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Axis Bank‘s Q3FY12 PAT of INR11bn (up 24%YoY) surprised on the upside
(being 7% above consensus). During the quarter, core income continued
to impress; NIMs were steady at 3.75% while NII and fee income were up
24% and 26% respectively. There was no negative surprise on the
important metrics – asset quality as both slippages and GNPA were
maintained at 1.4%/1.1%. Restructuring pool was equally steady at 1.5%
of advances. We are revising our earnings estimates up by 4%/2% for
FY12/13 respectively. We maintain ‘BUY’ and ‘Top pick’ call with a TP of
INR1,372 (2.2x FY13E ABV, translating to ~30% discount to HDFC Bank
against the current 50%), offering an upside of 35%.
Asset quality: Slippages and restructuring under control
Given the difficult operating environment and SME and agri advances accounting for
21% of the book, slippage being maintained at 1.4% is a clear positive. Also,
restructuring has not been resorted to in a big way with the addition of ~INR3bn,
taking the overall proportion to 1.55% of advances (1.5% in Q2FY12). The management
is sticking to its guidance of about ~80bps of credit cost while the Q3FY12 cost comes
in at ~90bps. However, we believe that the Street is building in a much higher slippage
number of 1.5%‐2% and LLP of ~120bps. Led by write‐offs and recoveries/upgrades of
INR3.6bn, the increase in GNPL was restricted to 1.1% (up a marginal 2bps QoQ).
Provisioning coverage continues to stand at 75%, including the prudential write‐offs.
Over the last 2‐3 years, the bank has been leveraging its improving CASA (41.5%) and
pricing power to increase exposure to large corporates with a minimal impact on NIMs.
The segment now stands at 57%, up from 50% in FY10, hence we expect slippages to
remain benign. However, restructuring of infra advances needs to be monitored.
Outlook and valuations: Core intact; maintain ‘BUY’
Led by a healthy NIM and fee income performance coupled with a benign asset quality
(against the consensus expectation), we anticipate ~21% earnings CAGR over FY12‐14E.
The bank’s strategy of moderating the pace of loan growth is already reflecting in more
formidable retail franchise and consistently higher RoA of 1.6%. The stock is attractive
at 1.6xFY13E adjusted book and 8.4x FY13E earnings. We maintain ‘BUY’ on the bank
Steady business: Big corporates, retail book explain entire growth
Even after a robust Q2, advance growth showed no sign of fatigue (6% QoQ, 20% YoY), led
entirely by the growth in large corporates of 20% and retail assets of 32% ‐ which offset the
flat accretion in agriculture and SME book. Traction in retail explained about half of the
incremental loan book growth. The management reiterated its guidance of growing by
about 5% higher than the industry levels. However, given the high base set in Q4FY11, Axis
Bank will need to show a double digit sequential loan book growth (on the back of meeting
PSL requirements) to meet the target for FY12.
Sectoral split up of the exposure still suggests that the non‐fund based exposure to power
sector is high at 19% though as highlighted in our note “Much ado about Power’, dated the
3rd August 2011 , the exposure is overstated as Axis being a consortium leader fronts the LC
opening guarantees for other consortium members. As and when the non‐fund exposure
crystallizes into fund based exposure, Axis Bank’s share will be restricted to its contribution
of 15%‐20%.
Margins hold the highs at 3.75%, moderation expected
Steady CASA at 42% is clearly an ally to the robust NIM performance in Q3FY12. However,
daily average CASA balance declined marginally by 100 bps to 37%. NIM which surged to
3.78% in Q2FY12 from 3.28% of Q1 continued to remain at similar levels. This is well above
the upper end of the management’s guided range of 3.25%‐3.5%. Incrementally, we expect
NIM to moderate and tread towards the guided range as the impact of term deposit based
deposits growth ‐ largely wholesale (up 9% while deposits grew 7% QoQ) in Q3FY12 ‐
reflects in cost of funds. Also Q4 will see a ramp up in PSL lending, typically low yielding in
nature. We are building in about ~25bps decline in margins on a sequential basis.
Fee income continues to boost profitability, trading income a surprise
Once again, the diversified income platform came out strongly with the fee growing at 26%
(35% of net revenues). Against the expectation of normalization in corporate banking fee in
the backdrop of reduced investment climate in the country, the segment contributed to
39% of fees by clocking 34% YoY growth. Retail banking fees once again grew at an
impressive pace of 26% YoY; within which, the third party distribution income grew at 53%
(bancassurance tie up with Max New York Life being an important factor). Treasury and
DCM segment also grew strongly by 25%. Trading profits proved to be a PAT booster at
INR1.18bn while the same was a mere INR280mn in Q2. Prime constituent is Forex &
Derivatives at INR130bn which was offset by loss in corporate bonds and equity portfolio.
