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Axis Bank (AXSB)
Banks/Financial Institutions
Strong loan growth takes its toll on margins. Axis Bank’s net earnings remained
strong- however a 37bps decline in margins for 4Q was below expectations. Higher
priority sector requirements, being funded by wholesale deposits led to margin
pressure. Fee income trends remained healthy, while asset quality saw further
improvement. We largely maintain our earnings - lower margins compensated by higher
fees and better asset quality. However, somewhat expensive valuations and a recent
outperformance may lead to near-term correction. Stock trades at 2.7X BV and 15X
FY2012E EPS.
Margins decline sharply; fees and asset quality continue to impress
Axis Bank reported a 37 bps decline in margins with NII growth at 17% yoy, lower than expected.
A strong loan growth in FY2010 required higher priority sector commitments in 4QFY11 funded
primarily with high-cost term deposits, given the liquidity conditions during the quarter, resulting
in higher margin pressure. While the bank will raise lending rates in 1QFY12E on select products,
we expect margin pressure to continue for next couple of quarters as well, as the impact of low
yielding priority sector loans continues. Overall growth in CASA remained strong, but again a
higher loan growth resulted in CASA ratio declining by 120 bps qoq in 4Q. The proportion of
wholesale deposits remained stable at 65% of term deposits.
On the positive front, fee income growth was diversified and healthy at 39% yoy. Asset quality
trends further improved with slippages declining to 0.8%, lowest over the last many quarters,
resulting in lower provisions. Overall profitability in 4Q was higher than our estimates by 5%.
Going forward, we maintain our earnings for FY2011-13E and retain our BUY rating. The stock
has relatively outperformed recently and this may lead to some near-term underperformance on
back of the margin disappointment. We roll over our target price for FY2013E to `1,700. At our
TP, the stock will trade at 2.7X FY2013E BV and 14X EPS.
Loan growth continues at a robust pace
Loan book growth sequentially was at 16% to `1,424 bn (37% yoy) as the quarter saw focus shift
towards meeting priority sector lending requirements. Nearly two-thirds of the increase in loans for
the quarter was to agri/microfinance (60% qoq and 36% yoy) and SME (26% qoq but 17% yoy).
Large corporate segment grew by 45% yoy while retail loans grew by 33% yoy. The management
did highlight that there has been slowdown in fresh proposals, especially in infrastructure, but
existing pipeline for the current year continues to remain healthy and would seek to grow loans at
1.4X industry average (our estimate is 21% CAGR for FY2011-13E). Deposits increased by 34%
yoy (22% qoq) to `1,892 bn. CASA ratio for the quarter was at 41% as against 43% in December
2010 as higher interest rates are impacting pace of accretion of low-cost deposits.
Weak margin performance; headwinds remain for 1HFY12E
Axis Bank’s net interest margin (NIM) was 3.4% in 4QFY11—37 bps decline qoq as cost of
funds rose sharply. Further pressure resulted from a decline in CD ratio (75% compared to
79% in December 2010). Cost of funds increased by 77 bps qoq while lending yields
improved only by 33 bps, despite an increase of 75 bps in lending rates through the quarter.
NII grew 17% yoy, 5% below our expectations to `17 bn. NIMs could remain soft in
1HFY12E as the impact of soft lending rates emerges from a higher share of low yielding PSL
loans underwritten in the current quarter. We build a 20 bps decline in our overall NIMs in
FY2012E but we see upwards bias to our estimates, especially in 2HFY12E, given the strong
liability franchise and tight liquidity environment.
Limited concern on asset quality; slippages decline to 0.8% for the quarter
Axis Bank reported slippages at 0.8% (annualized), lower than 1.6% reported in 1HFY11
and 1.2% in 3QFY11. Upgradations and recoveries remained flat qoq while write-off
declined sharply to `100 mn compared to `870 mn in December 2010. Also, non-interest
income saw a higher contribution from recovery from written-off assets during the quarter.
Gross NPLs were at `15.9 bn (1.0% of loans) while net NPLs were at `4.1 bn (0.3% of
loans) compared to `14.8 bn and `3.9 bn in the previous quarter. Loan loss provisions for
the quarter were at 0.6% (annualized) compared to 1% in 9HFY11. We are building loan
loss provisions at 0.8% for FY2012-13E.
Other highlights
Adjusted growth in fee income was strong at 39% yoy (reported growth at 58% yoy as
the bank had revised fee income recognition policy in 4QFY10) driven by balance sheet
growth and better income from wealth management. Large corporates fees grew by
69% yoy while retail banking grew by 45% yoy. Fee income from business banking has
improved but is lower than overall growth trends. Treasury profits were low at `580 mn -
mainly from foreign exchange transactions.
Recovery from written-off accounts remained strong – the bank recovered `1.3 bn in 4Q
and `3.2 bn in FY2011.
Capital adequacy ratio stands comfortable at 12.7% with tier-1 ratio at 9.4%. The
management indicated that there is comfortable headroom to grow its balance sheet in
FY2012E given their current outlook on loan growth.
Cost-income ratio was flat qoq at 42%. The bank opened another 270 branches and 967
ATMs in 4Q, taking the total branch network to 1,390 and ATM count to 6,270.
