Allahabad Bank 30th Aug 2011

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Robust Growth in Quarterly Net Profit In Q1 FY12 Allahabad Bank has reported robust growth of 20% YoY and 62% QoQ in PAT to Rs.418 cr. The YoY growth of PAT was due to strong growth of 38% YoY in net interest income (Rs.1,176 cr) backed by 30% YoY growth in advances and improvement in NIM’s (30bps YoY). Also QoQ growth of PAT was due to sequential decline in provisioning (31% QoQ) with robust recovery (Rs.250 cr).

Strong Business Growth Total Business grew by 26% YoY and 3% QoQ to Rs.232,558 cr led by advances and deposits. Advances grew by 30% YoY and 4% QoQ to Rs.98,740 cr backed by growth across all segments. MSE segment grew by 60% YoY and 14% QoQ to Rs.13,666 cr; Priority sector credit grew by 27% YoY and 2% QoQ to Rs.31,404 cr and Retail credit grew by 26% YoY and 2% QoQ to Rs.13,270 cr backed by commercial vehicle and mortgage loans. Deposits were Rs.133,818 cr up 24% YoY and 1% QoQ due to healthy growth of 28% YoY and 4% QoQ of term deposits. Management has guided 25% business growth in FY12E with major focus on manufacturing sector.

NIM’s Remain Buoyant With rising interest rate scenario (RBI has gradually raised Repo rate from 5.25% in April 2010 to 8% in July 2011) the banks NIMs are under pressure due to high incremental cost. Allahabad Bank was able to improve NIMs on YOY basis (30bps) but witness slight decline on QoQ basis (9bps) to 3.4%. Robust growth in high yield MSE segment and 75bps rise in lending rate led to ~90bps (QoQ) increase in yield on advances which offset the increase of 100bps (QoQ) in cost of deposits. Management has maintained the target of 3% NIMs for FY12E.

Asset Quality Sequentially Improved with Lower Slippages Gross NPA has improved to 1.62% from 1.74% QoQ due to lower slippages, but GNPA has increased by 12bps YoY due to shift towards system based NPA recognition (SBN). Fresh slippages have reduced by 81% QoQ to Rs. 152 cr due to robust recovery system (recovery of Rs.250 cr in Q1 FY12). Currently advances of Rs.50 lakh and above are under SBN recognition and by September 2011 the bank targets to cover the entire loan book under SBN which may increase the pressure on the book quality. With high PCR of 80% as against 76% in Q4 FY11, net NPA improved to 0.6% from 0.79% QoQ (0.41% YoY).

Outlook and Valuation Bank has strong presence in rural India with 60% of total branches (2,416) are in semi urban and rural areas which ensures sustainability of low cost deposits. Bank has recently got a mandate to handle salary accounts of government employees of West Bengal and has also launched a campaign to open ~15 lakh saving accounts by Q3 FY12, of which bank has already opened ~2lakh accounts. These factors will help the bank to improve its CASA ratio. Bank has delivered strong performance in Q1 FY12 led by robust business growth, lower slippages due to good recovery system and higher margins. We are optimistic on Allahabad Bank due to [a] Expected strong business growth (25% FY12E), [b] Better asset quality, [c] High PCR (80%), [d] High dividend yield of 3%, at CMP.

At CMP of Rs.172 the stock is trading at P/BV of 0.9x its FY12E BV of Rs.188. Due to the prevailing bearish sentiments on the banking sector, we value Allahabad Bank at 1.1x P/BV, which is two year average of its one year forward P/BV multiple, on its FY12E BV of Rs.188 and arrive at our target price of Rs.207.

We recommend BUY for Allahabad Bank with upside potential of 20% and investment horizon of 12 months.

