Allahabad Bank - Q4FY13 Result Update - SPA Securities

ALB continued to report dismal set of numbers with net profit plunging by 68.5% YoY in Q4FY13 largely due to 36.7% YoY increase in provisioning expenses coupled with 18.0% decline in Net Interest Income. Asset quality deteriorated sharply on account of 2.6x surge in fresh slippages to INR 25.9 bn, out of which 3 accounts worth INR 9.4 are expected to be recovered by the next quarter. The decline in NII was due to 98 bps fall in YoA owing to a base rate cut and interest reversals of INR 1.9 bn on bad loans. We introduce FY15 estimates and retain our BUY rating on the stock with a revised target of INR 174 (Previous TP 195).

Sharp decline in NIMs

ALB witnessed a sharp sequential decline of 72 bps in NIMs to 2.3% due to a) 98 bps reduction in YoA owing to cut in base rates from 10.75% to 10.20% in two tranches, and b) interest income reversals on bad loans to the tune of INR 1.9 bn in Q4FY13. Consequently, the NII declined by 18.0% YoY to INR 10560 mn in Q4FY13. We expect NIMs to recover to ~3% levels over the next couple of years on the back of increased focus on high margin retail and MSME segments.

Asset quality sharply deteriorated

Asset quality deteriorated sharply with fresh slippages surging sequentially by 159.7% to INR 25.9 bn in Q4FY13. Consequently GNPA & NNPA deteriorated sharply increasing by 101 bps & 113 bps to 3.9% & 3.2% respectively. Importantly major portion of these slippages was bulky in nature with 9 accounts contributing to ~INR 16 bn out of which 3 accounts worth INR 9.4 are expected to be recovered in next couple of quarters. We therefore expect the asset quality to improve going forward with no strong pipeline of stressed assets and ALB's renewed focus on credit monitoring and faster recoveries & upgradations.

Restructured book - 11.4% of total advances

Restructured book increased to INR 148.8 bn, accounting for 11.4% of advances (10.8% of advances in Q3FY13). The bank has restructured advances of INR 13.9 bn in the last quarter, out of which major restructuring was done for pharma, iron & steel apart from other accounts in chemicals, textiles and food processing. Restructuring pipeline for the current quarter stands at ~INR 5 bn. Slippages from restructured portfolio to NPA stood at INR 12 bn.

16.7% growth in loan book

ALB reported 16.7% growth in advances to INR 1295 bn led by 30.5% surge in corporate advances. ALB focussed more on high yielding retail segment which witnessed a growth of 16.8% to INR 177 bn (13.5% of total advances) aided by 31.5% surge in trade loans. ALB plans to maintain its focus on retail segment and is targeting to increase the share of retail loan to 20% in FY14. In addition it is banking on MSME and corporate segment to drive its loan book.

CASA remained at +30% levels

Low cost CASA deposits increased by 12.9% YoY to INR 549 bn in Q4FY13 (primarily led by 14.9% surge in SA balances), which resulted in CASA ratio of 31.1% in Q4FY13 as against 30.8% in Q4FY12 and 30.4% in Q3FY13. ALB's continued focus in reduction of bulk deposits resulted in INR 63 bn decline of the same, thereby aiding 10 bps improvement in cost of deposits.

Outlook & Valuation

We expect asset quality concerns to recede for the entire banking industry with the expected macro economic recovery in the next financial year. ALB is also expected to witness sharp improvement in asset quality backed by its renewed focus on credit monitoring and faster recoveries & up-gradation. Its strategy of focusing on high yielding MSME & retail segment and reducing reliance on bulk deposits in addition to stressing on CASA deposit mobilization, will provide cushion to net interest margins.

We introduce FY15 estimates and retain our BUY rating on the stock with a revised target of INR 174 (Previous TP 195). At our target price, the stock would trade at FY15E P/BV of 1.0x.

Source : Equity Bulls

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