Allahabad Bank- Initiating Coverage - Fairwealth Institutional Research

Rating: Buy; CMP: Rs 151.5; Target: Rs 196; Upside: 29%; Horizon: 1 Yr

Allahabad Bank has witnessed sustained growth since last few years with continuous improvement in fundamentals, balance sheets and operational efficiency. Going forward, in a falling interest rate environment, efficient yield and cost management will help NIM to remain strong. Further, focus on fee based income will help RoA to move upward further. ALBK with relatively sound balance sheet, healthy return ratios, strong NIMs and stable asset quality is well positioned to benefit from economic revival. The bank has a strong track record of paying dividends and yield on current market price works out to ~4%.

Healthy Business growth to continue: ALBK has seen higher than industry growth in its advances in the last few years, the loan book grew at a CAGR of 28% during 2006-2012. In FY2012, loan book recorded a growth of 19%, ahead of industry averages. We expect credit off-take will continue to grow at a healthy pace of 18% in FY13E and FY14E each. Going forward, priority of the bank is to maintain the credit quality and margins over growth in coming years.

Diversified Loan book Portfolio; focus on MSME segment to continue: MSME loan book has grown by 41% at a 4 year CAGR rate. Aggressive loan growth in MSME segment has positively impacted yield on funds of the bank. We expect strong growth in the SME loan portfolio in FY13E and FY14E as the bank is aggressively pursuing this segment and has taken various strategic initiatives in this regard.

Branch expansion to increase footprint in South and West India: Most of the proposed 250 new branches are expected to be opened in CASA rich locations in Southern and Western India ALBK has planned to increase the footprint in South India by opening 100 branches out of the proposed new 250 branches in FY13E.

Excellent dividend yield: The Bank has continuously kept on increasing its dividend ratio barring FY07 and FY09. The dividend per share has doubled from Rs.3 in FY07 to Rs.6 in FY12, registering a CAGR of 19%. We are not factoring in earnings growth for this purpose and expect the bank to continue with maintaining the current dividend percentage of 60% for FY13E and FY14E. At the current price, the stock trades at an attractive dividend yield of 4.13%.

Valuation: At CMP of Rs.151.5, the stock is available at P/ABV of 0.79x and 0.63x of FY13E and FY14E respectively. We expect margins to remain at approximate current levels going forward for ALBK i.e. RoAE at 19.5% in FY13E and 21.1% in FY14E. We initiate coverage on Allahabad Bank with a price recommendation of Rs.196, an upside of ~29% from the current market price.

Key Risk: (1) Any substantial deterioration in economic environment may hamper the growth strategies (2) Further delay in interest rate cut will have negative impact on credit growth. (3) Higher slippages than anticipated will lead to deteriorated asset quality.

Source : Equity Bulls

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