Royal Bank of Scotland : Axis Bank – Time to switch

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Axis Bank has high levels of CASA, but also a high proportion of term deposits (>Rs 10m).
The rise in wholesale cost of funds and flattening of the yield curve will likely put pressure on
the bank's margins going forward. We factor in a higher cost of equity and downgrade the
stock to Sell with a TP of Rs1,172.
High CASA, but also higher proportion of bulk deposits
As at September 2010, low-cost deposits (current and savings accounts, or CASA)
constituted about 40% of total deposits at Axis Bank. Term deposits of over Rs10m
constituted about 45% of the total deposits. The remaining 15% comprised term deposits that
are less than Rs10m. One-year wholesale borrowing rates have gone up by 100-125bp qoq
(25-30bp mom and 325-350p yoy). Given the mix of term deposits, we believe the cost of
funds will rise faster than expected at Axis Bank.

Near-term margins to remain stable; we lower margins over FY12-13F
Axis Bank has increased its prime lending rate (PLR) by 75bp to 15.5% and its base rate by
50bp to 8.0% in the past three months. The bulk of Axis Bank’s loan book is linked to the
PLR, and we believe the increase in cost of funds will be passed on, translating to largely
stable margins in the near term. However, we observe that the yield curve has flattened and
the cost of wholesale borrowing is 100-125bp higher than retail term deposit rates. Going
forward, we expect net interest margins (NIM) to come under pressure and thus cut our NIM
forecast by about 10bp over FY12-13F.


Axis Bank-Enam securities deal: we factor in equity dilution in our estimates
Axis Bank has agreed with Enam to combine their Investment banking and equities businesses
(including related businesses such as distribution of financial products and loans against shares).
Axis Bank will pay about Rs20.6bn to the promoters of Enam in the form of shares, resulting in a
3.37% equity dilution at Axis Bank. We now factor this dilution into our FY12 estimates.
No material change in estimates: we build in a higher COE and downgrade to Sell

We factor in margin decline in FY12F and thereby cut our FY12F net profit by 4.3%. Further, we
factor in a higher cost of equity of 14% (from 13%) given the increase in interest rates. We arrive
at an EVA-based™ target price of Rs1,172, at which the stock would trade at 13.2x FY12F
earnings and 2.4x FY12F adjusted book value. Downgrade to Sell.