With a new and relatively stable management in place, the operating parameters of Allahabad Bank have shown a smart improvement in the recent quarters. The net interest margin (NIM) has improved to 2.5% levels from 2.2% levels in FY2009 business and current account and savings account (CASA) growth have been robust.
The provisioning coverage has been shored up while the gross non-performing asset in percentage terms (ie %GNPA) has been contained. The investment book has been relatively de-risked with a lower exposure to the available for sale (AFS) category. The performance at the bottom line level has been consistent.
In addition, the bank has now turned its focus on expanding in the more lucrative western and southern regions of India; and attaining 100% core banking solution (CBS) coverage. The expansion in the western and southern regions of India should offer much better credit deployment opportunities, which should trickle down to wider spreads. Meanwhile, a 100% CBS coverage should lead to an improvement in the fee income stream (as has been the case with the other public sector banks [PSBs]).
Importantly, the bank is well capitalised to fund its balance sheet growth as its capital adequacy ratio (CAR) is comfortable at 15%. In addition, the potential capital infusion by the Government of India would provide additional capital to fund the expansion of the branch network in the western and southern regions of India. Eventually, a pan-India presence would help the bank shed its “regional bank” tag.
With most of the operating parameters in line with those of the other major PSBs and the stock’s valuations cheap currently, the bank appears to be a strong re-rating candidate.
Driven by a distinct improvement in the key parameters and increased confidence in the new management of the bank, we are bullish on the stock. We are raising our FY2011 and FY2012 earnings estimates by 4.8% and by 9.4% respectively. At the current market price of Rs135, the stock trades at par with the FY2011 book value, which we believe is cheap considering the respectable return ratio (about 20% return on equity [RoE]). We upgrade the stock to BUY with a revised price target of Rs163.
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