For Q4FY2009, Allahabad Bank reported a net profit of Rs264.1 crore, indicating a growth of 55.8% year-on-year (y-o-y) mainly driven by a robust top line growth and treasury gains.
The net profit for the quarter is well above our estimate of Rs135 crore. The reported net interest income (NII) stood at Rs592.5 crore, up by a surprising 42.7% y-o-y.
The increase primarily stemmed from a significant 65-basis-point expansion in the reported net interest margin (NIM) during the quarter.
The reported NIM expanded by 65 basis points y-o-y to 2.97% during the quarter from 2.32% during the year-ago quarter.
The significant margin expansion was mainly driven by a 58-basis-point contraction in the cost of deposits, as the bank meaningfully reduced the proportion of high-cost bulk deposits during the year.
The non-interest income grew by 76.2% y-o-y to Rs458.3 crore, as the treasury gains almost doubled to Rs245 crore during the quarter, while the fee-based income improved by a robust 45.5% y-o-y.
The operating expenses increased steeply by 31.2% and 26.0% quarter on quarter (q-o-q) to Rs436.6 crore on account of an ad-hoc provision of Rs77 crore towards wage hike, leading to a 39.2% year-on-year (y-o-y) increase in the employee expenses.
During the quarter under review the business of the bank grew largely in line with that of the industry. The advances grew by 18.1% y-o-y to Rs59,443 crore, while the deposits grew by 18.6% y-o-y to Rs84,972 crore.
The current account and savings account (CASA) ratio dipped to 34.6% in Q4FY2009 as compared with 35% in Q3YF2009 and 36% during the year-ago period, as the term deposits of the bank grew at a much faster pace.
Though the asset quality of the bank deteriorated sequentially, it improved in relative terms. In absolute terms, the gross non-performing assets (GNPA) grew by 6.7% y-o-y and 6.1% q-o-q to Rs1,078.2 crore.
However, the GNPA in percentage terms improved to 1.81% from 1.93% sequentially. Meanwhile, the net non-performing assets (NNPA) in percentage terms improved by 10 basis points q-o-q to 0.72% with the provision coverage improving by 337 basis points sequentially to 61.1%.
The bank restructured loans worth Rs2,532 crore and has applications pending for loans worth Rs200 crore, which together constitutes 4.6% of the total loan book of the bank.
We believe this could result in higher delinquencies in the coming quarters.
The capital adequacy ratio (CAR) of the bank improved to 13.1% as at the end of Q4FY2009 compared with 12.0% a year ago and 12.2% for the previous quarter.
The sequential improvement in CAR is driven by Rs1,050 crore of capital raised by the bank during Q4FY2009.
We have fine-tuned our earning estimates for FY2010 to factor in a higher loan growth (in line with the management’s guidance for the current fiscal), while raising our assumptions for loan loss provisions.
We are also introducing FY2011 estimates in this note. We expect the bank’s earnings to grow by 23.2% in FY2011.
At Rs56, the stock trades at 2.7x FY2010E earnings per share (EPS), 1.2x FY2010E pre-provisioning profit (PPP) per share and 0.5x FY2010E book value (BV) per share.
At the current market price and dividend (Rs2.5 per share), the stock offers a healthy dividend yield of 4.5%.
However, in view of the threat to its asset quality, we maintain our HOLD recommendation with a revised price target of Rs65.