Axis Bank – 2QFY11 – Healthy business growth, NPA coverage rises says Anand Rathi

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Axis Bank – 2QFY11 – Healthy business growth, NPA coverage rises.

n       Net profit up 38.3%. Robust net interest income growth and lower NPA provisions aided net profit growth. While NII and fees rose respectively 40.5% and 18% yoy, provisions slid 24.1%.

n       Business growth strong, margins stable. Advances grew 36.5% yoy (1.8% qoq), faster than the industry’s ~19%. Deposit growth (35.7% yoy, 6.4% qoq) was also stronger than the industry’s ~15%. Reported NIM, though up 16bp yoy, declined 3bp qoq to 3.68%. Despite our expectation of rising liability costs over FY11-12, strong loan growth is likely to help Axis Bank register NIMs of 3.4% in FY11 and 3.5% in FY12.

n       Modest fee income growth. The bank registered modest fee growth (18% yoy), despite robust credit growth, due to slower growth in fees from agriculture, SME, capital markets and third-party distribution. Trading gains plunged 52% yoy, leading to a 3% yoy drop in non-interest income.

n       Healthy NPA coverage and asset quality. Although there was incremental re-structuring of `600m, total re-structured assets fell to `20.6bn (1.7% of loans) from `21.5bn in 1Q11.  Management expects further slippages from its SME segment. Hence, credit costs are not likely to decelerate sharply in FY11. However, the bank has very high NPA coverage (90.5%) and healthy asset quality (net NPAs at 0.34%).

n        Valuation. At our target price of `1,623, the stock would trade at 3.5x FY11e and 3x FY12e BV.