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Axis Bank Ltd Overweight
AXBK.BO, AXSB IN
Strong 3Q FY11; maintain Overweight
• Strong 3Q: Axis Bank reported very strong 3Q FY11 with net profit of
Rs8.9B, up 36% y/y and much higher than our and consensus estimates.
Positive margin surprise, stronger-than-expected loan growth, and lower
credit costs let to the large profit beat. Overall, 3Q FY11 surprised on
most parameters with a strong improvement in asset quality.
• Margin suprises: ~13bp q/q improvement in margin to ~3.8% was a
positive surprise. Increase in PLR/base rate and improvement in CASA
helped margins. We expect margins to moderate from 3Q FY11 levels as
fund costs are expected to catch up with lending rates. Management is
also cautious, indicating NIMs of 3.4-3.6%.
• Loan growth strong: Loan growth was very strong at 46% y/y (12%
qoq) due to strong disbursements across categories except SMEs. Credit
growth should remain strong, with ~28-30% credit growth expected by
management in FY11.
• Asset quality improvement: Asset quality improved substantially, with
just ~1.1% of gross slippage in 3Q vs >2.0% in FY10 and 1.6% in 1H
FY11. Thus credit costs came off from 1.5% in FY10 and 1.1% in 1H
FY11 to ~80bp in 3Q FY11. Overall asset quality has improved but
telecom exposure/Lavassa remains a concern.
• Maintain Overweight: Current valuations at 2.4x FY12E book do
factor in margin risks, in our view, and we thus maintain our Overweight
recommendation given the strong loan growth and asset quality
improvement. But Axis is not among our top picks – we expect its high
wholesale deposit dependence and sensitive exposure, such as telecom,
to have an impact on near-term stock performance. In spite of the large
profit beat, we keep our estimates unchanged as margins are likely to
moderate in the next quarter. Key risks are continued tight liquidity
beyond April and asset quality issues from high telecom exposure.
Margins surprise due to higher LDRs
Margins surprised with a 13bp q/q expansion to 3.81% from 3.68% in 2Q FY11.
Though quarter-end LDR increased to 79% from 70% in 2Q11, average LDRs
increased by only 100bp and hence margin improvement was a function of PLR/base
rate increase taken. The CASA ratio improved to 42.3% with 27% y/y growth. With
little room left in increasing LDR and a sharp increase in wholesale deposit rates, we
expect margins to moderate from current levels. Management did indicate also that
margins would moderate and have indicated a range of 3.4-3.6% for margins over the
next few quarters.
Loan growth strong
Loan book was very strong with a ~46% y/y increase, to some extent due to a low
base in 3Q FY10. Loan growth was strong at >30% in all segments except SME
where loan growth was slow at 3%. Management expects loan growth of ~28-30% in
FY12, which would be marginally higher than our estimate.
Strong improvement in asset quality
Asset quality has improved substantially with just ~Rs3.3bn of gross slippage in this
qtr (1.1% of advances) v/s >2.0% gross slippages in FY10 and 1.6% slippages in
1H11. Thus credit costs has come off from 1.5% in FY10 and 1.1% in 1H11 to
~80bps in 3Q11. Management expects the positive asset quality momentum to
sustain. MFI exposure at <1% is reasonable but telecom exposure especially towards
2G/3G licenses is high at 6% of advances and is a medium term concern.
Other highlights
Fee income: Core fee income growth was robust 21% y/y. Large and mid-size
corporate, treasury and retail fees showed a strong trend with >20% y/y growth.
Management expects fee income growth to be maintained at 20-25% y/y.
Operating costs: Operating costs increased 27% y/y with the cost-to-income ratio
constant at 42%. Axis has been adding aggressively to its branch network and that
will keep opex growth elevated.
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