Macquarie Research: Axis Bank: Better-than-expected quarter but concerns remain

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Axis Bank: Better-than-expected quarter but concerns remain

Event
 Axis Bank reported 2Q11 net profit of Rs7.4bn, which was up 38%YoY and
9% above our estimate. The earnings surprise was mainly driven by the top
line, which was partially offset by higher opex and provisions. We revise our
target price to Rs1,450 from Rs1,300 and maintain our Neutral rating.
Impact
 Loan growth healthy but should decline. Loan growth was healthy on a
YoY basis, at 36%, and ahead of our estimates. Growth, however, is still not
broad-based, coming mainly from infrastructure, cement and metals. Retail
lending was moderate at 18% YoY. Management expects loan growth to
decline to around 25% for FY11, which is in line with our estimate.
 Pressure on margins. Management is seeing wholesale deposits reprice
~200bp upwards, a quantum which we believe may not be compensated by
higher loan rates in a moderate-growth environment. Around 40% of deposits
for Axis are wholesale, and 55% of total deposits are repriced within one year
compared to only 30% of assets, amplifying the impact of higher deposit
rates. However, in the quarter there was a strong jump in interest income from
investments, which has helped nullify the cost but may not be sustainable.
NIMs were flat QoQ at 3.7%, but management sees some downside to these.
 Good performance on fees. Fees were up 18% YoY on a higher base in
2Q10 and were ahead of our expectations. Management is seeing strong
traction in loan syndication fees, which we expect to continue. Third-party
product fees have been lukewarm, but management expects these fees to
pick up.
 Asset quality stable. Asset quality was stable, with new delinquencies at
1.6% of loans, remaining flat QoQ. The SME portfolio remains under stress.
However, retail delinquencies have declined. Provision coverage improved
further to 80% from 77% in 1Q11, without technical write-offs.
Earnings and target price revision
 We have marginally increased our FY11 and FY12 estimates by 4% and 7%,
respectively, on the back of higher fees. Our TP increases to Rs1,450 from
Rs1,300 on the back of higher FY12E ROE, resulting in a higher multiple.
Price catalyst
 12-month price target: Rs1,450.00 based on a Gordon Growth Model
methodology.
 Catalyst: Continued momentum in loan growth.
Action and recommendation
 We maintain our Neutral rating. While the performance in the quarter was
good, we are mindful of near-term headwinds. Accordingly, we believe the
stock is fairly priced in at 2.9x FY12E BV.