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Axis Bank reported NII of INR 17.3 bn (up 7.3% Q-o-Q, 28.5% Y-o-Y), ahead of our
estimate (INR 16.1 bn), aided by a strong 13bps expansion in NIMs (against
expectation of margin decline) and 11.7% Q-o-Q growth in loan book. Margins drew
support from higher average CASA balances and loan book re-pricing during the
quarter. Following the trend set in the past few quarters, the bank continued to grow
in the large corporate segment, reducing its SME exposure. Incremental slippages
declined during the quarter to INR 3.34 bn (1.1%) against INR 4.46 bn (1.6%) in
Q2FY11. Headline asset quality improved with gross NPA ratio declining (marginally)
to 1.09% and net NPA lower at 0.29%; provision coverage improved sequentially by
4% pts to 74%. Average current account and savings account balances grew 13%
and 6%, respectively, Q-o-Q.
�� Margins surprise positively, up 13bps Q-o-Q
NIMs improved 13bps Q-o-Q to 3.81% (beating our estimates by a margin)
supported by: (a) 200bps improvement in average CASA ratio (42%) that
contained increase in cost of funds to 4bps despite 33bps increase in average
cost of term deposits; and (b) benefit of asset re-pricing on account of revision
in PLR and base rate in October and December. While incrementally higher
average CASA ratio supported margins to the extent of 8bps, asset re-pricing
benefit accounted for additional 9bps margin expansion. Though CD ratio stood
at 79% at end of Q3FY11, average CD ratio was at 73% during the quarter
(Q2FY11: 72%); hence, against the expectation, CD ratio made limited
contribution to NIMs incrementally. Given the stretched CD ratio and SLR
touching the threshold, incremental growth will be funded by expansion in
deposits, leading to margin compression. However, on the back of strong
performance in Q3FY11, margins are likely to close above our initial estimates
for FY11.
�� Outlook and valuations: maintain ‘BUY’
During the quarter, Axis Bank surprised positively with higher-than-expected
loan book growth and NIMs, while asset quality held on. However, going
forward, with CD ratio touching a high of 79%, further loan book growth shall
warrant an expansion in deposits. In the rising interest rate environment, we
expect NIMs to come under pressure contracting by 12bps in Q4FY11 and 19bps
over FY12. However, the bank will be able to maintain ROA of order of ~1.67%
over FY11-13 and ROE of 20% on account of lower NPL provisioning and higher
operating efficiency. The bank is currently trading at 2.3x FY12E adjusted book
and 12x FY12E earnings. We maintain ‘BUY’ recommendation on the stock and
rate it ‘Sector Outperformer’ on relative basis.
�� Strong momentum maintained in large corporate segment
Over the past few quarters, Axis Bank has been leveraging its improving liability
franchise and strong pricing power to increase exposure in the large corporate segment
with minimal impact on margins. In Q3FY11, the bank posted 10.7% Q-o-Q growth in
corporate advances (70% Y-o-Y). Incrementally, working capital loans form 50-55% of
loan book (against 35-40% YTD). Tractions remained strong in the retail segment (20%
Q-o-Q, 33.4% Y-o-Y), though management maintained its focus on secured lending
(housing and auto). Loan book growth spiked in the personal loan segment, as the bank
lent INR 25 bn (short term) for application money for flats. Growth in the SME book
(1.4% Q-o-Q, 3.3% Y-o-Y) continued to remain below the overall loan book growth
(11.7% Q-o-Q, 45.7% Y-o-Y). Management expects to grow loan book at 28-30% over
FY11, higher than the initial estimate of 25%.
�� Asset quality shows signs of improvement
Slippages during the quarter came in at INR 3.34 bn (1.1% of advances) from INR 4.46
bn in Q2FY11 (1.6% of advances). Management expects slippages to remain (low) in
range of INR 3-4 bn over Q4FY11. Recoveries came in at INR 1.26 bn, following the
trend of the previous two quarters. Write-offs moderated during the quarter to INR 870
mn (against INR 2.8 bn average during previous two quarter), signaling relatively lower
deterioration in book. Gross NPLs increased 8% Q-o-Q to INR 14.8 bn (1.09%), while net
NPAs declined 6% Q-o-Q to INR 3.8 bn (0.29%), driving provision coverage (ex write
offs) by 4% pts to 74%. Provision coverage including write offs stood at 82.69%, while
including prudential write offs it was at 91.42%. Credit costs (with one year lag) declined
to 109bps from 182bps in Q2FY11. The bank restructured INR 1.6 bn of advances (INR
1.1 bn through CDR mechanism); outstanding restructured assets stood at INR 21.2 bn
(1.71% of advances). During the quarter, INR 60 mn of restructured book slipped, while
INR 800 mn got repaid. So far, ~23% of peak restructured book has slipped;
management maintained guidance for 25% cumulative slippages from peak restructured
book.
�� Strong fees income growth
Axis Bank’s core fees income grew 24% Y-o-Y and 12% Q-o-Q. Tracking the loan book
growth, corporate fees income grew 36% Y-o-Y and 18% Q-o-Q. On the back of strong
growth in the third party distribution (a seasonal phenomenon) and card fees, retail fees
income jumped 21% Q-o-Q and 24% Y-o-Y. Tractions continued to remain weak in
business banking and capital market segment.
�� Other highlights
• Retail deposits formed 39% of overall deposits
• Adjusted for quarterly profits, Tier I stood at 10.19% and CAD at 13.79%
• Overall exposure to BBB rated loans increased by 3% pts YTD to 25% of corporate
book, as the bank increased exposure to infrastructure sector which gets recorded in
this segment. The bank earns relatively higher yields in this segment
• Micro- finance exposure stood at INR 12 bn (<1%) of overall advances
• Risk weighted assets stood at INR 1.7 tn
�� Company description
Axis Bank is the third-largest private sector bank in India in terms of asset size, with a
balance sheet of INR 1.5 tn. It has a network of over 1000 branches and extension
counters across the country.
The bank earns substantial fee income from transaction and merchant banking activities.
The key promoter UTI-I (special undertaking) holds 24%, LIC holds 9.6%, and the rest is
widely held by FIIs and public.
�� Investment theme
Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards
corporate advances than retail (as compared with its private peers). Retail advances
contributed 20% to the total loan portfolio. Thus, it has better scope for aggressively
expanding across segments where it has a low presence. It is also spreading across
geographies and targeting presence in more than 75% of India’s districts in the next five
years. The bank’s loan book is expected to grow at a brisk pace of 25% plus in FY10-12E.
Rapidly growing franchise and new product offerings (viz., credit cards) will further drive
growth in retail fee income. The bank is also intensifying efforts to penetrate the
remittance business by aggressively spreading its international operations. Other key
contributors to fee income will be project advisory, debt syndication, and third party
distribution of insurance.
�� Key risks
Change in management may affect the pace of growth and profitability in the near term.
Deterioration of macro environment can result in higher slippages and slow down
business growth.
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