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Axis Bank's 3QFY11 PAT grew 36% YoY to Rs8.9b (10% higher than our estimate of Rs8.2b), led by strong loan growth,
improvement in margins, and improving asset quality. Key highlights are:
Loans grew 46% YoY (on a base of 13% YoY growth in 3QFY10) and 12% QoQ to Rs1.23t, led by large corporate
loans.
Improvement in CD ratio and higher yield on funds led to sharp improvement in margins by 13bp QoQ to 3.81% v/s
our expectation of 10bp QoQ decline. The management guided 15-20bp QoQ decline in margins in 4QFY11, led by
higher cost of funds. As a result, FY11 margins are likely to be ~3.7% v/s 3.75% in 9MFY11.
CASA growth was strong at 36% YoY on an average daily basis; average daily CASA ratio stood at ~41%.
Slippages stood at Rs3.3b, leading to annualized slippage ratio of 1.3%. This includes slippages of Rs260m from
restructured loans. During the quarter, the bank added restructured loans worth Rs1.63b; Rs250m turned into NPA
and Rs0.8b was repaid from the restructured pool.
GNPA increased 9% QoQ in absolute terms due to lower write-offs. PCR (calculated) improved to 74% v/s 70% a
quarter ago. NNPA declined 6% QoQ in absolute terms. Including prudential write-offs, PCR stood at 82.7% v/s
80.2% a quarter ago.
The bank's capital adequacy ratio (CAR) stood at 13.8%; tier-I ratio stood at 10.2% (including 9M profits). The
management has guided that as tier-I ratio reaches 8.5-9%, they may look to raise capital (likely in CY12).
Valuation and view: We upgrade our profit estimate by ~3% for FY11 to factor in higher NII growth. We estimate BV at
Rs462 for FY11 and Rs542 for FY12. The stock trades at 2.3x FY12E and 1.9x FY13E BV, and at 12.6x FY12E and
10.6x FY13E EPS. We expect RoE of 19-20% in FY11-13 and RoA of ~1.6% over FY11-13. Maintain Buy with a target
price of Rs1,625 (3x FY12E BV) - 30%+ upside.
Strong balance sheet growth YoY on a lower base
Loans increased by 46% YoY and 12% QoQ in 3QFY11. Growth was driven by (1) large
corporate loans, which grew +11% QoQ, (2) agri loans, which grew +19% QoQ, and (3)
SME and retail loans, which grew +20% QoQ. On a YoY basis, corporate loans grew
~70%, agri and retail grew ~35% while SME loans remained flat. In 3QFY11, the proportion
of personal loans in overall retail loans grew to 16% v/s 8% a quarter ago. During the
quarter, the bank financed personal loans for government housing schemes which is likely
to run off in next two quarters. This proportion contributed ~18% of the incremental
growth.
While reported loan growth over 1Q-3QFY11 is very strong at 35%+ due to lower base,
growth will moderate to 28-30% in 4QFY11 on a higher base. We have increased our
estimate of loan growth to 27.5% in FY11 v/s 25% earlier and have kept FY12-13 growth
estimates unchanged at 25%. To grow 27.5% in FY11, the bank will have to grow ~8%
from 9MFY11 levels.
On reported basis, deposits were flat QoQ at Rs1.56t and grew ~37% YoY (on a lower
base). The proportion of wholesale deposits (calculated) remained stable at ~43% QoQ
but higher than 35% a year ago. CASA growth on average daily basis stood at 36%, SA
growth stood at 35% YoY and CA growth was 38% YoY. Reported CASA ratio stood at
~41% (v/s 40% a quarter ago).
Adjusted fees grew 25% YoY
Reported fee income (including treasury fees) grew ~20% YoY (and 14% QoQ), driven
by higher corporate fees (+36% YoY and +18% QoQ, indicates increased sanctions / nonfund-
based activity). While large and mid-corporate fee income is strong, muted growth in
agri and SME division (down 6% YoY) and business banking (down 5% YoY) disappointed.
The bank had changed the policy of recognizing commission income on guarantees (from
upfront recognition when guarantee becomes due to pro-rata basis over the period of
guarantee). As a result, other/fee income in 3QFY10 was higher by Rs280m. Adjusted for
this change in accounting policy, fee income grew ~25% YoY. Going forward, we believe
fee income growth would roughly track asset growth; we model fee income CAGR of
~23%.
