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Margin pressures
Axis' 4QFY11 net profit of Rs10bn, up 33% YoY, was inline with estimates
but quality of earnings was a tad disappointing as margins contracted
sharply on the back of rise in cost of deposits, fall in CASA ratio and
aggressive balance sheet growth. Sharp improvement in asset quality
helped to lower the loan loss charges (down 46% YoY) supporting profit
growth. RoA of 1.8% and RoE of 23% are amongst the best and may help
to sustain premium valuations, but CASA improvement and strong asset
quality will be the key. We are raising earnings by 2-3% for FY12-13.
Price target of Rs1,625 based on 2.6x FY13CL adjusted PB; Maintain BUY.
Margin pressures cap topline growth, in spite of asset growth
During 4QFY11, Axis’ loan book grew by 36% YoY/ 15% QoQ- strong QoQ
growth partly reflects on priority sector lending. However, in spite of healthy
loan growth, NII grew by just 17% YoY and declined by 2% QoQ due to a
sharp 37bps QoQ compression in margins to 3.4%. Axis’ margins are facing
pressures from three areas (1) faster rise in cost of funds due to rise in term
deposit rates and higher share of wholesale deposits (2) slower growth in
CASA deposits- 18% YoY growth is lowest in many years and (3) focus on
loan growth at the expense of margins.
NPL formation declines sharply and supports earnings
During 4QFY11, Axis witnessed a significant improvement in asset quality
trends with fresh slippages declining by 26% QoQ (flat YoY) and delinquency
ratio falling to 1% of previous year’s loans. Low NPL formation also reduced
provisioning burden (down 46% YoY) providing a big boost to profit growth.
Over past few quarters, Axis has seen higher asset quality pressures and 4Q
results will help to abate these concerns.
Fee growth picks-up and will support ROA
During 4QFY11, fee income grew by 39% YoY (reported growth high at 58%
due to reversal last year). Pick-up in fee growth is encouraging because over
past few quarters, gap between growth in fees and loans was widening raising
concerns on ROA. Axis generates amongst the highest fee income in the
sector (fee/ average asset ratio of 1.8% in FY10 vs sector average of sub 1%)
that supports its sector leading ROA of 1.8% and ROE of 23%.
Maintain BUY
We are raising earning estimates over FY12-13 by 2-3% largely due to lower
NPL provisioning. Healthy Tier I of 9.4% and high ROE can support loan Cagr
of 28% that will drive earnings Cagr of 23%. Pick-up in CASA growth and
strong asset quality are the key to valuations. Maintain BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin pressures
Axis' 4QFY11 net profit of Rs10bn, up 33% YoY, was inline with estimates
but quality of earnings was a tad disappointing as margins contracted
sharply on the back of rise in cost of deposits, fall in CASA ratio and
aggressive balance sheet growth. Sharp improvement in asset quality
helped to lower the loan loss charges (down 46% YoY) supporting profit
growth. RoA of 1.8% and RoE of 23% are amongst the best and may help
to sustain premium valuations, but CASA improvement and strong asset
quality will be the key. We are raising earnings by 2-3% for FY12-13.
Price target of Rs1,625 based on 2.6x FY13CL adjusted PB; Maintain BUY.
Margin pressures cap topline growth, in spite of asset growth
During 4QFY11, Axis’ loan book grew by 36% YoY/ 15% QoQ- strong QoQ
growth partly reflects on priority sector lending. However, in spite of healthy
loan growth, NII grew by just 17% YoY and declined by 2% QoQ due to a
sharp 37bps QoQ compression in margins to 3.4%. Axis’ margins are facing
pressures from three areas (1) faster rise in cost of funds due to rise in term
deposit rates and higher share of wholesale deposits (2) slower growth in
CASA deposits- 18% YoY growth is lowest in many years and (3) focus on
loan growth at the expense of margins.
NPL formation declines sharply and supports earnings
During 4QFY11, Axis witnessed a significant improvement in asset quality
trends with fresh slippages declining by 26% QoQ (flat YoY) and delinquency
ratio falling to 1% of previous year’s loans. Low NPL formation also reduced
provisioning burden (down 46% YoY) providing a big boost to profit growth.
Over past few quarters, Axis has seen higher asset quality pressures and 4Q
results will help to abate these concerns.
Fee growth picks-up and will support ROA
During 4QFY11, fee income grew by 39% YoY (reported growth high at 58%
due to reversal last year). Pick-up in fee growth is encouraging because over
past few quarters, gap between growth in fees and loans was widening raising
concerns on ROA. Axis generates amongst the highest fee income in the
sector (fee/ average asset ratio of 1.8% in FY10 vs sector average of sub 1%)
that supports its sector leading ROA of 1.8% and ROE of 23%.
Maintain BUY
We are raising earning estimates over FY12-13 by 2-3% largely due to lower
NPL provisioning. Healthy Tier I of 9.4% and high ROE can support loan Cagr
of 28% that will drive earnings Cagr of 23%. Pick-up in CASA growth and
strong asset quality are the key to valuations. Maintain BUY.
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