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Axis Bank – 3QFY2011 Result Update
Angel Broking maintain Buy on Axis Bank with a Target Price of Rs1,688.
For 3QFY2011 Axis Bank registered net profit growth of 35.9% yoy to `891cr,
which was better than our estimate of `837cr mainly on account of better-thanestimated
NIMs and trading profit. Strong sequential growth in retail and large
corporate segments in both assets as well as fees, together with declining
slippages and higher provision coverage were the key positives of the results. We
maintain our Buy recommendation on the stock.
Strong operating performance continues: Advances in
creased by a robust 11.7%qoq and 45.7% yoy, while deposits marginally de-grew by 0.7% qoq (up 36.9%
yoy). The advances growth was driven by the large and mid-corporate segment
(mainly infrastructure, metals, engineering and construction), which increased
69.5% yoy. The daily average balance of savings deposits grew 35.2% yoy and
those of the current account deposits by ~38% yoy. CASA ratio improved to
42.3% in 3QFY2011 from 41.5% in 2QFY2011. As a result of improvement in
CASA, re-pricing of loans and higher CD ratio, reported NIMs expanded by 13bp
qoq to 3.81%. Consequently, net interest income (NII) recorded a healthy 7.3%
qoq and 28.5% yoy growth. For 4QFY2011, management has guided for
~15-20bp compression in NIMs on account of rise in cost of funds for the system
as a whole. The gross slippages declined to `334cr from `446cr in 2QFY2011,
indicating an annualised slippage ratio of 1.3% and lower than the slippage ratio
of 1HFY2011 (1.7%) and FY2010 (2.2%). Provision coverage ratio including
technical write-offs improved to 82.7% from 80.2% as of 2QFY2011.
Outlook and Valuation: Post the recent sharp correction, the stock is trading at
attractive valuations of 2.3x FY2012E ABV. We remain positive on the bank owing
to its attractive CASA franchise, multiple sources of sustainable fee income, strong
growth outlook and A-list management. We maintain our Buy recommendation
on the stock, with a Target Price of `1,688.
Advances witness strong traction sequentially; deposits
growth muted
During 3QFY2011, the bank’s advances registered strong growth of 11.7% qoq
and 45.7% yoy primariliy led by growth in the large and mid-corporate segment
(mainly infrastructure, metals, engineering and construction), which grew by 10.7%
qoq and 69.5% yoy, and retail loans which rose by 20% qoq and 33.4% yoy
(partially on account of one-off loans of ~`2,500cr in the personal loans
category). Agriculture loans also saw good growth, rising by 18.7% qoq and
38.7% yoy to `10,772cr. Share of large and mid-corporate loans has gone up
from 49.1% as of 3QFY2010 to 57.1% as of 3QFY2011, while share of SME loans
has declined from 19.5% as of 3QFY2010 to 13.8% as of 3QFY2011.
Sequential deposits growth based on quarter-end numbers was muted (de-growing
marginally by 0.7%). Saving account deposits grew by 3.5% qoq. On a daily
average basis, deposits grew by 3.2% qoq. On a yoy basis, the deposits growth
was a strong 36.9% on the back of 45.1% increse in term deposits and 32.1%
increase in saving account deposits. CASA deposits on a daily average basis grew
by 36.3% yoy, while saving account deposits grew by 35.2% yoy. The CASA ratio
of the bank improved to 42.3% from 41.5% in 2QFY2011, but it was lower than
45.6% registered in 3QFY2010.
On account of healthy credit growth and muted deposits growth, the CD ratio
improved substantially from 70.5% as of 2QFY2011 to 79.3% during the quarter.
However, on daily average basis, CD ratio improved from 72% as of 2QFY2011
to 73% during the quarter. The bank’s cost of funds registered a marginal increase
of 4bp sequentially to 4.8% on account of increase in cost of funds in the system as
a whole. On the back of improvement in CASA ratio, re-pricing of loans and
higher CD ratio, reported NIM expanded by 13bp qoq to 3.81% from 3.68% in
2QFY2011. For 4QFY2011, management has guided for ~15-20bp compression
in NIMs on account of rise in cost of funds for the system as a whole.
Healthy non-interest income growth
Non-interest income excluding trading profit registered a growth of 11.6% qoq
and 22.3% yoy to `1,980cr. Fee income registered a healthy 21% yoy growth to
`968cr (`800cr) during 3QFY2011, with strong contribution from the corporate
and retail segments. Fee income from large and mid-corporate credit grew 36.4%
yoy, followed by treasury (25.6% yoy) and retail business (21.3% yoy). Meanwhile
fee income from Agri & SME and business banking declined 6.5% yoy and 5.0%
yoy, respectively. The bank generated `135cr (`170cr) of trading profit during
3QFY2011, a decline of 20.6% yoy.
