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Suresh Krishnamurthy

Mr O. N. Singh (right), CMD, with Mr Santanu Mukherjee, Country Manager, South Asia Visa International, at the launch of the bank's international debit-cum-ATM card - All-round business growth boosts profitability.

SHAREHOLDERS can accumulate the Allahabad Bank stock. The bank's business growth in the quarter ended December 2004 was impressive. Improvement can be seen in almost all vital business parameters. The stock valuation, in contrast, continues to be below many of its peers.

The stock continues to hold the potential to deliver returns commensurate with risk involved. Over the next 12 months, though, the valuation of bank stocks will continue to remain volatile.

Strong growth

Business growth at Allahabad Bank has been quite strong. In the first nine months of this financial year and in the last quarter of 2004, the deposit growth was twice that of the banking industry average.

This has, however, not had an adverse effect on the costs. The cost of funds has continued to decline even in the quarter ended December 2004.

In the case of advances, the rate of growth appears to lag the industry average in the last quarter of 2004. The exceptional performance in the first six months, however, continues to add lustre to the bank's showing.

The bank's advances growth at about 26.8 per cent is way ahead of industry's 15.5 per cent.

The quest for balance-sheet expansion, however, does increase the risk. For instance, expansion in farm credit has contributed significantly to advances growth.

Agricultural advances growth need not necessarily lead to accumulation of non-performing assets. That they rose by nearly 300 per cent is, however, a cause for concern.

Similarly, the continuing growth in investments portfolio of Allahabad Bank, which rose by 15 per cent in the first nine months, exposes the bank's financial statements to the risk of loss due to rising interest rates.

Surging profits

Bolstered by the advances growth and the improved spread (the difference in the rate at which funds are lent and that at which they arefunds are accessed), Allahabad Bank's profits rose sharply. The profits for the nine months ended December 2004 are already as much as that of the previous financial year ended March 2004.

In the first six months of this year, the bank continued to realise gains on its portfolio of government securities, enhancing profit growth.

In the quarter ended December 2004, lower provisions compensated for the decline in trading-related profit and added to profit growth.

Sustaining the pace of profit growth in the next quarter, however, may be difficult. One, the bank may have to provide more for revision in wages. Second, year-end provision for depreciation in value of government securities may be higher.

Third, trading-related profit in the quarter ended March 2004 was about Rs 220 crore. It is likely to be close to nil in the quarter ended March 2005. Consequently, profits for the quarter ended March 2005 may even decline. On the whole, however, the profit growth for the year ended March 2005 would continue to be impressive and better than the industry average.

Attractively valued

The stock's per share earnings for the year ended March 2005 is likely to be close to Rs 16. Also a much larger dividend compared to March 2004, is likely, given the substantial reduction in bad loans and the higher capital adequacy.

The book value of the stock is also likely to end closer to Rs 60. The stock, thus, appears attractively valued at the ruling market price.

Investors, though, are faced with the prospect of equity expansion in the near future. The offer is through a book-building route and there may be increased volatility ahead of the offer. The success of the offer will, however, only add to the attractiveness of the stock.

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