Q1 FY12 Result Update Sector: BFSI

Key Data

Market Cap (Rs. cr) 8,198

Market Cap (US$ mn) 1,784

O/S Shares, cr 47.6

Face Value, Rs. 10

2 Wk Avg Vol, NSE 4.7 Lacs

52 Wk High 271

52 Wk Low 180

Rs/US$ 45.94

Bloomberg ALBK IN

Reuters ALBK.BO

NSE ALBK

BSE 532480

Shareholding Pattern

% Q1 FY12 Q1 FY11

Promoters 58.0 55.2

FII 14.5 13.9

Inst Inv 15.8 14.1

Public 11.7 16.8

Bunty Chawla (Analyst) bunty.chawla@sihl.in Siddharth Rajpurohit (Senior Analyst) siddharth.rajpurohit@sihl.in

150170190210230250270290

Allahabad Bank Sensex

CMP Rs.172 Recommendation: BUY Target Price: Rs.207

Allahabad Bank 30th Aug 2011

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Exhibit 1: Yield on Advances and Cost of Funds Trend

Source: Company, SIHL Research

Exhibit 2: NIMs (% Trend)

Source: Company, SIHL Research

Exhibit 3: Advances Mix %

Source: Company, SIHL Research

10.11

10.32

10.40

10.60

10.7111.58

5.58

5.60

5.70

6.00

6.017.01

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Yield on Advances % Cost of Deposits %

3.00

2.84

2.97

3.00

3.10

3.34

3.443.49 3.40

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

NIM %

Priority Sector Credit, 31.8%

Agriculture,13.7%

MSE, 13.8%

MSME, 16.5%

Retail Credit, 13.4%

Others, 10.7%

With prudent business strategies bank has been able to pass on rise in cost of funds. Despite of rise in cost of funds, NIMs posted just 10bps decline to 3.4% QoQ.

Well diversified loan portfolio, reduces single sector exposure risk.

Allahabad Bank 30th Aug 2011

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Exhibit 4: CASA % Reported

Source: Company, SIHL Research

Exhibit 5: CASA Ratio Analysis Particulars Q1 FY12 Q1 FY11 Q4 FY11 YoY% QoQ%

Current Deposits Rs. cr 8,055 7,698 9,156 5% -12%

Savings Deposits Rs. cr 34,800 29,369 35,000 18% -1%

Term Deposits Rs. cr 90,963 71,253 87,731 28% 4%

Total Deposits Rs. cr 133,818 108,320 131,887 24% 1%

CASA Rs. cr 42,855 37,067 44,156 16% -3%

CASA % Reported 32.2% 34.4% 33.7% (225)bps (153)bps

Total Advances Rs. cr 98,740 75,718 94,571 30% 4%

Credit/Deposit Ratio (Reported) 74.1% 70.3% 72.2% 382bps 194bps

Total Business Rs. cr 232,558 184,038 226,458 26% 3%

Source: Company, SIHL Research

Term deposits growth of 28% YoY outgrew the growth in Current (5%) and Savings Account

(SA) deposit (18%). This resulted in pressure on the CASA component in the overall deposits, and the CASA figure came in at 32.2%, down 225 bps YoY and 153 bps QoQ.

With the increase in differential of interest rate between saving banks and term deposits, money has moved from SA to term deposits which had an adverse impact on CASA share in total deposits.

Allahabad Bank has recently got a mandate to handle salary accounts of government employees in West Bengal which will improve CASA ratio for the bank.

Allahabad Bank has targeted to add 155 branches in FY12, which will help the bank to garner more CASA accounts.

34.42%

34.84%

33.41%

33.70%

32.17%

31.5%

32.0%

32.5%

33.0%

33.5%

34.0%

34.5%

35.0%

35.5%

CASA % Reported

Allahabad Bank 30th Aug 2011

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Exhibit 6: Peer Comparison Exhibit 6.1: Peer Comparison by Market Capitalization (Based on Q1 FY12 Financial Data)

Sr. No.

Company Name CMP Rs.

MCap Rs. Cr

BV Rs.

