Visit http://indiaer.blogspot.com/ for complete details Axis Bank (AXSB IN, Mkt Cap $14.4b, CMP Rs1,564, Buy) 2QFY11 PAT grew 38% YoY to Rs7.35b. While profit growth is line, NII growth surprised us positively (4% higher than expected) led by better margin performance. Stable margins at 3.68% (3bp QoQ decline), CASA growth (36%) and adj fee income growth of 23% were key positives. Continued higher slippages and credit cost, moderate loan growth QoQ and sharp increase in other operating expenses were the key negatives.
Key highlights:
- On a lower base, loans grew 37% YoY (on a base of 18% YoY growth in 2QFY10) and 2% QoQ to Rs1.1t, led by large corporate loans.
- CASA growth was strong at 36% YoY on an average daily basis; average daily CASA ratio stood at ~40% (stable QoQ).
- Other operating expenses increased ~17% QoQ to Rs7.6b as branch and ATM expansion accelerated during the quarter.
- Slippages stood at Rs4.4b leading to annualized Slippage ratio of 1.7% vs 2.2% in FY10. This includes slippages of Rs920m from restructured loans. Outstanding standard restructured loans stood at Rs20.6b (~1.9% of the loan book)
- On back of higher write offs, GNPA and NNPA remained stable QoQ in absolute amount. Including prudential write offs, PCR stood at 80.2% vs 76.6% a quarter ago.
Strong balance sheet growth YoY on a lower base
- Loans increased by 37% YoY and 2% QoQ in 2QFY11. Growth in the quarter is driven by large corporate loans. Large corporate loans grew 6% QoQ, whereas agri declined 15% QoQ. SME and retail loans remained flat QoQ. On a YoY basis, Corporate loans grew 59% whereas, agri, retail and SME grew ~15%
- In our view, reported loan growth in 3QFY11 will look very strong at 35%+ due to lower base; however on a higher base, growth will moderate to 25% in 4QFY11. We are keeping FY11-12 growth estimates unchanged at 25%.To grow 25% YoY in FY11; bank will have to grow 17% from 1HFY11 levels. Mgmt maintained its loan growth guidance of 1.3x of industry growth.
- Deposits growth as picked up during the quarter with growth of 6% QoQ and 36% YoY (on a lower base). The proportion of wholesale deposits (calc) remained stable at 45% QoQ however, higher than 40% a year ago.
- CASA growth on average daily basis stood at 36%, SA growth stood at 41% YoY and CA growth was 28% YoY. Reported CASA ratio stood at ~40% (stable QoQ)
Strong core operating profit growth of 27% YoY and adjusted growth of 31% YoY
- Trading profits declined during the quarter to Rs1.1b vs Rs2b in 1QFY11 and from Rs2.2b in 2QFY10
- Operating expenses increased 28% YoY and 10% QoQ to Rs11.6b, which is ~6% higher than our estimates. Other operating expense increased ~17% QoQ as branch and ATM expansion accelerated during the quarter. Bank increased its reach to 1,103 branches & extension counters and 4,846 ATMs.
- Cost to Core income ratio has remained stable QoQ and YoY at 46%.
- While we remain cautious about the asset quality, we believe strong core operating profits growth will help the bank to absorb the higher credit cost. Nevertheless, we expect the NPA provisions to remain flat (on a higher base) on a YoY basis and credit cost to decline to 1.2% vs 1.5% a year ago on back of lower slippages ratio of 1.75% vs 2.2% a year ago.
- We expect the bank to report a loan growth of ~25% CAGR and fee income growth of ~22% over FY10-12. In our view, core operating profitability and fall in credit cost will drive the earnings growth in FY11.
- We upgrade our profit estimates by 1% for FY11 and 3% for FY12, to factor in higher NII growth however, partially compensated by increase in operating expense.
- We estimate BV of Rs460 and Rs541 in FY11 and FY12 respectively. We expect EPS to be Rs79 in FY11 and Rs100 in FY12.
- Stock trades at 3.4x FY11E BV, 2.9x FY12E BV and 20x FY11E EPS, 16x FY12E EPS. We expect RoE of ~19% in FY11 and ~20% in FY12 and RoA of ~1.6% over FY10-12.
- Maintain Buy with FY12 based revised target price of Rs1,730 (3.2x FY12 BV), 11% upside from current levels.
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