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Suresh Krishnamurthy

FRESH investments can be considered in Allahabad Bank. A substantial proportion of its loans had turned bad, affecting the bank's performance, but the situation has changed for the better.

The NPAs (non-performing assets) are still high, but their ability to derail profit growth has diminished.

In addition, there are favourable factors such as low cost of funds, and higher deposit and loan growth in recent quarters.

There are quite a few negative factors, such as high proportion of operating costs and low return on assets. But the stock is attractively valued.

Story of advances

Allahabad Bank's performance in the first half of 2003-04 is encouraging. The Bank reported growth in advances and deposits which were higher than that of the industry.

The deposit growth of 7.6 per cent was higher than industry's growth of about 6 per cent.

Importantly, the proportion of low-cost deposits to total deposits of Allahabad Bank is one of the highest in the industry.

This edge has been maintained in the first half, and the cost of deposits has thus fallen to below 6 per cent.

In addition, there is also a distinct improvement in the spreads. The difference between the rates at which funds are lent and borrowed was one of the lowest in the industry for this bank because of persistent rise in bad loans. This difference has now risen to 3.4 per cent.

This is comparable to the spreads of the best banks in the industry. The rise in spreads may have been partly due to the credit growth achieved by the bank.

Growth in advances of about 4.5 per cent compared favourably with the industry's growth of less than 2 per cent. Growth in advances, however, does not capture the operational performance of a bank completely.

This is because of short-term advances made during the half-year, which may be better captured in the growth in average advances.

The growth in interest income and the indicated yield on advances suggests that growth in average advances has been about 12.8 per cent. This too is encouraging.

Even more impressive is the fall in the proportion of net non-performing assets, which had dropped to 5.2 per cent at end-September 2003 from just above 7 per cent at end-March.

This has been accomplished without any large increase in provisioning, suggesting that recovery of impaired loans is proceeding apace.

Growth to continue

The profit growth of 80 per cent in the first half of 2003-04, however, is misleading. Similar to most banks, a 125 per cent rise in profits from the sale of government securities is the primary reason for the large growth in profitability.

However, the improvement in operating parameters suggests that robust growth may continue in the second half of this fiscal.

If funds lent as advances or invested in government securities rise by about 6 per cent, as they did in the second half of last year, profit growth would be about 15 per cent, even if other income stays flat.

However, the potential for profit booking in government securities continues.

Robust growth in advances could boost profit growth even more. This would also lead to a reduction in net non-performing assets to less than 5 per cent of advances.

In terms of valuation, the stock now trades at 0.6 times its book value per share. Even when adjusted for the entire net non-performing assets, the price-to-book-value ratio is undemanding, at 1.25 times. These factors suggest that the downside to the stock price is limited.

In addition, if such favourable factors as higher-than-industry growth in advances, and sustained decline in cost of deposits continue, the potential for share price appreciation is significant.

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