Inexpensive valuation appears to have persuaded analysts to recommend 'buy' on Allahabad Bank shares despite the bank's second quarter net profit having halved from a year ago due to rise in provisions, decline in net interest income and dilution in net interest margin.
"We have been cautious on the stock for more than two years due to change of guard at the helm coupled with Allahabad Bank's relatively high exposure to the MSME (micro, small and medium enterprise) segment. Post the underperformance, the stock trades at 0.6 times one year forward adjusted book (and is) favourable from a risk-return perspective. Hence, we upgrade our recommendation to buy from hold," Nilesh Parikh, analyst with Edelweiss Securities, wrote in his note to clients.
The brokerage has a target price of Rs 168 on Allahabad Bank shares.
"Despite 17-18% plus return on equity and reasonable CASA (current account savings account) deposits, the bank trades at significant discount to its peers, mainly due to technological backwardness and poor perception in asset quality," Parikh said.
Monday, the state-run lender reported 52% drop in its July-September net profit as it made more provisions to limit the effect of deteriorating asset quality. The bank added fresh non-performing assets of Rs 1,700 crore during the quarter and saw its restructured loan portfolio expand by Rs 2,700 crore during the three-month period.
Edelweiss has cut its 2012-13 earnings estimates for Allahabad Bank by 9% after taking into account higher credit cost and lower margin.
At 11:42 AM, Allahabad Bank shares were trading at Rs 135.20 on the National Stock Exchange (NSE), up 0.5% from previous close.