Allahabad Bank (ALBK) reported INR5.8bn loss in Q4FY16 impacted by muted revenue momentum and blow up in asset quality. Slippages spiked to INR74bn (>19% versus 4-5% run rate in past 6 quarters). Revenue momentum was tepid with NII slipping >12% YoY. However, controlled opex cushioned profitability. Factoring in higher-than-anticipated credit cost, we prune our FY17/18E earnings by ~10%/9%. On operational front ALBK’s competitive prowess will be severely impacted given diversion towards clean up coupled with capital constraints for growth (which may not be forthcoming for mid-sized PSU banks) thus we see operating profitability to remain under pressure. Maintain ‘HOLD’.
Slippages spike further; outlook cautious
Slippages catapulted to INR74bn, with INR9.75bn on account of banks AQR and INR49bn accounts related to other banks AQR. Management highlighted things are unlikely to improve soon as balance sheet clean up continues (INR87.2bn of SMA-II accounts need monitoring). Additionally, performance of accounts under 5:25 scheme (INR14.6bn), SDR cases (INR17.8bn), higher exposure to stressed segments (I&S and power) and overall elevated stressed assets (NNPLs plus restructured book) at > 12% keeps us guarded.
Revenue traction drags, lower opex cushions profitability
Soft NII growth (down >12% YoY on muted loan growth and softer NIMs) fed into slower revenue traction, in turn leading to >9% YoY decline in core operating profitability. Lower opex (down > 5% YoY) cushioned profitability. Given structural challenges, we see operating profitability remaining under pressure.
Outlook and valuations: Structural challenges lurk; maintain ‘HOLD’
Apart from high asset quality stress, mid-size PSU banks are hampered on operational front too. We perceive clear demarcation between large and mid-size PSU banks and expect pressure to continue in latter. Given increasing BASEL III requirement and limited capital support from government, dilution risk is imminent at weak multiples, which will be detrimental to shareholders’ returns. The stock is trading at 0.5x FY18E P/BV (post dilution). We maintain ‘HOLD/SU’ with TP of INR58.
