EARNINGS REVIEW of Axis Bank by Goldman Sachs

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Above expectations on lower provisions, core in line
What surprised us

Axis Bank reported 2QFY11 net profit of Rs7.35 bn, up 38% yoy and 7% above
our estimate on lower provisions (38% below GSe). Key highlights: (1) Loan
growth was strong (+36% yoy but just 2% qoq), driven by loans to large- and
mid-sized corporates (up 59% yoy). Management expects industry credit
growth yoy at <20% and Axis growth to moderate from 36% currently to
around 26%-27% in FY11 (1.3X industry). (2) NII growth at 40% yoy was
supported by growth in balance sheet, while NIMs declined 3 bp qoq to
3.68%—management maintained guidance of 3.5% for FY11. Around 43.5% of
Axis' 2Q deposits were institutional and we believe this could lead to margin
pressure, unless it increases lending rates. (3) Fees grew in line by 18% yoy,
driven by the corporate business as retail fees declined 89% yoy. Management
stated this was because of the new insurance tie-up and will likely pick up in
subsequent quarters. Capital gains declined 52% yoy, a reflection of weak debt
market and a one-off last year. (4) Gross NPA rose 20% yoy, but just 2% qoq to
Rs13.6 bn (1.2% of loans), while net NPLs remained low at 0.37%. The bank’s
incremental slippage ratio was 2.2%, including Rs900 mn or 4.2% of opening
restructured loans, that slipped into NPLs.
What to do with the stock
We fine-tune FY11E-FY13E EPS by 1.2%/1.6%/3.2% to factor in lower
provisions. We remain Neutral and raise our 12-month target price to
Rs1,450 (vs. prior Rs1,380) as we roll forward BVPS by one quarter to
September 2011. We note that our implied valuation would be Rs1,510 if
we were to base it on our March 2012E BVPS. Key risks: Higher
dependence on bulk term deposits