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Strong franchise with healthy profitability
■ Leading private bank. Axis Bank is India’s third largest private sector bank,
with a branch network of 1,400+ branches and an asset base of $52 bn. The
bank has delivered a robust loan CAGR of 40% and net profit CAGR of 44%
over the past ten years. Its market share has increased to 3.3% (Jun-11).
■ Strong deposit franchise. One of the key strengths of Axis Bank’s business
model has been the robust liability franchise with high proportion of low cost
savings and current account balances (over 40% of the total deposits). This
provides a stable funding base and a large customer base (currently has a
10 mn customer base) to cross-sell products. The bank’s branch network
has expanded by 64% over the last two years to 1,411 branches. The bank
is likely to sustain 20%+ savings deposit growth over the next few years
(savings deposit CAGR of 27% over the last three years).
■ Margins near bottom. While the bank's margins have dropped by a sharp
59 bp over the past two quarters to 3.28% (with rising funding costs), it has
indicated that steady state NIMs are between 3.25% and 3.5%. We believe
NIMs are currently close to the trough levels. However, it expects the
margins to be volatile given the higher share of wholesale deposits (40% of
total deposits) and the volatility in quarterly loan growth.
■ Asset quality trends healthy. Over the past three years, the bank’s strong
loan growth (34% CAGR) and higher share of mid-corporate/SME loans
there were asset quality concerns. While credit costs increased to ~2%
levels in 1H10, they declined to 0.5% levels over the last four quarters.
Gross NPLs have stabilised at ~1% levels and the coverage is healthy at
90% (incl write-offs). However, we expect credit costs to rise to 1% levels
over the next few quarters but is likely to be within manageable limits.
■ Healthy profitability and inexpensive valuations One of the fastest
growing, most profitable banking franchises in India and has delivered
average RoAs of 1.4% over the past five years. The bank is currently trading
at 1.8x one-year forward book value (vs historic average of 2.4x) and given
the healthy profitability, faster growth and inexpensive valuations, we
maintain our OUTPERFORM rating on the stock
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong franchise with healthy profitability
■ Leading private bank. Axis Bank is India’s third largest private sector bank,
with a branch network of 1,400+ branches and an asset base of $52 bn. The
bank has delivered a robust loan CAGR of 40% and net profit CAGR of 44%
over the past ten years. Its market share has increased to 3.3% (Jun-11).
■ Strong deposit franchise. One of the key strengths of Axis Bank’s business
model has been the robust liability franchise with high proportion of low cost
savings and current account balances (over 40% of the total deposits). This
provides a stable funding base and a large customer base (currently has a
10 mn customer base) to cross-sell products. The bank’s branch network
has expanded by 64% over the last two years to 1,411 branches. The bank
is likely to sustain 20%+ savings deposit growth over the next few years
(savings deposit CAGR of 27% over the last three years).
■ Margins near bottom. While the bank's margins have dropped by a sharp
59 bp over the past two quarters to 3.28% (with rising funding costs), it has
indicated that steady state NIMs are between 3.25% and 3.5%. We believe
NIMs are currently close to the trough levels. However, it expects the
margins to be volatile given the higher share of wholesale deposits (40% of
total deposits) and the volatility in quarterly loan growth.
■ Asset quality trends healthy. Over the past three years, the bank’s strong
loan growth (34% CAGR) and higher share of mid-corporate/SME loans
there were asset quality concerns. While credit costs increased to ~2%
levels in 1H10, they declined to 0.5% levels over the last four quarters.
Gross NPLs have stabilised at ~1% levels and the coverage is healthy at
90% (incl write-offs). However, we expect credit costs to rise to 1% levels
over the next few quarters but is likely to be within manageable limits.
■ Healthy profitability and inexpensive valuations One of the fastest
growing, most profitable banking franchises in India and has delivered
average RoAs of 1.4% over the past five years. The bank is currently trading
at 1.8x one-year forward book value (vs historic average of 2.4x) and given
the healthy profitability, faster growth and inexpensive valuations, we
maintain our OUTPERFORM rating on the stock
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