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High CASA ratio and diversified income source - a key strength
Fall in credit cost, control over cost to income ratio to drive earnings growth
Axis Bank's key strengths have been its ability to grow CASA deposits (CAGR of over
40% over FY04-10) and diversified fee income (CAGR of over 50% over FY04-10). Unlike in
the past (2x of the industry growth), the bank is expected to grow 1.3x of the industry
growth, which will help CASA growth to maintain pace with overall deposit growth. We
expect return ratios to be strong with RoA of 1.5%+ and RoE of 19-20% over FY11-13 led by
strong core operating performance and a decline in credit costs.
Core operating performance expected to remain strong: Axis Bank is expected
to post core operating profits CAGR of 22% over FY10-13 led by 23% CAGR in NII
(backed by robust loan growth), fee income growth of 22%+ and controlled operating
expenses (C/I ratio to remain stable at 45-46%). With the well diversified fee income
source, growth can surprise positively. Operating profit CAGR is expected to be 19%
over FY10-13 due to conservative estimates on trading income and recoveries from
written off accounts. However, aggressive write offs over FY09-11 can provide positive
surprises on recoveries from written-off accounts.
Margins to moderate with an increase in bulk borrowing rates: Strong CASA
ratio, pricing power and improvement in CD ratio helped the bank to improve margins
in FY11. We expect calculated margins to improve 25bp in FY11 on a higher base
(FY10 NIM improved 15bp led by capital raising). However with increase in bulk deposit
rates, we expect margins to moderate ~20bp in FY12 and ~10bp in FY13. Axis bank
has over 40% (cal) bulk deposits in overall deposits.
Delinquencies have peaked out; fall in credit cost to drive earnings growth:
Strong loan CAGR of 50% over FY05-10 and a slow down in economic growth led to
higher slippages over FY09-10. However, over 2QFY11 and 3QFY11 the bank has
shown an improving trend on asset quality. Slippages from restructured accounts at
18% are near the peak, in our view. We expect the slippage ratio to fall to 1.25% over
FY12 and FY13 from 2.2% in FY10 and 1.5% in FY11. Fall in slippages and higher
up-grades and recoveries will lead to a decline in credit costs from 1.5% in FY10 to
0.85% in FY12 and FY13. We are conservative in our credit cost estimates, as for
FY11 we factor in credit costs of 0.95%. With net NPAs of 0.3%, restructured assets
of 1.6% and PCR of 83% asset quality is comfortable.
PAT CAGR of 23%+ over FY10-13; maintain Buy: Axis Bank has demonstrated its
ability to deliver high RoA of 1.5% despite pressure on asset quality in FY09 and
FY10. While margins are likely to moderate, a fall in credit costs, strong loan growth
and controlled opex will lead to PAT CAGR of more than 23% over FY10-13. The
stock trades at 13.3x FY12E and 11.1x FY13E EPS. Maintain Buy with a target price
of Rs1,590 (2.5x FY13E BV of Rs636).
3QFY11 highlights
Key positives
Margins surprised us positively with 13bp QoQ
improvement to 3.81% despite cost of funds
increasing 4bp QoQ.
Strong traction in CASA deposits, improved yield
on funds led to sequential improvement in margins.
CASA growth was strong at 36% YoY on an average
daily basis and the average daily CASA ratio stood
at ~41%. Loans grew 46% YoY and 12% QoQ. On
a reported basis, CD ratio increased to 79% from
71% a quarter ago, however average daily CD ratio
is comfortable at 72-73%.
Key negatives
GNPA increased 9% QoQ in absolute terms due to
lower write-offs. However, slippages are trending
down (Rs3.3b for 3QFY11), leading to annualized
slippage ratio of 1.3% v/s 1.65% in 1HFY11.
Other highlights
On a reported basis, fees grew ~20%. However,
adjusted for accounting policy change for guarantee
related income, fees grew ~25% YoY in 3QFY11
and 9MFY11.
