X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Allahabad Bank public issue: Our view - Views on News from Equitymaster
StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Allahabad Bank public issue: Our view
Apr 1, 2005

Allahabad Bank’s second public issue (100% book building) for 100 m equity shares, at a face value of Rs 10 each, will be open for bidding between the 6th and 12th of April 2005. The price band is Rs 75 (floor price) to Rs 82 per share (cap price) of face value of Rs 10 each. Going by the current market price of Rs 100, the bank is expected to mop up Rs 8.2 bn (at the cap price) through the offer. The issue is slated to bring down government's holding in the bank from 71% to 55%. The bank has appointed merchant bankers - DSP Merrill Lynch, JM Morgan Stanley, Kotak Investment Banking, I-Sec, SBI Capital and Enam Securities to manage the offer.

One of the fastest growing banks
The 8th largest bank in the country, Allahabad Bank has one of the highest growth rates amongst smaller PSU banks. Over the last 4 years, the bank has witnessed a CAGR of 17.8% and 20.4% in its deposits and advances respectively. The bank has gradually extended its operations beyond central India, to provide services to over 15 m customers across the country through 1,938 branches. But still a bulk of its business is generated from central and eastern India. The bank has a capital adequacy ratio of 13.5% with government being the largest shareholder (71% holding). Post issue, the government will continue to hold 55% stake in the bank.

The bank’s credit portfolio is skewed towards corporate segment (86%). Of the retail portfolio (14%), housing loans comprise 38%. As the banking sector witnessed a robust credit growth during 9mFY05, Allahabad Bank has been able to capitalise on the same. It posted a growth of 28% YoY in its loan book (largely comprising non food credit) during 9mFY05, while the growth in the retail segment was 50% YoY during the same period. The bank has deployed most of its funds in advances and pruned its investment portfolio during the falling interest rate regime.

The bank, however, had Net NPA to advances ratio of 2.3% at the end of 9mFY05.

Objects of the issue

  • To increase the Tier I capital adequacy ratio (at present 8.4%) and overall CAR (at present 13.5%) for meeting the Basel norms going forward. Also, the bank needs to hike its capital base to meet the growth in the corporate and retail credit segment.

  • The bank plans to expand its operations to have a pan India presence.

  • The bank intends to go in for international expansion in places like Hong Kong and Kazakhstan.

Reasons to apply
Sustaining steady growth: The bank has witnessed a steady growth across parameters, which has led to the significant improvement in its net interest income (NII). During 9mFY05, the NII amplified by 30% YoY. Although the bank is skeptical about continuing the unusual credit growth rates, witnessed this fiscal (up 40% YoY in 9mFY05) on the back of a boom in non-food credit, it has projected a growth rate of 35% for the next fiscal (FY06).

Business growth
Parameters YoY variation CAGR
(Rs bn) 9mFY03 % 9mFY04 % 9mFY05 %  
Total business 238 16.4% 316 32.8% 422 33.5% 21%
Total deposits 196 14.0% 281 43.4% 381 35.6% 25%
Gross advances 113 17.1% 139 23.0% 200 43.9% 21%
Non food credit 105 23.2% 138 31.4% 197 42.8% 23%
Investments 112 17.6% 138 23.2% 199 44.2% 21%

Strong corporate exposure: Allahabad Bank has a majority of its exposure in the corporate segment (86%) and going forward, demand growth in this segment will augur well for the bank’s credit portfolio. Also, the thrust on infrastructure funding may help the bank accelerate its credit growth.

Low cost funding: The bank has consistently replaced its borrowings with low cost deposits over the years. Low cost deposits have grown by 21% YoY during 9mFY05 and form 38% of the bank’s total deposit portfolio. This has enabled the bank to reduce its cost of deposits from 6.7% in FY03 to 4.9% in 9mFY05 and this has reduced the cost to income ratio from 49% to 43% during the same period.

Mortgage financing fillip: The bank is a likely beneficiary of the budget provisions, providing impetus to home loan financing, as 38% of its retail exposure is in this segment. A growth of demand in this segment will thus help the bank increase its market share in the retail segment and also yield better returns for it.

