RBS says Hold Axis Bank : Time for a breather

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Axis Bank
Time for a breather
The 2QFY11 performance was slightly better than expected. Going forward, we
believe the bank's asset-liability repricing mismatch in 2HFY11 may constrain
margins given the rising interest rate environment. We increase our FY11-12
earnings estimates and raise our target price to Rs1562. Maintain Hold.



2QFY11: Core earnings better than we expected; net profit largely in line
Axis Bank’s NII grew 41% yoy in 2QFY11 (+6.7% qoq) on the back of 37% yoy loan growth
(+1.8% qoq), itself largely driven by a 14bp yoy margin expansion to 3.68% (-3bp qoq). Fee
income increased a moderate 18% yoy, partly driven by a decline in third-party product sale
fee business. Treasury income’s contribution to PTP fell to 9.8% from 17.5% in 1QFY11 (see
Chart 2). Operating expenses were higher yoy, partly led by 13-14% inflation in wages and
branch expansion costs. NPL provisions were 34bp of loans in 2Q (vs 29bp in 1Q). On
balance, net profit of Rs7.4bn was marginally better than we forecast.
NIMs likely to come under pressure, partly due to asset-liability repricing mismatch
As per the FY10 annual report, about Rs318bn in liabilities and Rs190bn in assets are due
for repricing in 2HFY11. Given the rising interest rate environment, we think this mismatch is
likely to put pressure on net interest margins in 2HFY11. In addition, bulk deposits (average
maturity of six to nine months) account for about 44% of total deposits as of September
2010. We thus expect the bank’s cost of funds to rise faster than the market generally
expects, broadly in line with our sector view. Management has guided for an NIM of 3.5% in
FY11 (vs 3.75% in FY10).
Loan growth likely to moderate; management guides for stable asset quality
Loans grew about 37% yoy as of Sept 2010 (+6.0% to date in 1HFY11), largely driven by yoy
growth of 59% in corporate loans, 12% in SME loans and 17% in retail loans. Slippages
(2.2% of loans on a 1-year lagging basis) remained largely stable qoq. Management expects
no more than a moderate easing in delinquencies in the medium term. Cumulative
restructured assets were Rs20.6bn as of Sept 2010 (1.9% of loan book).
We increase our earnings estimates, raise our target price to Rs1,562, maintain Hold
We increase FY11-12F net profit by about 10%, driving a higher EVA™ based target price of
Rs1,562. At our target price, the stock would trade at 3.0x FY12F adjusted book value.