PCR (calculated) improved to 74% v/s 70% a quarter
ago. Including prudential write-offs, PCR stood at
82.7% v/s 80.2% a quarter ago
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
High CASA ratio and diversified income source - a key strength
Fall in credit cost, control over cost to income ratio to drive earnings growth
Axis Bank's key strengths have been its ability to grow CASA deposits (CAGR of over
40% over FY04-10) and diversified fee income (CAGR of over 50% over FY04-10). Unlike in
the past (2x of the industry growth), the bank is expected to grow 1.3x of the industry
growth, which will help CASA growth to maintain pace with overall deposit growth. We
expect return ratios to be strong with RoA of 1.5%+ and RoE of 19-20% over FY11-13 led by
strong core operating performance and a decline in credit costs.
Core operating performance expected to remain strong: Axis Bank is expected
to post core operating profits CAGR of 22% over FY10-13 led by 23% CAGR in NII
(backed by robust loan growth), fee income growth of 22%+ and controlled operating
expenses (C/I ratio to remain stable at 45-46%). With the well diversified fee income
source, growth can surprise positively. Operating profit CAGR is expected to be 19%
over FY10-13 due to conservative estimates on trading income and recoveries from
written off accounts. However, aggressive write offs over FY09-11 can provide positive
surprises on recoveries from written-off accounts.
Margins to moderate with an increase in bulk borrowing rates: Strong CASA
ratio, pricing power and improvement in CD ratio helped the bank to improve margins
in FY11. We expect calculated margins to improve 25bp in FY11 on a higher base
(FY10 NIM improved 15bp led by capital raising). However with increase in bulk deposit
rates, we expect margins to moderate ~20bp in FY12 and ~10bp in FY13. Axis bank
has over 40% (cal) bulk deposits in overall deposits.
Delinquencies have peaked out; fall in credit cost to drive earnings growth:
Strong loan CAGR of 50% over FY05-10 and a slow down in economic growth led to
higher slippages over FY09-10. However, over 2QFY11 and 3QFY11 the bank has
shown an improving trend on asset quality. Slippages from restructured accounts at
18% are near the peak, in our view. We expect the slippage ratio to fall to 1.25% over
FY12 and FY13 from 2.2% in FY10 and 1.5% in FY11. Fall in slippages and higher
up-grades and recoveries will lead to a decline in credit costs from 1.5% in FY10 to
0.85% in FY12 and FY13. We are conservative in our credit cost estimates, as for
FY11 we factor in credit costs of 0.95%. With net NPAs of 0.3%, restructured assets
of 1.6% and PCR of 83% asset quality is comfortable.
PAT CAGR of 23%+ over FY10-13; maintain Buy: Axis Bank has demonstrated its
ability to deliver high RoA of 1.5% despite pressure on asset quality in FY09 and
FY10. While margins are likely to moderate, a fall in credit costs, strong loan growth
and controlled opex will lead to PAT CAGR of more than 23% over FY10-13. The
stock trades at 13.3x FY12E and 11.1x FY13E EPS. Maintain Buy with a target price
of Rs1,590 (2.5x FY13E BV of Rs636).
3QFY11 highlights
Key positives
Margins surprised us positively with 13bp QoQ
improvement to 3.81% despite cost of funds
increasing 4bp QoQ.
Strong traction in CASA deposits, improved yield
on funds led to sequential improvement in margins.
CASA growth was strong at 36% YoY on an average
daily basis and the average daily CASA ratio stood
at ~41%. Loans grew 46% YoY and 12% QoQ. On
a reported basis, CD ratio increased to 79% from
71% a quarter ago, however average daily CD ratio
is comfortable at 72-73%.
Key negatives
GNPA increased 9% QoQ in absolute terms due to
lower write-offs. However, slippages are trending
down (Rs3.3b for 3QFY11), leading to annualized
slippage ratio of 1.3% v/s 1.65% in 1HFY11.
Other highlights
On a reported basis, fees grew ~20%. However,
adjusted for accounting policy change for guarantee
related income, fees grew ~25% YoY in 3QFY11
and 9MFY11.
PCR (calculated) improved to 74% v/s 70% a quarter
ago. Including prudential write-offs, PCR stood at
82.7% v/s 80.2% a quarter ago
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