Allahabad Bank’s (ALB) Q1FY09 results have surpassed our expectations with net profit coming in at Rs934 million against our estimate of Rs344 million, led by robust asset growth.
A higher incremental credit-deposit (CD) ratio for the quarter resulted in NII growth despite continued margin pressure. As expected, MTM losses totaled Rs2.6 billion, but a write-back of provisions on account of the farm loan waiver cushioned the fall in net profit to some extent.
The write-back also improved asset quality with net NPAs declining to 0.75% from 1.18% as at end of June 2007.
The Bank is targeting 20% business growth for FY09, in line with the industry. With SLR investments at ~27% of total funds, the incremental credit off-take would be met through deposit acceptance. Thus, despite the increase in PLR rates, we expect margins to remain stable at best.
The investment portfolio is highly exposed to the interest rate risk, with 41.5% of its investments in the AFS category. Further, the tightening macroeconomic conditions raise concerns on sustainability of asset quality.
Given these concerns, we have revised our earnings estimates for FY09 and FY10 downwards. We have also reduced our DDM-based target price from Rs114 to Rs86. The decline in net profits owing to the interest rate risk on investments and lower growth trend in non-interest income will act as an overhang on valuations. We recommend a HOLD on the stock.