November 06, 2012

RESULT UPDATE - Q2FY13

Allahabad Bank
Sensex: 18763 CMP: INR 135 Target: INR 207 BFSI

Allahabad Bank came out with disappointing set of numbers largely on the back of decline in NIM and sharp deterioration in asset quality due to change in asset classification from standard restructured assets to NPA worth of INR 7.2 bn. NII degrew by 10.9% YoY to INR 11.7 bn, which was lower than our estimates largely due to interest reversal of INR 1.7 bn. NIMs declined by 37 bps sequentially to 2.8% driven by 90 bps decline in YoA. ALB further restructured INR 20.2 bn in Q2FY13 resulting in total restructures book of INR 127.5 bn (11.5% of advances). We change our estimates to factor in increasing slippages and lower NIM and retain our BUY rating on the stock with a revised target price of INR 207.
15.8% growth in loan book ALB reported 15.8% growth in advances to INR 1122 bn led by 33.2% surge in agri loan segment. ALB focussed more on high yielding retail segment which witnessed a growth of 12.8% to INR 157 bn (14% of total advances). The bank is exercising caution while lending to power (12% of advances), telecom and metal sector. 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. Sharp decline in NIMs ALB witnessed a sharp sequential decline of 37 bps in NIMs to 2.8% due to interest income reversal of INR 1.7 bn and reduction in base rates, which resulted in sharp decline of 90 bps in YoA to 11.5%. CoD declined 27 bps to 7.6% due to reliance on low cost foreign borrowings and repayment of high cost bulk deposits (o/ s bulk deposit INR 380 bn & avg cost 9.25%). We expect NIM to recover to +3% in FY13 aided by re-pricing of high cost bulk deposits and focus on high margin retail and MSME segments. CASA increased to +30% levels Low cost CASA deposits increased by 12.8% YoY to INR 491 bn in Q2FY13 (primarily led by 16.0% surge in CA balances), which resulted in CASA ratio of 30.5% in Q2FY13 as against 30.7% in Q2FY12 and 29.8% in Q1FY13. ALB is focussing more on CASA deposit mobilization and intends to add 500 new branches over the next three years to increase its total branch network to over 3000 by FY15, out of which 250 branches would be opened in FY13 (opened 48 in H1FY13). Asset quality worsened Asset quality deteriorated due to stress in agri and MSME segment coupled with change in asset classification from standard restructured assets to NPA worth of INR 7.2 bn (due to difference in opinion between the regulator and the bank on treatment of restructured assets). Resultantly gross slippages surged to INR 17.2 bn - 6.1% of advances (including one time lumpy account of INR 2.8 bn pertaining to Steel
Shareholding (%)
Promoters FIIs DIIs Others

sector & INR 7.2 bn of classification change). This resulted in worsening of asset quality with 99 bps sequential surge in GNPA to 3.0% & 101 bps surge in NNPA to 2.1%. We expect GNPA to decline to ~2.1% led by renewed focus on credit monitoring and faster recoveries & upgradations (increased by 1.7x INR 10.6 bn). Restructured book increased to 11.5% of total advances Restructured books increased to INR 127.5 bn, accounting for 11.5% of advances (9.7% of advances in Q1FY13). The bank has restructured advances of INR 20.2 bn in the last quarter, out of which major restructuring was done for SEBs. Decline in Non-interest income Non-interest income declined by 2.3% YoY to INR 3.0 bn in Q2FY13 led by lower recoveries from written?off accounts. Core fee based income declined by 20.2% to INR 2.1 bn led by 48.9% decline in processing fees (since it has removed the processing fee charges on retail & agricultural loan). Treasury profit surged by 6.7x to INR 470 mn. Outlook & Valuation Although ALB disappointed on the earnings front in the last quarter, we believe the stock at 0.7x FY14E ABV adequately covers all the concerns relating to the asset quality. Moreover we expect asset quality concerns to recede for the entire banking industry with the expected macro economic recovery in the next financial year. The stock has been underperforming over the past few quarters largely due to impending change in management. Its strategy of focussing in favour of high yielding MSME & retail segment and reducing reliance on bulk deposits in addition to stressing on CASA deposit mobilization, which will provide cushion to net interest margins. Further higher exposure of ~36% in AFS book (duration of 2.9years) will aid profitability in a declining interest rate scenario. We change our estimates to factor in increasing slippages and lower NIM and retain our BUY rating on the stock with a revised target price of INR 207. At our target price, the stock would trade at FY14E P/BV of 1.1x.
Y/E March (INR mn)
532480 ALBK ALBK IN ALBK.BO 500.03 10 66.90 211.40/103.00 3416426 29.95 1.52 Interest income Interest Expended Net interest income Growth (%) NIM (%) APAT Growth (%) EPS (INR) P/E P/ABV Net NPA RoA RoE Dividend Yield

