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Axis Bank Q3FY11 Result Update; Upgrade as concerns on slippages allayed; Hold; Target: Rs1,300
n Axis Bank (AXSB) Q3FY11 earnings at Rs8.9bn was better than our as well as street expectation driven by better than expected NIMs and NII
n Key highlights: (1) NII growth of 28.5% led by 45.7% growth in advances (2) 13bps qoq expansion in NIMs and (3) lower slippage rate during the quarter to 1.1%
n We believe that NIMs may contract by 12-15bps in Q4FY11 due to PSL loans but our key concerns on NPAs and provisions are allayed
n With slippages coming under control we believe that AXSB could trade at its historic average valuations at 2.5x 1-year forward. Upgrade to HOLD with TP of Rs1,300
NII growth and NIMs above expectation…
AXSB’s NII has grown by 45.7% yoy to Rs17.3bn, ahead of our expectation driven by
45.7% yoy growth in advances and 13bps expansion in NIM’s at 3.8%.
…As average deposit growth at just 3% qoq
We believe that the NIMs during the quarter could have been maintained as the balance
sheet growth during the quarter could have been back ended and also funded through
(1) borrowings from RBI and (2) partial reduction in the investment portfolio.
If one adjusts for the increased borrowings and reduction in investment portfolio, the
CDR works out to 74% compared to reported CDR of 79%.
With average deposit growth during the quarter limited to 3% qoq (of which term
deposits could have been even lower), the cost of funds has risen by just 4bps qoq.
NIMs can come down by 12-15bps next quarter
We believe that AXSBs NIMs can drop by 12-15bps next quarter as the bank accelerates
the deposit growth and also driven by the pressure from PSL loans (seasonal
phenomenon).
Advances growth strong at 45.7%; can slow down in Q4FY11 to ~30%
The advances grew by a 45.7%yoy (11.7%qoq) to Rs1.2tn during Q3FY11 driven by sharp
growth in corporate loans, mortgages and a one-off opportunity in the personal loans
segment.
However, we expect the loan growth to slow down to ~30% in Q4FY11 driven by base
effect as large part of last year’s loan growth came in fourth quarter.
Cutting term deposits helps improve deposit profile
During the quarter, CASA mix improved by 77bps sequentially to 42.3% as the bank shed
off some of the term deposits.
Advances growth reflects in composition of fee income
As the advances in corporate and retail segment grew sharply, the similar trend was
reflected in fee income. The fee income grew by 14% qoq, led by 18.5% qoq growth in
corporate banking and 23.9%qoq growth in retail banking.
Lower slippages and improving PCR – a positive
The slippages at Rs3.3bn were a positive as the slippage rate slowed down to 1.1% from
1.5% in FY10 and 1.4% in H1FY11. As the bank has not written back much of the
provisions on the upgradations/recoveries, the provision cover also improved further by
400bps to 74%.
Valuation and view
Our negative view on AXSB was on back of higher slippages and resultantly required
provision expenses. The reduction in slippage rate during the quarter and management
guidance of it remaining at current level is comforting. We believe that with reduction in
slippages, the stock can trade at 5-year average valuations of 2.5x one-year forward
valuations. We upgrade the stock to HOLD with a price target of Rs1,300
Two things which could still work against AXSB are (1) more than expected pressure on
NIMs which are currently highest ever for the bank and (2) higher exposure to telecom
sector (6% of loans) which includes loans against licenses.
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