CLSA:: buy Axis Bank: Positive surprise

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Axis bank: Positive surprise


Axis' 3QFY11 result (net profit up 36%YoY) was ahead of estimates with
treasury gains being high and NPL formation falling. We were positively
surprised by acceleration in loan growth (46%YoY), especially with an
expanding NIM (up 13bps QoQ to 3.8%). Margins are likely to contract
~20bps in 4Q, partly due to rising share of overseas loans. The widening
gap between fee growth and loan  growth will limit RoA expansion.
Raising earnings by 2-3% for FY11-13; Maintain BUY.

Profit better than estimates – most parameters surprise positively
In 3QFY11, Axis reported 36%YoY growth in net profit supported by a) higher
treasury gains, b) healthy top line and c) fall in credit costs. Its strong deposit
franchise (CASA of 42%) enabled Axis  to report a healthy NIM of 3.8% (up
13bps QoQ) despite the sharp rise in term deposit costs in 3Q. Loan growth of
46% YoY was partly due to a low base and is expected to moderate to ~30%
in 4Q. NIMs are likely to contract 15-20bps in 4Q due to a) rising share of
international loans where spreads are 100bps (up 87% YoY to 17% of loans)
and b) moderation in CASA growth.
Fee growth lag to loan growth is expanding
Axis has had a strong fee growth trajectory with fee growth leading the loan
growth in 7 of past 12 quarters. However in recent quarters gap between the
fee growth and the loan growth has been expanding and this could lead to
RoA stabilising at 1.6%. 70% of fees are non-retail and rising competition in
corporate fees (especially debt syndication, where Axis is a leader) will put
pressure on fee growth. Scaling up of retail fees would be a key to support
healthy fee growth.
NPL formation moderates, but still high
In 3QFY11, Axis Bank’s fresh slippage ratio (as a % of previous years’ loans)
moderated to 1.6% (v/s 2.2% in past two quarters). While this was positive,
the NPL formation ratio still remains higher than average for past five years
(1.3%) and needs to moderate further in coming quarters. Rise in the fresh
restructuring was concerning.
Maintain BUY
Axis has underperformed Bankex on concerns of ‘higher share of wholesale
funding’. The positive margin surprise in 3Q results allays these concerns and
may lead to some re-rating. We remain BUYers of the stock with price target
of Rs1,550 (have lowered target due to rise in cost of equity). Earnings are
estimated to deliver Cagr of 26% (FY10-13) with RoE rising to 20% by FY12.
Axis management mentioned a likely capital raising in CY12.