Sep-12
55.24 11.59 20.27 12.90

Key Data
BSE Code NSE Code Bloomberg Code Reuters Code Shares O/S (mn) Face Value Mcap (INR bn) 52 Week H/L 2W Avg. Qty, NSE

FY11
110147 69922 40225 51.76% 3.26% 14231 17.93% 29.88 7.72 1.59 0.79% 1.04% 18.65% 2.60%

FY12
155233 103606 51627 28.35% 3.42% 18668 31.17% 37.33 4.75 1.04 0.98% 1.12% 19.64% 3.38%

FY13E
183558 127842 55716 7.92% 3.11% 17701 -5.18% 35.40 3.78 0.79 1.29% 0.90% 16.42% 4.23%

FY14E
213730 146584 67146 20.51% 3.24% 22816 28.90% 45.63 2.93 0.70 1.20% 1.00% 19.53% 5.63%

Relative Prince Performance

130 120 110 100 90 80 70 60 Nov-11 Dec-11 Apr-12 Aug-12 Jun-12 Feb-12 Mar-12 May-12 Sep-12 Oct-12 Jan-12 Jul-12

Free Float (INR bn) Beta

ALB

Sensex

Rohit Agarwal
rohit.agarwal@spagroupindia.com Ph. No. 91 33 40114800/ 839

BFSI Quarterly Financials

Particulars (INR mn) Interest Earned Interest Expended Net Interest Income NIM (%) Other Income Net Total Income Operating Expenses Operating Profits Provisions & Contingencies Profit Before Tax Provision for Tax Net Profit EPS Equity GNPA NNPA (%) GNPA (%) NNPA RoA Q2FY13 42805 31062 11743 2.80 3021 14764 6741 8023 4645 3378 1036 2342 4.68 5000 33114 23306 2.95 2.10 0.51 Q2FY12 38933 25751 13182 3.68 3092 16274 6781 9493 4117 5376 496 4880 10.25 4762 17152 6641 1.77 0.69 1.24 % Chg 9.94% 20.62% -10.92% (88 bps) -2.28% -9.28% -0.59% -15.49% 12.83% -37.17% 108.83% -52.01% -54.30% 5.00% 93.06% 250.93% 118 bps 141 bps (73 bps) Q1FY13 44582 31523 13059 3.17 3096 16154 6598 9556 3132 6425 1284 5140 10.28 5000 21622 11910 1.96 1.09 1.14 % Chg -3.99% -1.46% -10.08% (37 bps) -2.39% -8.60% 2.17% -16.04% 48.32% -47.42% -19.32% -54.44% -54.44% 0.00% 53.15% 95.68% 99 bps 101 bps 63 bps H1FY13 87387 62585 24802 2.98 6117 30919 13340 17579 7776 9803 2321 7482 14.96 5000 33114 23306 2.95 2.10 0.51 H1FY12 74432 49494 24938 3.54 5951 30889 12500 18389 7313 11076 2014 9061 19.03 4762 17152 6641 1.77 0.69 1.19 % Chg 17.41% 26.45% -0.55% (56 bps) 2.78% 0.10% 6.72% -4.41% 6.33% -11.49% 15.20% -17.43% -21.36% 5.00% 93.06% 250.93% 118 bps 141 bps (73 bps)

3.5
14% 12% 10% 8% 6% 4% 2% 0% Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 NIMs (RHS) Cost of Deposits Yield on Advances NIMs - declining 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Asset Quality - Deteriorating