Improvement in margins - a positive surprise
Margins surprised us positively, with 13bp QoQ improvement to 3.81% despite cost of
funds increasing 4bp QoQ. While on a reported basis, CD ratio increased to 79% from
71% a quarter ago, the bank has reported average daily CD ratio of 72-73% (largely
stable QoQ). Strong traction in CASA deposits, improved yield on funds (due to change in
PLR and base rate) led to improvement in margins QoQ. On a reported basis, we expect
the bank to report 15-20bp decline in margins for 4QFY11. Still, FY11 blended margin
decline over FY10 is unlikely to be more than 5bp.
Asset quality surprised positively
Axis Bank reported gross NPAs of 1.09% (down 3bp QoQ) and net NPAs of 0.29%
(down 5bp QoQ). In absolute terms, reported gross NPAs increased 9% QoQ due to
lower write-offs and net NPAs declined 6% QoQ led by improvement in PCR (calculated)
to 74% from 70% a quarter ago. Provision coverage including prudential write-offs stands
at ~82% v/s ~80% a quarter ago.
Slippages during the quarter stood at Rs3.3b, leading to annualized slippage ratio of 1.3%
v/s 1.65% in 1HFY11 and 2.2% in FY10. Slippages during the quarter include slippages of
Rs260m from restructured loans. While the bank has added Rs1.63b worth of loans to
restructured category, Rs260m have slipped and Rs800m were repaid. On a QoQ basis,
net restructured loans have increased by Rs560m. Of the gross level of peak restructured
loans of Rs32b, Rs5.85b (~18% of the restructured loans) have already slipped into NPA
category. Outstanding standard restructured loans stood at Rs21.2b (~1.7% of the loan
book).
Valuation and view
Strong loan growth, improvement in margins and better asset quality are some of the key
positive surprises. While we believe some stress on asset quality still prevails, strong core
operating profits growth will help the bank to absorb higher credit cost.
We expect the bank to report a loan CAGR of ~25% and fee CAGR of ~23% over FY11-
13. We upgrade our profit estimate by ~3% for FY11, to factor in higher NII growth. We
estimate BV of Rs462 in FY11 and Rs542 in FY12. We expect EPS to be Rs81 in FY11
and Rs98 in FY12. The stock trades at 2.3x FY12E and 1.9x FY13E BV, and 12.6x
FY12E and 10.6x FY13E EPS. We expect RoE of 19-20% and RoA of ~1.6% over
FY11-13. Maintain Buy, with a target price of Rs1,625 (3x FY12E BV) - 30%+ upside.
Recent developments
Axis Bank has acquired the broking and IB business of
Enam Securities though share swap in the ratio of 5.7:1,
leading to effective dilution of 3.3% of the enlarged
equity capital base.
Valuation and view
We expect bank to report a loan CAGR of ~25% and
PAT CAGR of 20% over FY11-13.
We expect RoE of 19-20% in FY11-13 and RoA of
~1.6% over FY11-13.
Stock trades at 2.3x FY12E BV and 1.9x FY13E BV
and 12.6x FY12E EPS, 10.6x FY13E EPS. Buy.
Sector view
Loan growth continues to remain strong however rising
inflation and increasing interest rates are the near term
headwinds for the sector.
Our Economist expects current tightness in liquidity to
start easing in 4QFY11 thus allaying the pressure of
significant NIMs compression.
We believe that margins going ahead would start
compressing but gradually. With strong loan growth and
high CD ratio there is a strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
Company description
Axis Bank is a private sector bank in India, with a balance
sheet size of Rs2.06t. Promoted by UTI in 1994, it has a
countrywide presence through 1,120 branches and extension
counters across 734 locations and 5,303 ATMs. With assets
clocking 40% CAGR and PAT clocking 47.6% CAGR over
the past 10 years, Axis Bank has emerged as one of the
best run banks in India.
Key investment argument
Higher than industry average loan growth with ability
to sustain NIM of ~3.5% augurs well for the core
operations of the bank.
The bank's key strengths are its ability to grow CASA
deposits (CAGR of 41% over FY05-10) and diversified
fee income (CAGR of 50% over FY05-10).
The bank has built a strong retail network on the
platform of best technology and quality staff.
