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Axis Bank (AXSB IN; Last Price: INR1039; DB Rec: Buy)
Stock down 16% since S&P downgrade The stock is down 16% since S&P downgrade
(Sensex down 5%) and is trading at an attractive valuation of 1.9x FY12E P/B – implying a
24% discount to its past five year’s average valuations. The valuation discount of Axis
Bank to HDFC Bank has now widened to ~44% (vs. average discount of 31% over past
five years), which is excessive in our view and should narrow going forward. The stock is
trading at a 1 Std dev. below its five year average of 1-yr fwd P/B.
Stock is pricing in exaggerated credit costs of 442bps vs. our baseline estimate of
90bps. The current prices factor in a sharp rise in NPL from SME and power exposure –
which we believe is a low likelihood event. Increase in SME NPLs, if any, (a risk that
would materialize in the event of Indian GDP growth compressing to 6.5%) is likely to be
towards the end of FY12 or in early FY13. Similarly any increase in infrastructure NPL
would show up only in FY13. Even then, we do not expect Axis Bank’s NPLs to rise to
levels disproportionately higher than the rise in system wide NPLs. In our estimates we
are factoring credit costs of ~100bps for FY12E compared to ~40bps in 1QFY12 - hence
there is enough built-in cushion in our estimates for rising credit costs.
Catalysts for near term outperformance: Change in sentiment towards power (SEB
reforms) and SME sector. This could be driven by policy reforms from the government
(for power and infra sectors) and any indication of pause in rate tightening cycle by RBI
leading to a cooling off in wholesale borrowing costs.
Operating profit growth driven by NII and fee income continues to be strong. While
credit costs may rise from the low level of last two quarters, the bank should still be able
to deliver RoA of 1.5%+ after making adequate NPL provisions
In case of a mild stress case (assuming India’s GDP growth of 7.5%), potential earnings
downside is 6% and in case of severe stress case (India’s GDP growth of 6.5%)
earnings downside is 15%. However, severe stress implying a recession in developed
market is not a central scenario of our global economists. As mentioned above we do
not expect a severe stress on asset quality and to that extent current valuation discount
of Axis Bank to HDFC Bank is excessive. We believe that risk-reward is favorable at
current levels.
Key Risks: i) higher-than-expected slippages from SME loans (~20% of total) resulting in
higher credit costs and hence lower-than-expected earnings forecasts, and ii) a sharp
reduction in its high CASA (low-cost deposit) ratio due to rising term deposit rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Axis Bank (AXSB IN; Last Price: INR1039; DB Rec: Buy)
Stock down 16% since S&P downgrade The stock is down 16% since S&P downgrade
(Sensex down 5%) and is trading at an attractive valuation of 1.9x FY12E P/B – implying a
24% discount to its past five year’s average valuations. The valuation discount of Axis
Bank to HDFC Bank has now widened to ~44% (vs. average discount of 31% over past
five years), which is excessive in our view and should narrow going forward. The stock is
trading at a 1 Std dev. below its five year average of 1-yr fwd P/B.
Stock is pricing in exaggerated credit costs of 442bps vs. our baseline estimate of
90bps. The current prices factor in a sharp rise in NPL from SME and power exposure –
which we believe is a low likelihood event. Increase in SME NPLs, if any, (a risk that
would materialize in the event of Indian GDP growth compressing to 6.5%) is likely to be
towards the end of FY12 or in early FY13. Similarly any increase in infrastructure NPL
would show up only in FY13. Even then, we do not expect Axis Bank’s NPLs to rise to
levels disproportionately higher than the rise in system wide NPLs. In our estimates we
are factoring credit costs of ~100bps for FY12E compared to ~40bps in 1QFY12 - hence
there is enough built-in cushion in our estimates for rising credit costs.
Catalysts for near term outperformance: Change in sentiment towards power (SEB
reforms) and SME sector. This could be driven by policy reforms from the government
(for power and infra sectors) and any indication of pause in rate tightening cycle by RBI
leading to a cooling off in wholesale borrowing costs.
Operating profit growth driven by NII and fee income continues to be strong. While
credit costs may rise from the low level of last two quarters, the bank should still be able
to deliver RoA of 1.5%+ after making adequate NPL provisions
In case of a mild stress case (assuming India’s GDP growth of 7.5%), potential earnings
downside is 6% and in case of severe stress case (India’s GDP growth of 6.5%)
earnings downside is 15%. However, severe stress implying a recession in developed
market is not a central scenario of our global economists. As mentioned above we do
not expect a severe stress on asset quality and to that extent current valuation discount
of Axis Bank to HDFC Bank is excessive. We believe that risk-reward is favorable at
current levels.
Key Risks: i) higher-than-expected slippages from SME loans (~20% of total) resulting in
higher credit costs and hence lower-than-expected earnings forecasts, and ii) a sharp
reduction in its high CASA (low-cost deposit) ratio due to rising term deposit rates.
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