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High return ratios to sustain: Axis Bank’s ROAs improved significantly between
FY08-11, driven by improving margins and strong fee income growth. Fee
income buoyancy will continue, with incremental income from Insurance and
Broking/IB and peaking rate cycle which could positively impact margins in FY13.
We do expect marginal increase in credit costs over FY11-13E. However, strong
fee income momentum and stable opex metrics would help sustain ROAs >1.5%.
Asset quality: Power and SME exposures – Key risks: Power exposure for Axis is
relatively unseasoned, with just 20% exposure to operating projects which
remains a concern. Also Axis’ SME exposure is relatively high at ~15% v/s large
private banks and in line with PSU banks which may see some stress, but overall
SME origination is better relative to PSU banks. Thus, near-term asset quality
concerns do remain but market is discounting significant stress, with the current
valuations trading at ~28% discount to historic average.
Stock factoring in very high credit costs: Private Banks, including Axis, have
been a beneficiary of robust asset quality over the last 4-6 quarters and we
believe credit costs will normalise upwards. Axis, with high SME exposure, may
be more vulnerable in the near term but we estimate that the stock is pricing in
~170bps of credit costs, much higher than average credit costs of ~110bps and
also higher than credit costs levels seen in 08-09 of ~150bps.
Valuations attractive; BUY: Our Sep-12 PT of Rs1225/share is based on twostage
Gordon growth model which implies 2.1x FY12 book. Axis’ SME exposure
has come off to ~15% from 20% in FY09 and with asset quality remaining
comfortable for large corporate, we believe the stock is pricing in too much
pessimism. Stable asset quality and peaking rate cycle would be near-term stock
catalysts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
High return ratios to sustain: Axis Bank’s ROAs improved significantly between
FY08-11, driven by improving margins and strong fee income growth. Fee
income buoyancy will continue, with incremental income from Insurance and
Broking/IB and peaking rate cycle which could positively impact margins in FY13.
We do expect marginal increase in credit costs over FY11-13E. However, strong
fee income momentum and stable opex metrics would help sustain ROAs >1.5%.
Asset quality: Power and SME exposures – Key risks: Power exposure for Axis is
relatively unseasoned, with just 20% exposure to operating projects which
remains a concern. Also Axis’ SME exposure is relatively high at ~15% v/s large
private banks and in line with PSU banks which may see some stress, but overall
SME origination is better relative to PSU banks. Thus, near-term asset quality
concerns do remain but market is discounting significant stress, with the current
valuations trading at ~28% discount to historic average.
Stock factoring in very high credit costs: Private Banks, including Axis, have
been a beneficiary of robust asset quality over the last 4-6 quarters and we
believe credit costs will normalise upwards. Axis, with high SME exposure, may
be more vulnerable in the near term but we estimate that the stock is pricing in
~170bps of credit costs, much higher than average credit costs of ~110bps and
also higher than credit costs levels seen in 08-09 of ~150bps.
Valuations attractive; BUY: Our Sep-12 PT of Rs1225/share is based on twostage
Gordon growth model which implies 2.1x FY12 book. Axis’ SME exposure
has come off to ~15% from 20% in FY09 and with asset quality remaining
comfortable for large corporate, we believe the stock is pricing in too much
pessimism. Stable asset quality and peaking rate cycle would be near-term stock
catalysts.
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