Allahabad Bank – Re-rating in th offing – Reliance Equities

After Quick Gun Murugun’s recommendation on Oriental Bank, yesterday its time to review Allahabad Bank today.

In the last few quarters, Balance-sheet restructuring both on the liabilities and the asset side will aid margin improvement. Fee income is set to gather traction, given the thrust on fee income and implementation of the bank’s core banking solution (80% business is currently under CBS). The bank’s conservative approach of putting cyclical treasury gains to good use, shoring up the provisioning buffer and wage revisions should hold it in good stead.

After a subdued FY09, when earnings declined 21%, Analysts expect a robust 27% CAGR over FY09-11 with core operating profits growing at a faster 31% CAGR over the same period. Allahabad Bank has always traded as if it were a poorer cousin to its larger PSU peers – at a discount of 35% over the past four years. The discount should narrow, as the bank improves its operating performance through technology upgrades and balance sheet restructuring. Factors that already favour a narrowing discount are a steady deposit profile, comparable cost-to-income, manageable asset quality and, above all, a stable guard at the helm.

The bank is expected to report an EPS of Rs 23.4 for FY10 and Rs 27.7 for FY11.