Key investment risks
Higher than expected deterioration in asset quality due
to fast loan growth (46% CAGR over FY05-10) in the
past.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Axis Bank's 3QFY11 PAT grew 36% YoY to Rs8.9b (10% higher than our estimate of Rs8.2b), led by strong loan growth,
improvement in margins, and improving asset quality. Key highlights are:
Loans grew 46% YoY (on a base of 13% YoY growth in 3QFY10) and 12% QoQ to Rs1.23t, led by large corporate
loans.
Improvement in CD ratio and higher yield on funds led to sharp improvement in margins by 13bp QoQ to 3.81% v/s
our expectation of 10bp QoQ decline. The management guided 15-20bp QoQ decline in margins in 4QFY11, led by
higher cost of funds. As a result, FY11 margins are likely to be ~3.7% v/s 3.75% in 9MFY11.
CASA growth was strong at 36% YoY on an average daily basis; average daily CASA ratio stood at ~41%.
Slippages stood at Rs3.3b, leading to annualized slippage ratio of 1.3%. This includes slippages of Rs260m from
restructured loans. During the quarter, the bank added restructured loans worth Rs1.63b; Rs250m turned into NPA
and Rs0.8b was repaid from the restructured pool.
GNPA increased 9% QoQ in absolute terms due to lower write-offs. PCR (calculated) improved to 74% v/s 70% a
quarter ago. NNPA declined 6% QoQ in absolute terms. Including prudential write-offs, PCR stood at 82.7% v/s
80.2% a quarter ago.
The bank's capital adequacy ratio (CAR) stood at 13.8%; tier-I ratio stood at 10.2% (including 9M profits). The
management has guided that as tier-I ratio reaches 8.5-9%, they may look to raise capital (likely in CY12).
Valuation and view: We upgrade our profit estimate by ~3% for FY11 to factor in higher NII growth. We estimate BV at
Rs462 for FY11 and Rs542 for FY12. The stock trades at 2.3x FY12E and 1.9x FY13E BV, and at 12.6x FY12E and
10.6x FY13E EPS. We expect RoE of 19-20% in FY11-13 and RoA of ~1.6% over FY11-13. Maintain Buy with a target
price of Rs1,625 (3x FY12E BV) - 30%+ upside.
Strong balance sheet growth YoY on a lower base
Loans increased by 46% YoY and 12% QoQ in 3QFY11. Growth was driven by (1) large
corporate loans, which grew +11% QoQ, (2) agri loans, which grew +19% QoQ, and (3)
SME and retail loans, which grew +20% QoQ. On a YoY basis, corporate loans grew
~70%, agri and retail grew ~35% while SME loans remained flat. In 3QFY11, the proportion
of personal loans in overall retail loans grew to 16% v/s 8% a quarter ago. During the
quarter, the bank financed personal loans for government housing schemes which is likely
to run off in next two quarters. This proportion contributed ~18% of the incremental
growth.
While reported loan growth over 1Q-3QFY11 is very strong at 35%+ due to lower base,
growth will moderate to 28-30% in 4QFY11 on a higher base. We have increased our
estimate of loan growth to 27.5% in FY11 v/s 25% earlier and have kept FY12-13 growth
estimates unchanged at 25%. To grow 27.5% in FY11, the bank will have to grow ~8%
from 9MFY11 levels.
On reported basis, deposits were flat QoQ at Rs1.56t and grew ~37% YoY (on a lower
base). The proportion of wholesale deposits (calculated) remained stable at ~43% QoQ
but higher than 35% a year ago. CASA growth on average daily basis stood at 36%, SA
growth stood at 35% YoY and CA growth was 38% YoY. Reported CASA ratio stood at
~41% (v/s 40% a quarter ago).
Adjusted fees grew 25% YoY
Reported fee income (including treasury fees) grew ~20% YoY (and 14% QoQ), driven
by higher corporate fees (+36% YoY and +18% QoQ, indicates increased sanctions / nonfund-
based activity). While large and mid-corporate fee income is strong, muted growth in
agri and SME division (down 6% YoY) and business banking (down 5% YoY) disappointed.
The bank had changed the policy of recognizing commission income on guarantees (from
upfront recognition when guarantee becomes due to pro-rata basis over the period of
guarantee). As a result, other/fee income in 3QFY10 was higher by Rs280m. Adjusted for
this change in accounting policy, fee income grew ~25% YoY. Going forward, we believe
fee income growth would roughly track asset growth; we model fee income CAGR of
~23%.
