Allahabad Bank

Relatively Allahabad Bank is very cheap .. it's available at a PE of 4 and a dividend yield of 3.40%. Recently (May 2008), Emkay Research gave a buy call on Allahabad with a buy target of Rs. 170 per share. (here)

When I started to run the numbers on Allahabad Bank, the first thing I was interested in .. were the provisions numbers. Lately I went through a bank's quarterly report where the bank had drastically reduced the provisions for that quarter, and was hence able to show a higher net profit for the quarter. Given the increase in interest rates and rise in food prices of essential commodities, there is a higher probability of people defaulting on their loans than say, 12 months back. I'm glad to say that Allahabad Bank has infact, increased it's provisions for the quarter and year.

However this doesnt mean that all numbers deck up well. Some observations -
a) The net profit has declined sharply from last quarter. Q4 has delivered the lowest profits of all quarters, this year.
b) The Opex has risen sharply which will worry the bank. From just 281 crs (on a base of 1440 crs) - the expenses has risen to 508 crs (on a base of 1720 crs).
c) The administration of taxes seems a bit doubtful. The bank pays about 145 crs of taxes on a PBT of 1120 crs - which is about 12.9%. This seems a bit low .. but when I compare it with FY07 (7.6%), FY06 (4.7%) and FY05 (5.1%) .. this number seems pretty satisfactory.

The Emkay report rightly points out, "We like the continuance of the strategy of slower balance sheet growth as the advances have grown by 21% y-on-y compared to a 42% growth in FY07". I would still like to maintain a conservative picture around this because, in case of loans, the impact of intrepidness in lending is seen in about 12 months of the lending. (on a similar note, banks like Barclays and Reliance have gone crazy with lending activity. I received a call from Reliance Capital, about 3 months back where they were offering loans at 10%. The problem today faced by the banks & NBFCs is : while on a standalone your calculations will show that the loan applicant has sufficient income to take care of his expenses and pay off the loan ... the FIs just dont know the number of loans the person holds. If the applicant holds 2-3 loans, then no calculations will be useful as the chances of him/her defaulting is much higher than envisaged by our risk tools. I would blame the credit infrastructure in the country for this menace)

Since I am not good at evaluating banking stocks (the only stock I have ever bought or recommended in this space was Bank of Baroda), I compared Allahabad Bank's performance with Bank of Baroda (didnt include Kotak or ICICI Bank - they trade at very high PEs). Some notes -
a) The opex of BOB has historically been much higher than Allahabad Bank. But given Q4 results, both are pretty much equal.
b) The disappointing part of Allahabad's results were the NII which have been declining. This doesnt seem to be the case with BOB which still delivers rising NII.
c) Taxes paid by BOB are around the 35% mark (of PBT). Allahabad is still about 13% only, which is strange.

Note: the Dec quarter of BOB is nothing short of brilliant. The incomes have really risen but the lingering credit market fear has pushed the price of the stock down. You might want to look at Bank of Baroda aswell. Karvy had recommended a buy on BOB on 29th April 2008 (here)

It seems a number of banking stocks are undervalued. If we factor the 2009 RBI-opening-up-banking-regulations scenario, we can expect some M&A activity in banking which'll pick up the entire industry valuations too .. or I think it will.