Management highlighted that they are likely to open about 250 branches during the
current fiscal. We expect cost-income ratio at about 44% levels for FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Axis Bank (AXSB)
Banks/Financial Institutions
Strong loan growth takes its toll on margins. Axis Bank’s net earnings remained
strong- however a 37bps decline in margins for 4Q was below expectations. Higher
priority sector requirements, being funded by wholesale deposits led to margin
pressure. Fee income trends remained healthy, while asset quality saw further
improvement. We largely maintain our earnings - lower margins compensated by higher
fees and better asset quality. However, somewhat expensive valuations and a recent
outperformance may lead to near-term correction. Stock trades at 2.7X BV and 15X
FY2012E EPS.
Margins decline sharply; fees and asset quality continue to impress
Axis Bank reported a 37 bps decline in margins with NII growth at 17% yoy, lower than expected.
A strong loan growth in FY2010 required higher priority sector commitments in 4QFY11 funded
primarily with high-cost term deposits, given the liquidity conditions during the quarter, resulting
in higher margin pressure. While the bank will raise lending rates in 1QFY12E on select products,
we expect margin pressure to continue for next couple of quarters as well, as the impact of low
yielding priority sector loans continues. Overall growth in CASA remained strong, but again a
higher loan growth resulted in CASA ratio declining by 120 bps qoq in 4Q. The proportion of
wholesale deposits remained stable at 65% of term deposits.
On the positive front, fee income growth was diversified and healthy at 39% yoy. Asset quality
trends further improved with slippages declining to 0.8%, lowest over the last many quarters,
resulting in lower provisions. Overall profitability in 4Q was higher than our estimates by 5%.
Going forward, we maintain our earnings for FY2011-13E and retain our BUY rating. The stock
has relatively outperformed recently and this may lead to some near-term underperformance on
back of the margin disappointment. We roll over our target price for FY2013E to `1,700. At our
TP, the stock will trade at 2.7X FY2013E BV and 14X EPS.
Loan growth continues at a robust pace
Loan book growth sequentially was at 16% to `1,424 bn (37% yoy) as the quarter saw focus shift
towards meeting priority sector lending requirements. Nearly two-thirds of the increase in loans for
the quarter was to agri/microfinance (60% qoq and 36% yoy) and SME (26% qoq but 17% yoy).
Large corporate segment grew by 45% yoy while retail loans grew by 33% yoy. The management
did highlight that there has been slowdown in fresh proposals, especially in infrastructure, but
existing pipeline for the current year continues to remain healthy and would seek to grow loans at
1.4X industry average (our estimate is 21% CAGR for FY2011-13E). Deposits increased by 34%
yoy (22% qoq) to `1,892 bn. CASA ratio for the quarter was at 41% as against 43% in December
2010 as higher interest rates are impacting pace of accretion of low-cost deposits.
Weak margin performance; headwinds remain for 1HFY12E
Axis Bank’s net interest margin (NIM) was 3.4% in 4QFY11—37 bps decline qoq as cost of
funds rose sharply. Further pressure resulted from a decline in CD ratio (75% compared to
79% in December 2010). Cost of funds increased by 77 bps qoq while lending yields
improved only by 33 bps, despite an increase of 75 bps in lending rates through the quarter.
NII grew 17% yoy, 5% below our expectations to `17 bn. NIMs could remain soft in
1HFY12E as the impact of soft lending rates emerges from a higher share of low yielding PSL
loans underwritten in the current quarter. We build a 20 bps decline in our overall NIMs in
FY2012E but we see upwards bias to our estimates, especially in 2HFY12E, given the strong
liability franchise and tight liquidity environment.
Limited concern on asset quality; slippages decline to 0.8% for the quarter
Axis Bank reported slippages at 0.8% (annualized), lower than 1.6% reported in 1HFY11
and 1.2% in 3QFY11. Upgradations and recoveries remained flat qoq while write-off
declined sharply to `100 mn compared to `870 mn in December 2010. Also, non-interest
income saw a higher contribution from recovery from written-off assets during the quarter.
Gross NPLs were at `15.9 bn (1.0% of loans) while net NPLs were at `4.1 bn (0.3% of
loans) compared to `14.8 bn and `3.9 bn in the previous quarter. Loan loss provisions for
the quarter were at 0.6% (annualized) compared to 1% in 9HFY11. We are building loan
loss provisions at 0.8% for FY2012-13E.
Other highlights
Adjusted growth in fee income was strong at 39% yoy (reported growth at 58% yoy as
the bank had revised fee income recognition policy in 4QFY10) driven by balance sheet
growth and better income from wealth management. Large corporates fees grew by
69% yoy while retail banking grew by 45% yoy. Fee income from business banking has
improved but is lower than overall growth trends. Treasury profits were low at `580 mn -
mainly from foreign exchange transactions.
Recovery from written-off accounts remained strong – the bank recovered `1.3 bn in 4Q
and `3.2 bn in FY2011.
Capital adequacy ratio stands comfortable at 12.7% with tier-1 ratio at 9.4%. The
management indicated that there is comfortable headroom to grow its balance sheet in
FY2012E given their current outlook on loan growth.
Cost-income ratio was flat qoq at 42%. The bank opened another 270 branches and 967
ATMs in 4Q, taking the total branch network to 1,390 and ATM count to 6,270.
Management highlighted that they are likely to open about 250 branches during the
current fiscal. We expect cost-income ratio at about 44% levels for FY2012E.
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