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Axis Bank (AXSB)
Banks/Financial Institutions
Delivers a perfect quarter; upgrade to BUY. Amidst a lot of perceived concerns on
margins and asset quality, Axis Bank has delivered a perfect quarter—margins are up by
13 bps qoq and net NPLs are down 5 bps qoq. The management reiterated their
positive outlook on asset quality, but expect margins to decline from 3Q levels.
Valuations have corrected sharply recently and the stock now trades at 2.3X PBR and
12X PER on FY2012E earnings. We upgrade our rating to BUY (from ADD) post this
price correction with a TP of `1,600.
Concern exaggerated; recent price correction offers a strong upside; upgrade to BUY
Axis Bank’s results have allayed a lot of concerns prevailing about margin trends and asset quality.
Margins have increased by 13 bps during the quarter, benefiting from higher CASA ratio and a
reasonable pricing power. Asset quality has improved with quarterly run rate on slippages
declining by 25% qoq. While we build margin compression in 4QFY11E and FY2012E due to rising
deposit costs, we reiterate our view that banks with high CASA will be able to manage margins
much better than other financial entities. Outlook on asset quality is positive and we expect similar
trend in future quarters as well. We maintain our positive view on the stock, on the backdrop of a
strong economic growth. Post the recent correction of 18% over past 3 months, valuations have
become very attractive. We upgrade our rating to BUY with a target price of `1,600 (30% upside).
We increase our earnings estimates marginally by 4% in FY2011E and largely maintain it for
FY2012E and FY2013E. We build in a margin compression of 10 bps in FY2012E over FY2011E.
We also reduce our loan growth marginally to 22%, on a somewhat higher loan growth in
FY2011E.
Loan growth ahead of industry; focus remains on large corporate segment
Sequential loan book growth was at 12% to `1,235 bn (46% yoy) but YTD loan growth is higher
than industry at 18.4%. Focus continues to remain on the large corporate segment which grew by
70% yoy to `637 bn. Infrastructure and finance sectors saw healthy growth while disbursements
for working capital has increased in the current quarter. Retail loans (20% of loans) grew by 33%
yoy driven mainly by housing (26% yoy growth) and personal loans (short-term application money
of `25 bn for housing). SME loans were flat during the quarter but agriculture loans grew 19%
qoq (seasonal trend). We see limited concern on the ability of the bank to grow loans at 1.3X
system growth and we build a 25% CAGR for FY2010-13E. Deposits increased by 37% yoy (flat
qoq) to `1,558 bn. CASA deposit growth remained strong (savings deposit grew 32% yoy). CASA
proportion to total deposits improved by 80 bps qoq to 42.3%.
NIMs improve 13 bps qoq, above expectations
Axis Bank’s net interest margin (NIM) was 3.8% in 3QFY11—13 bps improvement qoq and
better than our expectations as cost of funds and asset yields were nearly flat for the quarter
and CD ratio (average) for the quarter improved by about 100 bps (closing CD ratio
expanded to 79% as compared to 71% in the previous quarter). Funding costs were flat
qoq at 4.8%. NII grew 29% yoy, 5% ahead of our expectations to `16.2 bn. We are
building NIMs to decline in 4QFY11E by about 20 bps and FY2012E by 10 bps as expansion
in CD ratio from current levels is unlikely and funding costs have increased sharply in recent
times. However, we highlight that the previous rate hike of 50 bps in December is yet to
reflect fully in margins. Further the bank has taken a further rate hike of 25 bps in January
2011. Overall, we maintain our view that a tight liquidity environment would benefit banks
given their pricing power and Axis Bank can leverage it better through its higher share of
CASA deposits.
Reported asset quality trending better; slippages decline to 1.2% for the quarter
Axis Bank reported slippages at 1.2% (annualized), lower than 1.6% reported in 1HFY11.
Upgradations and recoveries remained flat qoq and the bank reported lower write-offs
during the quarter (`870 mn compared to `2.9 bn in 2QFY11). The management mentioned
that exposure to microfinance is less than 1% of overall loans. Gross NPLs were at `14.8 bn
(1.1% of loans) while net NPLs were at `3.9 bn (0.3% of loans) compared to `13.6 bn and
`4.1 bn in the previous quarter. Loan loss provisions for the quarter were at 0.8%
(annualized) compared to 1.2% in 1HFY11. We are building loan loss provisions at 1.0% for
FY2011E and 0.9% for FY2012E.
Other highlights
�� Growth in fee income was slower than overall loan growth at 21% yoy and was driven
mainly by the large corporate segment (36% yoy) and retail banking (21% yoy). Fee
income from business banking, capital markets and agri/SME banking continues to
remain under pressure. Treasury profits were at `1.3 bn compared to `1.1 bn in 2QFY11
and mainly from fixed income portfolio.
�� There was a net write-back of `146 mn, largely from the overseas investment book, even
as the bank made provisions for domestic G-Sec book.
�� Capital adequacy ratio stands comfortable at 12.5% with tier-1 ratio at 10.2%.
�� Cost-income ratio declined by 145 bps qoq to 42% mainly due to lower employee costs.
The bank opened another 17 branches and 457 ATMs, taking the total branch network
to 1,120 and ATMs to 5,303. Management highlighted that they are likely to open over
200 branches during the current fiscal. We have maintained our cost-income ratio at
about 42% levels.
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