Friday, December 2, 2011


We interacted with the management of Allahabad Bank (ALBK) at its analyst meet to understand the business environment for the bank. Key highlights of the same:

Asset Quality: The management acknowledged a difficult business environment due to slowing domestic economy and high interest rates. However, the bank has practiced prudence in lending to quality borrowers and shying away from risky businesses. The GNPA & NNPA stood at 1.8% & 0.7% as on 2QFY2012 respectively. The bank is 100% CBS as far as the identification of NPAs is concerned and remains focused on improving quality of assets in the backdrop of a challenging business environment. In fact, it has recovered Rs443cr loans of which Rs355cr were small loans of Rs5lakh and below during 1HFY2012. The management expects to recover another Rs550cr over H2FY2012. We expect the slippages to remain low on account of higher recoveries and anticipate GNPA of 1.8% over FY2012 and FY2013.

Consistent growth & resilient NIMs: ALBK has rebalanced its loan portfolio by getting out of certain riskier accounts such as short-term loan business in 2QFY2012. Nonetheless, the loan growth has been consistent and the bank has guided for loan growth to be 4-5% above systemic growth. Margins have been resilient as evident in 2QFY2012 on the back of lower cost of funds, high operating efficiency and asset re-pricing. We expect NIMs to be at ~3.3% in FY2012 and FY2013.

Scalability: ALBK has recruited about 7,200 new employees in the last three years and they are all mainly officers with CA or MBA qualification. The bank has become young, median age of junior officers is 36, which is expected to improve the productivity of the bank. Also, the bank is highly focused in scaling up its branches and ATMs. The management plans to increase the access points through expanding its branch network to 3,000 branches and 2,000 ATMs by FY2015. This would give a major boost to its fee income as well. The feebased income has gone up from Rs213cr to Rs257cr, a growth of 21% in 2QFY2012. ALBK continues to be the largest partner of LIC as far as sale of Life Insurance policy is concerned. Also, it has over 2 lakh pensioners in its book. Scaling up of access point would aid fee income growth going forward.

Outlook and Valuation
Total business of ALBK has grown at a CAGR of 22% over the last four years. We expect ALBK to successfully implement the following broad strategies (a) focus on core deposit, reducing dependence on bulk deposits; (b) emphasis on CASA deposit mobilization; (c) maintaining a lean cost structure; (d) maintaining NIMs; (e) reviving fee-based income; and (f) reinvigorating recovery of NPAs. All these efforts would yield results and help the bank to strengthen its balance sheet on the one hand by maintaining moderate level of profitability and overcome the adverse impact of global slow down on the other. We expect ALBK to outperform the industry and continue to grow at the same pace of ~22% between FY2011-13E. ALBK is an attractively valued mid-size public sector bank with above average credit growth, lean cost structure, high CASA deposits and firm asset quality. Further, lower bulk dependence, wide branch network and higher coverage ratio makes ALBK preferable over its peers. At CMP of Rs154, the bank is trading at 0.7x FY2013E ABV. We maintain our Buy on Allahabad Bank based on 1.0x FY2013E ABV, with a target price of Rs212, implying an upside of ~40% from the CMP.

To read the full report: ALLAHABAD BANK