| Summary of Content STOCK UPDATE Allahabad Bank
Cluster: Cannonball
Recommendation: Buy
Price target: Rs270
Current market price: Rs218 Q1FY2012 results: First-cut analysis Result highlights -
Allahabad Bank's Q1FY2012 results came in line with our estimates at the net interest income (NII) level while the net profit was slightly higher than our estimates (20.4% year on year [YoY]) to Rs418 crore. This was led by a strong growth in the NII of the bank which grew by 38.2% YoY contributed by strong advances growth and steady net interest margins (NIMs; 3.4% compared to 3.5% in Q4FY2011). An improvement in asset quality was another positive as gross and net non performing assets (NPAs) declined to 1.62% and 0.6% respectively (compared to 1.74% and 0.79% in Q4FY2011). -
Strong growth in NII: The NII of the bank increased by a strong 38.2% YoY and 2.1% quarter on quarter (QoQ) to Rs1,175.6 crore. This was driven by a healthy growth in advances which grew by 30.4% YoY and steady margins. Deposits grew by 23.5% YoY and 1.5% sequentially whereas the current account - savings account (CASA) ratio was at 32.2%. Going forward increased deposits from the government business is likely to boost the CASA ratio. -
Advances up 5.5% QoQ led by corporate and SME segments: The advances of the bank showed a robust growth of 30.4% YoY and 5.5% QoQ. This was led by a 13.7% QoQ growth in the small and medium enterprise (SME) advances followed by a 5.2% QoQ growth in corporate advances. The bank continues to expand in the high yielding SME and retail segments which constitute approximately 45% of the advances. -
Margins remain firm at 3.4%: Despite rising cost pressures Allahabad Bank's margins remained steady Q-o-Q at 3.4% led by a growth in the high yielding segment and repricing of the advances. The yield on loans expanded to 11.6% in Q1FY2012 compared to 10.7% in March thereby cushioning the margins. The management expects to maintain margins in excess of 3% in future. -
Steady growth in fee income: The overall non-interest income declined by 4.2% YoY to Rs286 crore mainly due to lower treasury income. The fee income increased by 21.6% YoY aided by non-interest income growth. The treasury profits in the quarter were Rs26 crore compared to Rs90 crore in Q1FY2011. -
Asset quality improves: The slippages remained low during the quarter at Rs150 crore while recoveries were higher at Rs250 crore. This led to an improvement in asset quality as gross and net NPAs declined to 1.62% and 0.6% respectively from 1.74% and 0.79% in the earlier quarter. The management has guided a recovery of Rs1,050 crore in FY2012 and maintained its positive outlook on asset quality. -
Valuations: Allahabad Bank's Q1FY2011 was characterised by strong NII growth, decline in NPAs and strong fee income growth. The bank targets to grow its advances by 25% in FY2012. Currently the stock trades at 1.4 FY2012 book value. We have a positive outlook on the stock and will release a detailed note shortly. Axis Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,637
Current market price: Rs1,297 Advances growth moderates Result highlights -
Axis Bank reported an earnings growth of 27% year on year (YoY) to Rs942.4 crore, slightly higher than our estimates. A healthy growth in the net interest income (NII; ~14% YoY) and lower provisions aided the growth in profits. The business growth moderated as both, the advances and deposits, saw a contraction sequentially. The net interest margin (NIM) dropped 16 basis points quarter on quarter (QoQ) to 3.28% while the current account- savings account (CASA) ratio remained at 40% plus levels. The asset quality remained stable on a sequential basis due to recoveries and write offs. We estimate the earnings to grow at a compounded annual growth rate (CAGR) of 22% over FY2011-13 resulting in a return on assets ( RoA) of +1.5%. We maintain our Buy recommendation with a price target of Rs1,637. -
Advances growth moderates: Axis Bank's advances declined 7.4% QoQ and increased 21.4% YoY led by a contraction in the large corporate (-7.4% QoQ), agri (15% QoQ) and the small and medium enterprise (SME; -7.3% QoQ) segments. Consequently, the credit to deposit ratio declined to 71.8% from 75.2% in Q4FY2011. The net interest income grew ~14% YoY and 1.4% QoQ, which is marginally below our estimates. -
Margins dip 16bps QoQ: During Q1FY2012 the bank reported a NIM of 3.28% compared to 3.44% in Q1FY2011. This was on account of the uptrend in term deposits and a revision in the rate for savings bank deposits which increased the cost of funds by 57 basis points QoQ to 6.13%. The average CASA balances declined in Q1FY2012 to 36.9% from 39.9% in Q1FY2011. The management has reiterated its guidance to maintain margins in the range of 3.25-3.5% on a sustainable basis. -
Strong growth in fee income led by corporate fees: The fee income grew by 42% YoY in Q1FY2012, mainly due to an 81% YoY growth in the corporate segment as the bank booked income from syndication deals. The fee income from the retail segment showed a healthy growth (35% YoY) while the business banking segment (5% YoY) reported a moderate growth. The capital market segment however reported a negative growth of -20% YoY. But despite an overall strong fee income growth the total noninterest income grew by 17% YoY due to lower treasury gains (Rs70 crore vs Rs196 crore in Q1FY2011) -
