given the thrust on fee income and implementation of the bank’s core banking solution (80% business is currently under CBS). The bank’s conservative approach of putting cyclical treasury gains to good use, shoring up the provisioning buffer and wage revisions should hold it in good stead. The share of available for sale investments at 50% may seem dangerously high. However, a large proportion of these is contributed by investments in liquid schemes. After a subdued FY09, when earnings declined 21%, we expect a robust 27% CAGR over FY09–11 with core operating profits growing at a faster 31% CAGR over the same period.

■ Calls for a re-rating
Allahabad Bank has always traded as if it were a poorer cousin to its larger PSU peers—at a discount of 35% over the past four years. The discount should narrow, as the bank improves its operating performance through technology upgrades and balance-sheet restructuring. Factors that already favour a narrowing discount are a steady deposit profile, comparable cost-to-income, manageable asset quality and, above all, a stable guard at the helm.

To see full report: ALLAHABAD BANK