P/BV (X)

NIM (%)

RoA (%)

RoE# (%)

CASA (%)

CAR (%)

G.NPA (%)

Base rate

hike* (X)

No. of Branches

Business Rs. Cr

Business per

Branch Rs. Cr

1 Oriental Bank Of Commerce 313 9,127 338 0.93 2.94 0.88 17.15 23.40 13.64 2.07 4 1,644 242,770 148

2 Indian Bank 200 8,602 194 1.03 3.43 1.31 23.52 31.30 13.03 0.98 4 1,895 192,934 102

3 Allahabad Bank 172 8,198 169 1.02 3.40 1.12 21.04 32.20 12.75 1.62 4 2,416 232,558 96

4 Indian Overseas Bank 109 6,713 119 0.91 2.85 0.44 14.15 27.60 13.38 2.76 4 2,279 270,321 119

Source: Company, SIHL Research * Number of times Base rate hike in CY2011 until 30th Aug 2011 #based on FY11 Financials Arranged in descending order of Market Cap

Exhibit 6.2: Peer Comparison by Total Business (Based on Q1 FY12 Financial Data)

Sr. No.

Company Name CMP Rs.

MCap Rs. Cr

BV Rs.

P/BV (X)

NIM (%)

RoA (%)

RoE# (%)

CASA (%)

CAR (%)

G.NPA (%)

Base rate

hike* (X)

No. of Branches

Business Rs. Cr

Business per

Branch Rs. Cr

1 Indian Overseas Bank 109 6,713 119 0.91 2.85 0.44 14.15 27.60 13.38 2.76 4 2,279 270,321 119

2 Oriental Bank Of Commerce 313 9,127 338 0.93 2.94 0.88 17.15 23.40 13.64 2.07 4 1,644 242,770 148

3 Allahabad Bank 172 8,198 169 1.02 3.40 1.12 21.04 32.20 12.75 1.62 4 2,416 232,558 96

4 UCO Bank 69 4,298 87 0.79 2.46 0.75 20.70 25.90 13.51 3.50 4 2,213 223,626 101

5 Corporation Bank 426 6,314 506 0.84 2.10 1.04 21.89 21.00 14.05 1.07 5 1,362 196,686 144

Source: Company, SIHL Research * Number of times Base rate hike in CY2011 until 30th Aug 2011 #based on FY11 Financials Arranged in descending order of Total Business

Allahabad Bank 30th Aug 2011

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Outlook and Valuation Exhibit 7: One Year Forward P/BV Trend

Source: Company, SIHL Research

Bank has strong presence in rural India with 60% of total branches (2,416) are in semi urban and rural areas which ensures sustainability of low cost deposits.

Bank has recently got a mandate to handle salary accounts of government employees of West Bengal and has also launched a campaign to open ~15 lakh saving accounts by Q3 FY12, of which bank has already opened ~2lakh accounts. These factors will help the bank to improve its CASA ratio.

Bank has delivered strong performance in Q1 FY12 led by robust business growth, lower slippages due to good recovery system and higher margins. However, we believe with inflation figure still above 9% levels, RBI may further tighten the Repo Rate in the Mid Second quarter review on 16th Sept 2011, which may increase pressure on NIMs.

We are optimistic on Allahabad Bank due to [a] Expected strong business growth (25% FY12E), [b] Better asset quality, [c] High PCR (80%), and [d] High dividend yield of 3% at CMP.

At CMP of Rs.172 the stock is trading at P/BV of 0.9x its FY12E BV of Rs.188. Due to the prevailing bearish sentiments on the banking sector, we value Allahabad Bank at 1.1x P/BV, which is two year average of its one year forward P/BV multiple, on its FY12E BV of Rs.188 and arrive at our target price of Rs.207.

We recommend BUY for Allahabad Bank with upside potential of 20% and investment horizon of 12 months.