Cost to income ratio inches up: The cost to income ratio (ex treasury income) surged to 46.1% from 42.2% in Q4FY2011 as operating expenses (opex) increased by 25% YoY. The increase in the opex was due to a revision in wages and an increase in the headcount. -
Asset quality remains stable: The bank reported slippages to the tune of Rs296 crore (Rs248 crore in Q4FY2011) which were offset by write offs of Rs230 crore and an upgradation of Rs92 crore. The gross and net non performing assets (NPAs) at the end of the quarter were at 1.06% and 0.31% respectively, in line of the preceding quarter. The bank added Rs107 crore to the restructured loans (total 1.44% of gross customer assets). The provision expenses declined due to a write back of Rs16 crore from the standard asset provisions. -
Valuation: Axis Bank delivered a strong earnings growth in Q1FY2012, though the core income was slightly below estimates due to a moderation in business and dip in margins. Nevertheless, the asset quality trends seem reasonable while fee income showed a strong pickup. We continue to maintain our estimate of a 22% CAGR growth in earnings over FY2011-13 contributed by 24.5% growth in advances. We maintain our BUY rating with a target price of Rs1,637 (3x FY2012 book value). Union Bank of India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs309 Higher provisions dent earnings Result highlights -
Union Bank of India (Union Bank)'s Q1FY2012 earnings were significantly below estimates as net profits declined by 22.8% year on year (YoY) and 22.3% quarter on quarter (QoQ), mainly due to one off provisions of Rs214 crore (based on revised Income Recognition Asset Classification [IRAC] norms). Meanwhile the net interest income (NII) also came in below estimates due to a slower growth in advances and deterioration in margins which declined 34 basis points QoQ to 3.1%. The asset quality showed some stress as slippages increased sequentially due to migration to system based non performing asset (NPA) classification for smaller accounts (Rs0 - 5 lakh). We have trimmed our estimates to factor in slower growth guided by the management and expect earnings to grow at a compounded annual growth rate (CAGR) of 21% over FY2011-13. We maintain our Buy recommendation with a target price of Rs375 (1.5x FY2012 book value). -
One off provisions of Rs214 crore depress earnings: During the quarter the bank provided an additional Rs214 crore (Rs189 crore for NPAs and Rs25 crore for restructured advances) due to revised IRAC norms. This led to a sharp sequential increase in the provisions which led to a 22.3% QoQ dip in the profits. -
NII growth moderates: Led by a slower growth in advances and contraction in margins the net interest income increased by 18% YoY while it declined 7.4% QoQ. Being a seasonally weak quarter in terms of credit growth and due to impact of high rates on credit demand, the advances contracted by 3.6% QoQ while they grew 16.7% YoY. In view of the weak macro environment the management has trimmed the advances growth target to 19% (22% earlier) and deposit growth target to 17% (20% earlier) for FY2012. -
Sharp decline in margins on Q-o-Q basis: The net interest margins (NIM) declined sequentially by 34 basis points to 3.1% (3.44% in Q4FY2011) due to a lag in re-pricing of advances, decline in incremental credit deposit (CD) ratio and an increase in the savings deposit rates. The current account-savings account (CASA) ratio remained stable at 31.5% (compared to 31.8% in Q4FY2011). The management continues to guide for 3.2% NIMs for FY2012. -
Slippages rise on migration to system based NPA classification: The gross and net NPAs increased to 2.57% and 1.32% respectively from 2.37% and 1.19% in Q4FY2011. The gross slippages during Q1FY2012 were at Rs766 crore of which Rs505 crore were on account of migration to system based NPA recognition for smaller accounts (agri Rs102 crore, small and medium enterprise [SME] Rs200 crore). Post Q1FY2012 the bank has implemented system based NPA recognition on all categories of advances except for the agriculture advances which it expects to complete by Q2FY2012. The management expects slightly higher NPAs in Q2FY2012 and expects to reduce it to ~2% by FY2012 end. -
Non-interest income grew 11% YoY: The non- interest income grew 11.3% YoY mainly due to a subdued growth in fee income. During Q1FY2012 the core fee income reported a nominal growth of 5% YoY to Rs210 crore. However the treasury income was slightly higher at Rs171 crore compared to Rs155 crore in Q1FY2011. -
Valuation: Union Bank's Q1FY2012 results were marred by one off provision on account of revised provisioning norms leading to lower than estimated growth in earnings. We have trimmed our loan growth estimates as the bank has lowered guidance on business growth. Going forward, the slippages could moderate as the bank has migrated to system based NPA recognition (except for agri loans). We expect the bank's earnings to grow at a CAGR of 21% over FY2011-13. We value the bank at 1.5x FY2012 book value, resulting in a target price of Rs375. We maintain our Buy recommendation on the stock.
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