Asset quality improving
The gross slippages during the quarter came down to `334cr compared to `421cr
in 1QFY2011 and `446cr in 2QFY2011, indicating an annualised slippage ratio
of 1.3% and lower than the slippage ratio of 1HFY2011 (1.7%) and FY2010
(2.2%). Gross NPAs increased by 8.8% sequentially to `1,483cr, on account of
lower write-offs during the quarter. Net NPAs declined by 5.8% on a sequential
basis by `24cr to `386cr. The NPA provisions fell to `233cr from `321cr in
2QFY2011 and `304cr in 1QFY2011. The bank improved its provision coverage
ratio including technical write-offs from 80.2% in 2QFY2011 to 82.7% in
3QFY2011. Gross and net NPA ratios of the bank were stable at 1.1% and 0.3%,
respectively.
The bank restructured loans aggregating `163cr during 3QFY2011 (cumulatively
`90cr in 1HFY2011). The cumulative restructured assets increased to `2,117cr
(1.6% of gross customer assets) from `2,061cr in 2QFY2011. Out of the
cumulative restructured book, large and mid corporate credit group accounted for
~73% and the SME segment 15%, while the balance was restructured in
agriculture and capital markets. A sector-wise analysis by the bank indicates that
restructuring of textiles was the highest at 22%, followed by shipping at 21%, while
agriculture and petroleum accounted for 9% and 8%, respectively
Operating expenses rise
Operating expenses were up by 27.0% yoy on account of the 28.4% increase in
staff costs and 26.3% increase in other operating expenses. As a result of better
operating performance, cost-to-income ratio improved to 42.4% from 43.9% in
2QFY2011.
During 3QFY2011, the bank added 74 branches (taking the number of branches
opened in 9MFY2011 to 142) and 457 ATMs, taking its network size to 1,120
branches and 5,303 ATMs. The bank has plans to open ~200-250 branches in
FY2011.
Healthy capital adequacy
The bank has a healthy capital adequacy ratio of 12.5%, with tier-I capital of 8.9%
at the end of 3QFY2011. The CAR has declined sequentially due to not
considering profit during the quarter in tier-I capital as per the RBI guidelines. If the
profit for 9MFY2011 was included, then CAR would have been 13.8% with tier-I of
10.2%. Management indicated its plans to raise equity in FY2012 to ensure
sufficient capital for growing at a healthy pace. Management’s indicated comfort
zone of 8.5-9% for tier-I CAR appears to be slightly on the higher side and could
restrict RoE expansion to optimum levels.
Investment Arguments
Equity capital increased to support faster market share gains
We believe the bank’s strong capital adequacy positions it for market share gains
as the GDP and capital market activity continue to revive, with at least 500bp
higher growth than industry over FY2010-12. The bank has expanded its network
at 35% CAGR since FY2003 till-date, driving a four-fold increase in CASA market
share to 4.0% by FY2010 (20bp yoy increase in FY2010). In our view, such gains
(30-50bp every year) will continue going forward as well, especially as the network
expansion (200+ additions, about 20-25% yoy) remains strong.
Fee income continues to drive higher RoEs
Fee income contribution across a spectrum of services has been a meaningful
1.9% of assets (almost twice the level in PSBs) over FY2008-10. Further, with
corporate loan growth picking up and capital markets reviving, fee income growth
is also expected to gain traction (30% CAGR over FY2010-12), taking the
contribution to 2.0% of assets by FY2012.
NPA concerns receding
With an improving economic outlook and reducing corporate leverage, NPA
concerns are receding. Sequentially, the slippage rate has broadly been declining
(down from 2.2% in FY2010 to 1.3% in 3QFY2011). We expect NPA
provisions/average assets to decline to 0.4% by FY2012 from 0.8% in FY2010.
Outlook and Valuation
Our Target P/ABV multiple of 3.2x on FY2012 estimates, is at a 20% discount to
our Target P/ABV multiple of 4.0x for HDFC Bank, keeping in mind the relatively
higher credit and market risks. At present, Axis Bank is trading at ~30% discount
to HDFC Bank. However, we believe that going ahead as Axis Bank establishes a
longer and more credible track record of pricing and managing risks, this gap visà-
vis HDFC Bank could narrow down.
Post the recent sharp correction, the stock is trading at attractive valuations of 2.3x
FY2012E ABV. We remain positive on the bank, owing to its attractive CASA
franchise, multiple sources of sustainable fee income, strong growth outlook and
A-list management. We maintain a Buy on the stock, with a Target Price of `1,688.
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