Stock Review: Allahabad Bank

DURING the stock market run-up in January 2008, the valuations of Allahabad Bank had lagged those of its larger peers. The gap, however, has narrowed during the current rally. The change in investor perception can be attributed to the bank's improving performance over the past few quarters. The valuation gap between Allahabad Bank and its larger peers like Punjab National Bank and Bank of Baroda has reduced considerably during the past three months. In January 2008, the bank's price-to-earnings (P/E) ratio stood at 6.8, which was much lesser, compared to others, which averaged 13.6. But now the bank's stock is valued at 7.5 times its trailing 12-month earnings, which compares with the average P/E of 9 for the biggies. Banks are rated on a host of performance parameters. One of these is the net interest margin (NIM), which is the spread between the yield on advances and the cost of borrowing. A higher NIM reflects better operating efficiency. One of the ways of achieving higher NIMs is to ensure that the cost of deposits is low. This is precisely what Allahabad Bank has been doing for several quarters. It has been shedding bulk deposits and at the same time, increasing the base of low cost current and savings account (CASA) balances. This has helped the bank in maintaining its NIM at about 3% for several quarters.

   The bank has also shown competency in the core business of lending. Advances have grown at an average 20% over the past three financial years. While the loan book grew at a high rate, asset quality remained intact. The bank's net non-performing assets (NPAs) have been under 1% for the past three years. Very few Indian banks have been able to achieve this feat.

   The June 2010 quarter results seem to further reaffirm investor's confidence in the bank. The bank's scrip has gained 11% in the past one month as against a 0.5% drop in the Sensex. Moreover, the stock recently rose to its 52-week high amid sluggish broader market.

   Though the bank's stock has attracted investor attention, the bank needs to continue its growth streak in future. One near-term challenge will be to maintain the current levels of NIM. The bank has so far retained its NIM mainly by reducing its bulk deposits. But it may not continue with this strategy indefinitely since it would soon exhaust its excess bulk deposits. Therefore, it needs to be seen whether the bank can keep its operating efficiency intact in coming quarters.