3.0 2.5 2.0 1.5 1.0 0.5 0.0 Q2FY12 Q3FY12 Q4FY12 NNPA (%) Q1FY13 Q2FY13 GNPA (%) PCR (%) - RHS

90 80 70 60 50 40 30 20 10 0

700 600 500 INR bn 400 300 200 100 0 FY11

CASA ratio to remain above 30%

40% 35% 30% 25% 20% 15% 10% 5% 0% FY14E CASA Ratio

20000 15000 INR mn 10000 5000 0 Q2FY12 Q3FY12 Slippage

Slippage Ratio

7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

FY12

H1FY13

FY13E

Q4FY12

Q1FY13

Q2FY13

CASA Deposit (LHS)

Source: Company, SPA Research

CASA Deposit Growth

Slippage Ratio (RHS)

BFSI

Financials
Income StatementY Y/E March (INR mn) Interest income Growth (%) Interest Expended Net interest income Growth (%) Other Income Net Income Operating Expenditure Operating Income Provisions & Contingencies PBT Tax PAT APAT Growth (%) EPS (INR) FY11 110147 31.61% 69922 40225 51.76% 13704 53929 23383 30546 11239 19307 5076 14231 14231 17.93% 29.88 FY12 155233 40.93% 103606 51627 28.35% 12987 64613 26914 37699 16074 21626 2958 18668 18668 31.17% 37.33 FY13E 183558 18.25% 127842 55716 7.92% 13636 69352 29195 40157 16556 23601 5900 17701 17701 -5.18% 35.40 FY14E 213730 16.44% 146584 67146 20.51% 15409 82555 33842 48713 17880 30833 8017 22816 22816 28.90% 45.63 Balance Sheet Ratios Credit/Deposit Ratio Investment/Deposit Ratio CASA Ratio Balance Sheet Y/E March (INR mn) SOURCES OF FUNDS Equity Share Capital Reserves Total Shareholders Funds Total Deposits Growth (%) Borrowings Other Liabilities & Provisions Total Liabilities 4762 80312 85074 5000 100066 105066 5000 105588 110588 1859259 16.50% 101858 41021 2112727 5000 118122 123123 2156741 16.00% 112044 43688 2435595 Slippage Ratio Efficiency Ratios Cost to Income Ratio APPLICATION OF FUNDS Current Assets Investments Advances Growth (%) Fixed Assets Other Assets Total Assets 110274 432471 140252 542832 144746 624257 1305955 17.50% 12400 25370 2112727 180926 686683 1527967 17.00% 12620 27399 2435595 P/ABV Dividend Yield 1.59 2.60% 1.04 3.38% 0.79 4.23% 0.70 5.63% Profit per Employee (in INR mn) Valuation Ratios P/E 7.72 4.75 3.78 2.93 0.67 0.84 0.79 1.01 Business per Employee (in INR mn) 43.36% 41.65% 42.10% 106.30 121.70 141.01 40.99% 162.85 2.11% 2.18% 2.60% 2.00% Gross NPA Net NPA Provision Coverage Ratio 1.76% 0.79% 1.85% 0.98% 2.09% 1.29% 1.94% 1.20% 69.47% FY11 FY12 FY13E FY14E Capital Adequacy Ratio (CAR) Tier I Aseet Quality Ratios 12.96% 12.83% 12.70% 8.57% 9.13% 9.00% 12.60% 8.80% 70.99% 69.64% 70.24% 32.79% 34.01% 33.58% 33.48% 30.50% 30.63% 70.85% 31.84% 30.63% Cost of Deposits Net Interest Margin RoA RoE 5.88% 3.26% 1.04% 7.11% 3.42% 1.12% 7.40% 3.11% 0.90% 7.30% 3.24% 1.00% 19.53% BVPS ABVPS DPS Profitability Ratios Yield on Advances 10.10% 11.53% 12.00% 12.10% 178.64 145.03 6.00 210.12 171.09 6.00 221.16 170.26 5.66 246.23 192.45 7.53 Key Ratios Y/E March (INR mn) Per Share Data (INR) EPS 29.88 37.33 35.40 45.63 FY11 FY12 FY13E FY14E

18.65% 19.64% 16.42%

1318872 1595931 24.36% 69182 39783 21.01% 90945 37634

73.58% 71.86% 66.66%

1512911 1829576

936249 1111451 30.75% 11482 22435 18.71% 11977 23063

1512911 1829576

BFSI

Sharad Avasthi

Dy Head - Equity Research

sharad.avasthi@spagroupindia.com

Tel.: +91-33-4011 4800

Ext.832

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