Allahabad Bank - Way2Wealth

Investment Argument

Consistency in performance

Allahabad Bank (ALBK) has been able to show a consistent performance in the last few years with improved focus on income from advances & consistent performance in margins. The bank has also been able to improve its credit-deposit (CD) ratio from ~60% in FY06 to ~68% in FY10.This is one of the key reasons that the bank has been able to show consistent improvement in its performance.

Cost Ratio well managed

ALBK cost to income has decreased from as high as ~48% in FY07 to ~39% in FY10. We expect ALBK to have this ratio at ~40% for FY11E & FY12E.

Well capitalized to aid growth

Capital adequacy ratio (CAR) of ALBK was ~13.6% as on Mar'10 with Tier I at ~8.1%, well above the RBI requirement of 6.0%. The Tier II stood at ~5.5%. The bank is expecting Rs.10 bn infusion from the government in the second half of this fiscal.

Restructured accounts are manageable

ALBK's restructured portfolio, which is ~4.7% of its advances, experienced a good trend of upgrades from Rs.40 bn to Rs.34 bn. This was in contrast to the trend of increased restructuring witnessed amongst its peers. The slippages from the restructured assets were <2%. ALBK is confident on steady performance of the portfolio and expects upgrades in its book going forward.

Valuation: At Rs.169, the stock is available at P/ABV of 0.82x of FY12E. We expect margins to improve from here on for the bank i.e. RoAE to reach to 20.4% in FY12E from 19.1% in FY10. With stability seen on the revenue side, we value the bank at a P/ABV of 1x FY12E. We initiate coverage on the stock with a price recommendation of Rs.206, an upside of ~22% from the current market price.

Source : Equity Bulls

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