Stock Market Result Update on Allahabad Bank for 2QFY2012

Stock Market Result Update on Allahabad Bank for 2QFY2012 with an Accumulate recommendation and a Target Price of `169 (12 months).

For 2QFY2012, Allahabad Bank reported 21.2% yoy growth in its net profit to `488cr, well ahead of our estimates due to a lower-than-expected effective tax rate. On the PBT level, results were largely in-line with our estimates. NIM surprised positively despite a drop in CD ratio. Slippages rose due to the completion of switchover to system-based NPA recognition platform. We upgrade the stock to Accumulate (from Neutral) on attractive valuations.

NIM surprises positively; slippages rise on switchover: After the healthy 5.5% qoq growth in advances in the seasonally lean first quarter, the bank’s advances came off by 3.1% qoq (up 16.6% yoy) during 2QFY2012. Deposits growth remained healthy at 6.1% qoq and 25.0% yoy. Consequently, the CD ratio dipped by 640bp qoq to 67.4%. CASA deposits growth was moderate at 10.3% yoy (with saving deposits registering relatively better growth of 15.8% yoy), leading to a sharp 409bp yoy reduction in calculated share of CASA to 30.6%. Despite the fall in CASA proportion and a lower CD ratio, the bank managed to expand its reported NIM by 28bp qoq to 3.7% on the back of a sharp 98bp qoq surge in yield on advances (partly due to faster growth in the high-yielding SME segment’s advances and conscious reduction in the share of short-term loans in the loan book) vis-à-vis just an 11bp qoq rise in cost of deposits. Slippages for the quarter rose as the bank completed the migration to system-based NPA recognition platform. The annualized slippage ratio increased to 2.2% from 0.6% registered in 1QFY2012. Management attributed around half of the slippages arising to the switchover exercise. Overall asset quality was within manageable levels with gross and net NPAs rising by 6.9% qoq and 12.8% qoq, respectively. Provision coverage ratio, including technical write-offs, was stable sequentially at 79.6%.

Outlook and valuation: We had turned Neutral on the stock in our last result update on concerns over asset quality and since then the stock has fallen by 26%. Taking into account the bank’s reasonably healthy retail deposits base, especially in the eastern hinterland, the prospects of lower technically incremental slippages on completion of the switchover and attractive valuations (0.7x FY201E ABV), we upgrade the stock to Accumulate with a target price of `169.