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Robust balance sheet growth: Axis Bank has had a strong credit
growth in the past. It has now become a dominant player with market
share of ~3.5%. We expect it continue to grow above industry average
for at least a couple of more years. Any further scope for improvement
in its current CD ratio of 75.3% is limited. It has a healthy CAR of
12.7% that will enable it to grow its balance sheet without capital
constraints.
NIMs to moderate: It’s commendable that it has been able to
maintain NIMs in different rate cycles. However, we feel NIMs have
peaked and expect it to squeeze by ~10 bps to 3.2% on account of
increasing cost of deposits, mainly from increased cost on saving
accounts. Higher CASA of 41.1% will provide cushion against significant
fall in NIMs.
Asset quality among best: It’s asset quality has remained one of the
best, which is also reflected in its credit rating for its corporate and SME
book. Slippage decreased to 1.2% in FY11 as compared to 1.9% in
FY10. Exposure to restructured assets is limited to 1.4% of advances.
We have conservatively factored slippage of 1.3% for FY12-13E as
seasoning takes place. Despite this, credit cost is expected to decline as
the bank has lot of buffer in provision coverage which is at 80.9%.
Fee income continues to remain strong: Fee income has always
remained robust for the bank. Fee income is mainly driven by its
dominant position in placement and syndication of corporate bonds. It
continues to strengthen its focus on project advisory, cash management
services, wealth advisory services and online trading. With its
acquisition of Enam Securities it will now be able to offer a complete
suite of products to its customers and become an important player in
equity market. Fee Income forms 31% of net revenue.
Valuation: Stock has corrected significantly, which provides entry point
for investors. At the CMP the stock is trading at 13.1x and 11.3x FY12E
and FY13E earnings, and at 2.5x and 2.2x P/ABV FY12E and FY13E
respectively, which we feel is attractive considering the potential
growth, strong branch network and quality of assets. We expect ROA of
1.5% and ROE of 19.9% in FY13E. We initiate with a BUY rating on the
stock with the price target of Rs1535 based on P/ABV of 2.5x FY13E.
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