Other highlights
• Wholesale deposits formed 63% of term deposits.
• Tier I stood at 8.25% (9.58% including 9M profits) and CAD at 11.78%. We believe the
Tier 1 at current levels can take care of the bank’s growth for another 3‐4 quarters.
• The bank’s exposure to A and above within large and mid‐corporates dropped to 70%
from 73% a quarter back. This, we believe can be explained by both incremental infra
lending and the annual portfolio rerating.
• For SME, rating in the range of SME 1‐3 continues to hold the 79% mark.
• INR70mn of the restructured lot has slipped into NPL in Q3FY12.
• In Q3FY12, the bank opened 47 branches to take the total tally to 1,493 branches
Company description
Axis Bank is the third‐largest private sector bank in India in terms of asset size, with a
balance sheet of INR 2.7 tn. It has a network of over 1493 branches and extension counters
across the country.
The bank earns substantial fee income from transaction and merchant banking activities.
The key promoter UTI‐I (special undertaking) holds 24%, LIC holds 9.8%, and the rest is
widely held by FIIs and public.
Investment theme
Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards
corporate advances and retail (as compared with its private peers). Retail advances
contributed 22% to the total loan portfolio. Thus, it has better scope for aggressively
expanding across segments where it has a low presence. It is also spreading across
geographies and targeting presence in more than 75% of India’s districts in the next five
years. The bank’s loan book is expected to grow at 20% plus in FY12‐14E.
Rapidly growing franchise and new product offerings (viz., credit cards) will further drive
growth in retail fee income. The bank is also intensifying efforts to penetrate the remittance
business by aggressively spreading its international operations. Other key contributors to
fee income will be project advisory, debt syndication, and third party distribution of
insurance.
Key risks
Change in management may affect the pace of growth and profitability in the near term.
Deterioration of macro environment can result in higher slippages and slow down business
growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Axis Bank‘s Q3FY12 PAT of INR11bn (up 24%YoY) surprised on the upside
(being 7% above consensus). During the quarter, core income continued
to impress; NIMs were steady at 3.75% while NII and fee income were up
24% and 26% respectively. There was no negative surprise on the
important metrics – asset quality as both slippages and GNPA were
maintained at 1.4%/1.1%. Restructuring pool was equally steady at 1.5%
of advances. We are revising our earnings estimates up by 4%/2% for
FY12/13 respectively. We maintain ‘BUY’ and ‘Top pick’ call with a TP of
INR1,372 (2.2x FY13E ABV, translating to ~30% discount to HDFC Bank
against the current 50%), offering an upside of 35%.
Asset quality: Slippages and restructuring under control
Given the difficult operating environment and SME and agri advances accounting for
21% of the book, slippage being maintained at 1.4% is a clear positive. Also,
restructuring has not been resorted to in a big way with the addition of ~INR3bn,
taking the overall proportion to 1.55% of advances (1.5% in Q2FY12). The management
is sticking to its guidance of about ~80bps of credit cost while the Q3FY12 cost comes
in at ~90bps. However, we believe that the Street is building in a much higher slippage
number of 1.5%‐2% and LLP of ~120bps. Led by write‐offs and recoveries/upgrades of
INR3.6bn, the increase in GNPL was restricted to 1.1% (up a marginal 2bps QoQ).
Provisioning coverage continues to stand at 75%, including the prudential write‐offs.
Over the last 2‐3 years, the bank has been leveraging its improving CASA (41.5%) and
pricing power to increase exposure to large corporates with a minimal impact on NIMs.
The segment now stands at 57%, up from 50% in FY10, hence we expect slippages to
remain benign. However, restructuring of infra advances needs to be monitored.
Outlook and valuations: Core intact; maintain ‘BUY’
Led by a healthy NIM and fee income performance coupled with a benign asset quality
(against the consensus expectation), we anticipate ~21% earnings CAGR over FY12‐14E.