Improving efficiency: The bank has witnessed a steady growth in terms of its efficiency parameters and is in line with the industry benchmarks. This is very unlike most PSU banks and thus a plus for Allahabad Bank. The bank has established specialized branches for corporate customers to improve productivity further.

Autonomy benefits: Government’s recent declaration of granting autonomy to PSU banks has not only facilitated the sector’s consolidation route but also provided better options to the entities for improving their productivity and rightsizing their balance sheets.

Reasons not to apply
Lower retail base: The non-food credit growth during 9mFY05 has been primarily propelled by demand for retail credit. Given this, the fact that Allahabad Bank has minimal presence in this segment may prove to be a disadvantage to the bank in the long run, unless the bank can substantially spruce up its retail credit book at steady pace. Also, its regional concentration in the not so profitable centers (the bank has 40% of its branches in central and 30% branches in eastern India) may prove to be detrimental.

Lower fee based income: The bank’s ‘other income’ is heavily relied on treasury income as against fee-based income. Fee based income formed barely 26% of the total other income at the end of 9mFY05. Going forward, with the interest rates keeping an upward bias, the bank’s other income may have to take the hit of treasury losses. The bank has also not disclosed the extent of assets transferred from ‘available for sale’ to ‘held to maturity’ category.

Margin pressures: Despite a steady growth in loan book and access to low cost deposits, the bank has not been able to augment its net interest margins. Over the years, the bank’s net interest income growth has not been parallel to the growth in average earning assets and also the yields on advances have substantially declined (from 11.4% in FY00 to 9% in 9mFY05). This has caused its NIM to remain almost stagnant (3.5% in FY02 to 3.6% in 9mFY05). As we go forward, with the interest rates keeping an upward bias, we expect some pressure at the NIM levels for the banking sector as a whole.

Quality of assets…a concern: Although the bank has considerably improved its asset quality by pruning its net NPA to advances ratio from 12.2% in FY00 to 2.3% in 9mFY05, it still continues to feature at the bottom of the league in terms of asset quality. However, the comfort here is that the bank had an NPA coverage ratio of 77% at the end of 9mFY05, which is well above the industry average of 60%.

Contingent liabilities: The bank has a number of impending litigations against its subsidiary ALLBANK Finance to the tune of Rs 124 m. Also, the contingent liabilities in the books of its subsidiary Gramin Banks’ (7 in number) are to the tune of Rs 23 m.

Financials
(Rs m) FY03 FY04 9mFY05
Interest earned 25,703 26,686 23,549
Interest expended 16,605 15,822 13,253
Net Interest Income 9,098 10,864 10,296
Other income 5,243 7,498 5,013
Total income 14,341 18,362 15,309
Other Expenses 8,889 9,299 6,570
Operating profit 209 1,565 3,726
OPM (%) 0.8% 5.9% 15.8%
Provisions 3,606 4,234 3,970
Net profit 2,032 5,017 4,910
NPM (%) 7.9% 18.8% 20.9%
No. of shares (m) 346.7 346.7 346.7
EPS (Rs) 5.9 14.5 18.9

Our view

Comparitive valuations
9mFY05# ROA (%) OPM(%) NPM (%) CAR (%) Net NPA (%) P/BV (x)
Allahabad Bank 1.7% 12.4% 19.6% 13.4% 2.3% 2.2
Canara Bank 1.3% 13.5% 18.2% 12.9% 2.7% 1.6
Bank of Baroda 0.9% 13.5% 12.3% 13.9% 2.1% 1.3
Punjab National Bank 1.2% 14.1% 19.6% 13.1% 0.3% 2.2

At the cap offer price of Rs 82, the bank is trading 2.2 times its 9mFY05 book value. This puts it at a substantially rich valuation as compared to most of its peers.

Although the bank seems to be a on a fundamentally strong footing, its asset quality and regional concentration remain a matter of discomfort. Apart from listing gains, we do not see a substantial upside to the stock in the long term and would therefore advise serious investors, looking for visible growth stories, to keep aside their funds for better opportunities in the banking sector itself.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

SBI SHARE PRICE


Feb 23, 2018 (Close)

TRACK SBI

COMPARE SBI WITH

MARKET STATS