Allahabad Bank - Buy - Sharp rise in slippages; restructured assets leads to higher provisions - KJMC

Allahabad Bank has reported PAT of Rs 4002.2mn, up 55.4%YoY below our estimates of Rs 4597.2mn mainly due to decline in other income by 24.4% to Rs 3551.4mn and lower interest income. NII for the quarter grew by 11.9% YoY below our estimates while NIM for the quarter contracted by 40bps to 3.1% mainly due to reversal of interest, higher interest cost, lower credit offtake. ALBK reported highest slippages during the quarter to the tune of Rs 9.7bn while restructured assets stood at Rs 26bn. GNPA and NNPA of the bank stood at 1.9% and 1% respectively.

The stock is currently trading at 0.6x of its FY14E ABV. We value the standalone business at 0.8x of its FY13E ABV at Rs 245.0 and maintain our buy rating on the stock with Target Price of Rs 196.

Key Highlights

Advances grew sequentially; NIM declined: Advances for the quarter grew 18.7%YoY and 10.6% sequentially to Rs 1.1tn due to strong growth in agri and MSME advances while deposits for the quarter grew by 21.0%YoY and 9.8% sequentially. In addition, NIMs of the bank declined by 40bps to 3.1% sequentially mainly due to reversal of interest and higher cost of funds.

Tax rate remains lower: In continuation to its previous two quarter trends ALBK has provided lower tax rate of 10.4% since it has not availed tax benefits earlier on certain items like rural advances, priority sector advances, writeoffs etc. thereby continues to help net profits.

Slippages and restructured assets rise significantly: Asset quality of the bank remained stable with Gross NPA and NNPA at 1.9% and 1.0% respectively. Slippages during the quarter stood high at Rs 9.7bn which includes Rs 2.6bn from agri, Rs 4bn from MSME and one big account of Hydro project of Rs 900mn. Major chunk of slippages continues to remain in priority sector lending which constituted Rs 13bn during FY12 of the slippages of Rs 22bn. The rise in agri NPAs was mainly due to late payment release by sugar factory of Rs 45bn to sugarcane farmers. However, bank has made provisions upto 84% of net slippages during FY12. On restructuring front, bank has restructured Rs 26bn during the quarter which includes Air India of Rs 5bn and SEBs(Uttar Haryana, Rajasthan, Jodhpur) of Rs 11bn. The total outstanding restructured advances stood at Rs 92.9bn in which Rs 2.3bn have slipped into the NPL category. ALBK will further restructure UP SEB of Rs 21bn and Bharti Shipyard of Rs 2bn in the coming quarters.

Other income grew sharply: Other income of the bank declined by 24.4%YoY to Rs 3.6bn mainly due to decline in fee income by 11.3% to Rs 2.4bn and other non interest income by 87.8% to Rs 191mn. However, Trading gains increased sharply to Rs 590mn.

CASA remains stable: CASA share remains stable at 30.5% with savings increased by 5.9% sequentially and current deposits increasing sharply by 26.2% QoQ. Management has guided to open 250branches in FY13 which will help to maintain its CASA share.

Valuations and Outlook

ALBK has been reporting excellent performance since last three quarters but failed to deliver in Q4FY12 which was mainly due to significant rise in slippages and restructured assets. However, bank has made necessary provisions. Going forward, asset quality will remain stable expecting some recoveries in the coming quarters while pressure to remain on the restructured assets. Management will be focusing more on the recovery of NPAs in agri. On the business growth, credit offtake is expected to moderate at 18% given the expected slower pace of growth in GDP. The stock is currently trading at 0.6x of its FY14E ABV. We value the standalone business at 0.8x of its FY14E ABV at Rs 245 and maintain our Buy rating on the stock with Target Price of Rs 196.

Source : Equity Bulls

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