Allahabad Bank: asset quality, NIMs likely to boost stock

Allahabad Bank: asset quality, NIMs likely to boost stock

Two things stand out in Allahabad Bank’s September quarter earnings. First, it managed to restrain bad loans despite, like other public sector banks, migrating to a new system of recognizing non-performing assets (NPAs). It was all the more admirable since the lender had to switch over more loans to the new system compared with its mid-sized rivals.

While that is a positive, there is a red flag. The bank has lent 13,612 crore, or about 14% of its overall advances, to the power sector. That is higher than peers; however, the management indicates there is no stress on this portion of the loan book.

Secondly, the bank has delivered better-than-expected net interest margins (NIMs) at 3.68%, a sequential rise of 28 basis points. That is all the more surprising since the lender failed to grow its low-cost current and savings account (Casa) deposits significantly. Casa deposits fell to 30.6% of overall deposits compared with 32% in the June quarter.

Also See | Quarterly performance (PDF)

What bailed out Allahabad Bank was an increase in yield on advances. This metric grew almost 1 percentage point over the June quarter as the lender pruned short-term loans and repriced others.

However, the cutback in short-term advances also showed on the loan book. After growing at 30%-plus rates over the past three quarters, loan growth slowed to 17% from a year ago. Still, the lender is saying its loan growth should be 3-4 percentage points more than the sector’s growth this year.

Due to these two factors, the 36% growth in net interest income and the 21.2% growth in net profit look more impressive. Note that Allahabad Bank trades at a 0.9 times its estimated book value for fiscal 2012.

After months of lagging the Bankex on BSE, there is ample scope for the stock to rise.