Axis Bank -Asset quality: Best is behind us :: Macquarie Research,

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Axis Bank
Asset quality: Best is behind us
Event
 Cutting earnings sharply on increasing credit costs: We are paring down
FY13E and FY14E earnings for Axis Bank sharply, by 10%+, mainly on
account of higher credit costs, as we expect an increase in slippages and
restructurings to occur.
Impact
 Expect NPLs and restructuring to increase: In our view, Axis Bank does
have reasonable exposure to the power sector, for which we expect
restructurings to happen. Also amongst private banks, Axis Bank has one of
the largest SME portfolios, which comprises nearly 15% of its loan book, for
which we do see some stress emerging. Consequently, we expect the
stressed assets ratio (net NPLs + restructured assets) to increase from 12%
in FY11 to ~30% over the course of the next two years. We expect credit
costs to increase by 30bp to 95bp in FY13E/FY14E.
 High bulk deposit concentration remains a worry: Forty percent of Axis
Bank’s funding continues to come from bulk/wholesale deposits, which results
in substantial volatility in margins. Although we expect liquidity to broadly
remain benign, sudden tightness in money markets does expose Axis to ALM
risks, and we would be wary of such a funding structure.
 Strong fee income momentum looks encouraging: Contrary to its peers,
for who fee income growth has been unsatisfactory, Axis Bank continues to
deliver better fee income growth, owing to its excellent debt syndication
abilities and strong third-part distribution fees coming from its recent
insurance tie-up.
 Capital raising likely in FY13: Current levels of Tier-1 at 9%+ looks fine to
us; however, we believe equity dilution is likely to occur in FY13, assuming
22–23% growth over the next two years. We believe there is enough
headroom in Tier-II capital for decent growth in the loan book that the bank
can resort to this year. We, however, have not factored in any equity dilution
for the time being.
 Enam deal still waiting for regulatory approvals: The RBI (Reserve Bank
of India) has raised some concerns on the nature of the transaction (Axis
Bank has proposed to acquire the brokerage firm, Enam [unlisted]). Axis Bank
has presented a clarification on the transaction, and the deal will be
consummated once the approval is given by the regulator. Management is
confident of receiving the necessary approvals.
Earnings and target price revision
 We cut our FY13E and FY14E earnings by 12% and 16%, respectively, on
account of an increase in credit charges by 20bp and an increase in opex.
Price catalyst
 Due to research restrictions, Macquarie cannot advise its valuation on AXSB
IN at present.
Action and recommendation
 We are restricted on the stock.

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