Improvement in margins - a positive surprise
Margins surprised us positively, with 13bp QoQ improvement to 3.81% despite cost of
funds increasing 4bp QoQ. While on a reported basis, CD ratio increased to 79% from
71% a quarter ago, the bank has reported average daily CD ratio of 72-73% (largely
stable QoQ). Strong traction in CASA deposits, improved yield on funds (due to change in
PLR and base rate) led to improvement in margins QoQ. On a reported basis, we expect
the bank to report 15-20bp decline in margins for 4QFY11. Still, FY11 blended margin
decline over FY10 is unlikely to be more than 5bp.
Asset quality surprised positively
Axis Bank reported gross NPAs of 1.09% (down 3bp QoQ) and net NPAs of 0.29%
(down 5bp QoQ). In absolute terms, reported gross NPAs increased 9% QoQ due to
lower write-offs and net NPAs declined 6% QoQ led by improvement in PCR (calculated)
to 74% from 70% a quarter ago. Provision coverage including prudential write-offs stands
at ~82% v/s ~80% a quarter ago.
Slippages during the quarter stood at Rs3.3b, leading to annualized slippage ratio of 1.3%
v/s 1.65% in 1HFY11 and 2.2% in FY10. Slippages during the quarter include slippages of
Rs260m from restructured loans. While the bank has added Rs1.63b worth of loans to
restructured category, Rs260m have slipped and Rs800m were repaid. On a QoQ basis,
net restructured loans have increased by Rs560m. Of the gross level of peak restructured
loans of Rs32b, Rs5.85b (~18% of the restructured loans) have already slipped into NPA
category. Outstanding standard restructured loans stood at Rs21.2b (~1.7% of the loan
book).
Valuation and view
Strong loan growth, improvement in margins and better asset quality are some of the key
positive surprises. While we believe some stress on asset quality still prevails, strong core
operating profits growth will help the bank to absorb higher credit cost.
We expect the bank to report a loan CAGR of ~25% and fee CAGR of ~23% over FY11-
13. We upgrade our profit estimate by ~3% for FY11, to factor in higher NII growth. We
estimate BV of Rs462 in FY11 and Rs542 in FY12. We expect EPS to be Rs81 in FY11
and Rs98 in FY12. The stock trades at 2.3x FY12E and 1.9x FY13E BV, and 12.6x
FY12E and 10.6x FY13E EPS. We expect RoE of 19-20% and RoA of ~1.6% over
FY11-13. Maintain Buy, with a target price of Rs1,625 (3x FY12E BV) - 30%+ upside.
Recent developments
Axis Bank has acquired the broking and IB business of
Enam Securities though share swap in the ratio of 5.7:1,
leading to effective dilution of 3.3% of the enlarged
equity capital base.
Valuation and view
We expect bank to report a loan CAGR of ~25% and
PAT CAGR of 20% over FY11-13.
We expect RoE of 19-20% in FY11-13 and RoA of
~1.6% over FY11-13.
Stock trades at 2.3x FY12E BV and 1.9x FY13E BV
and 12.6x FY12E EPS, 10.6x FY13E EPS. Buy.
Sector view
Loan growth continues to remain strong however rising
inflation and increasing interest rates are the near term
headwinds for the sector.
Our Economist expects current tightness in liquidity to
start easing in 4QFY11 thus allaying the pressure of
significant NIMs compression.
We believe that margins going ahead would start
compressing but gradually. With strong loan growth and
high CD ratio there is a strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
Company description
Axis Bank is a private sector bank in India, with a balance
sheet size of Rs2.06t. Promoted by UTI in 1994, it has a
countrywide presence through 1,120 branches and extension
counters across 734 locations and 5,303 ATMs. With assets
clocking 40% CAGR and PAT clocking 47.6% CAGR over
the past 10 years, Axis Bank has emerged as one of the
best run banks in India.
Key investment argument
Higher than industry average loan growth with ability
to sustain NIM of ~3.5% augurs well for the core
operations of the bank.
The bank's key strengths are its ability to grow CASA
deposits (CAGR of 41% over FY05-10) and diversified
fee income (CAGR of 50% over FY05-10).
The bank has built a strong retail network on the
platform of best technology and quality staff.
Key investment risks
Higher than expected deterioration in asset quality due
to fast loan growth (46% CAGR over FY05-10) in the
past.
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