The bank’s strategy of moderating the pace of loan growth is already reflecting in more
formidable retail franchise and consistently higher RoA of 1.6%. The stock is attractive
at 1.6xFY13E adjusted book and 8.4x FY13E earnings. We maintain ‘BUY’ on the bank
Steady business: Big corporates, retail book explain entire growth
Even after a robust Q2, advance growth showed no sign of fatigue (6% QoQ, 20% YoY), led
entirely by the growth in large corporates of 20% and retail assets of 32% ‐ which offset the
flat accretion in agriculture and SME book. Traction in retail explained about half of the
incremental loan book growth. The management reiterated its guidance of growing by
about 5% higher than the industry levels. However, given the high base set in Q4FY11, Axis
Bank will need to show a double digit sequential loan book growth (on the back of meeting
PSL requirements) to meet the target for FY12.
Sectoral split up of the exposure still suggests that the non‐fund based exposure to power
sector is high at 19% though as highlighted in our note “Much ado about Power’, dated the
3rd August 2011 , the exposure is overstated as Axis being a consortium leader fronts the LC
opening guarantees for other consortium members. As and when the non‐fund exposure
crystallizes into fund based exposure, Axis Bank’s share will be restricted to its contribution
of 15%‐20%.
Margins hold the highs at 3.75%, moderation expected
Steady CASA at 42% is clearly an ally to the robust NIM performance in Q3FY12. However,
daily average CASA balance declined marginally by 100 bps to 37%. NIM which surged to
3.78% in Q2FY12 from 3.28% of Q1 continued to remain at similar levels. This is well above
the upper end of the management’s guided range of 3.25%‐3.5%. Incrementally, we expect
NIM to moderate and tread towards the guided range as the impact of term deposit based
deposits growth ‐ largely wholesale (up 9% while deposits grew 7% QoQ) in Q3FY12 ‐
reflects in cost of funds. Also Q4 will see a ramp up in PSL lending, typically low yielding in
nature. We are building in about ~25bps decline in margins on a sequential basis.
Fee income continues to boost profitability, trading income a surprise
Once again, the diversified income platform came out strongly with the fee growing at 26%
(35% of net revenues). Against the expectation of normalization in corporate banking fee in
the backdrop of reduced investment climate in the country, the segment contributed to
39% of fees by clocking 34% YoY growth. Retail banking fees once again grew at an
impressive pace of 26% YoY; within which, the third party distribution income grew at 53%
(bancassurance tie up with Max New York Life being an important factor). Treasury and
DCM segment also grew strongly by 25%. Trading profits proved to be a PAT booster at
INR1.18bn while the same was a mere INR280mn in Q2. Prime constituent is Forex &
Derivatives at INR130bn which was offset by loss in corporate bonds and equity portfolio.
Other highlights
• Wholesale deposits formed 63% of term deposits.
• Tier I stood at 8.25% (9.58% including 9M profits) and CAD at 11.78%. We believe the
Tier 1 at current levels can take care of the bank’s growth for another 3‐4 quarters.
• The bank’s exposure to A and above within large and mid‐corporates dropped to 70%
from 73% a quarter back. This, we believe can be explained by both incremental infra
lending and the annual portfolio rerating.
• For SME, rating in the range of SME 1‐3 continues to hold the 79% mark.
• INR70mn of the restructured lot has slipped into NPL in Q3FY12.
• In Q3FY12, the bank opened 47 branches to take the total tally to 1,493 branches
Company description
Axis Bank is the third‐largest private sector bank in India in terms of asset size, with a
balance sheet of INR 2.7 tn. It has a network of over 1493 branches and extension counters
across the country.
The bank earns substantial fee income from transaction and merchant banking activities.
The key promoter UTI‐I (special undertaking) holds 24%, LIC holds 9.8%, and the rest is
widely held by FIIs and public.
Investment theme
Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards
corporate advances and retail (as compared with its private peers). Retail advances
contributed 22% to the total loan portfolio. Thus, it has better scope for aggressively
expanding across segments where it has a low presence. It is also spreading across
geographies and targeting presence in more than 75% of India’s districts in the next five
years. The bank’s loan book is expected to grow at 20% plus in FY12‐14E.
Rapidly growing franchise and new product offerings (viz., credit cards) will further drive
growth in retail fee income. The bank is also intensifying efforts to penetrate the remittance
business by aggressively spreading its international operations. Other key contributors to
fee income will be project advisory, debt syndication, and third party distribution of
insurance.
Key risks
Change in management may affect the pace of growth and profitability in the near term.
Deterioration of macro environment can result in higher slippages and slow down business
growth.
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