0.25

0.45

0.65

0.85

1.05

1.25

1.45

1.65

P/BV

Allahabad Bank 30th Aug 2011

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Exhibit 8: Standalone Income Statement (Quarterly)

Particulars Rs. cr Jun-11 Jun-10 Mar-11 YoY% QoQ%

Total Income 3,836 2,702 3,589 42% 7%

Interest Earned 3,550 2,403 3,119 48% 14%

Interest Expended 2,374 1,553 1,968 53% 21%

Net Interest Income (NII) 1,176 850 1,151 38% 2%

Other Income 286 299 469 -4% -39%

NII + Other Income 1,461 1,149 1,621 27% -10%

Operating Expenses 572 444 841 29% -32%

Employee Cost 382 285 602 34% -37%

Other Operating Expenses 190 159 238 19% -20%

Op. Profit before Prov.& Cont. 890 705 780 26% 14%

Provisions and Contingencies 320 151 466 112% -31%

PBT 570 554 315 3% 81%

Tax 152 206 57 -26% 167%

Profit After Tax 418 347 258 20% 62%

EPS, Rs. 8.8 7.8 5.4 13% 62%

Source: Company, SIHL Research

Exhibit 9: Segment Performance (Quarterly)

Particulars Rs. cr Jun-11 Jun-10 Mar-11 YoY % QoQ%

Segment Revenue Total 3,836 2,702 3,589 42% 7%

Corporate / Wholesale Banking 1,827 1,197 1,747 53% 5%

Other Banking 53 44 155 21% -66%

Retail Banking 1,075 770 873 40% 23%

Treasury 880 691 814 27% 8%

Segment Result Total 890 705 780 26% 14%

Corporate / Wholesale Banking 331 294 262 13% 26%

Other Banking 49 40 137 22% -64%

Retail Banking 444 319 334 39% 33%

Treasury 66 52 47 27% 40%

Unallocated Expenses 320 151 466 112% -31%

Total Profit Before Tax 570 554 315 3% 81%

Source: Company, SIHL Research

Exhibit 10: Ratios Particulars Jun-11 Jun-10 Mar-11 Tier I 8.55 8.24 8.57 Tier II 4.20 5.31 4.39 CAR Basel II (%) 12.75 13.55 12.96 Return on Assets (Annualized %) 1.12 1.16 1.11 NIM(%) 3.40 3.10 3.49 Gross NPA(%) 1.62 1.50 1.74 Net NPA(%) 0.60 0.41 0.79 Provision Coverage (%) 79.90 85.36 75.67 CASA (%) 32.17 34.42 33.70 Deposits (Rs. cr) 133,818 108,320 131,887 Advances (Rs. cr) 98,740 75,718 94,571 Yield on Advances (%) 11.58 10.32 10.50 Cost of Deposits (%) 7.01 5.60 5.83 Cost / Income (%) 39.13 38.67 43.36

Source: Company, SIHL Research

Allahabad Bank 30th Aug 2011

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Exhibit 11: Standalone Income Statement (Annual) Particulars Rs. cr FY10 FY11 FY12E FY13E Interest Income 8,369 11,015 13,768 16,660 Interest Expenses 5,719 6,992 9,020 11,185 Net Interest Income 2,650 4,022 4,748 5,475 Other Income 1,516 1,370 1,343 1,544 Operating Income 4,166 5,393 6,091 7,019 Operating Expenses 1,618 2,338 2,437 2,738 Employee Cost 1,011 1,558 1,584 1,779 Other Expenses 606 781 853 958 Pre-Provisioning Profit 2,549 3,055 3,655 4,282 Provisions 777 1,124 1,235 1,314 PBT 1,772 1,931 2,420 2,968 Tax 565 508 774 950 PAT 1,206 1,423 1,646 2,018 EPS Rs. 27.0 29.9 34.6 42.4

Source: Company, SIHL Research

Exhibit 12: NII and PAT Trend (Rs. cr)

Source: Company, SIHL Research

1,781 2,159

2,650

4,022

4,748

5,475

975 769 1,206

1,423 1,646 2,018

-

1,000

2,000

3,000

4,000

5,000

6,000

NII Rs. cr PAT Rs. cr

Allahabad Bank 30th Aug 2011

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