Axis Bank Present perfect, future tense? : Macquarie Research

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Axis Bank
Present perfect, future tense?
Event
 Good franchise but some worries persist: Axis Bank continues to have a
reasonably good liabilities franchise. However key worries are slowing loan
growth and a possible pick up in credit costs as slippages and restructuring
increase. We are restricted on the stock and hence we can’t comment on rating
or TP.
Impact
 Slippages and restructured assets to pick up: Slippages for the past 2
quarters have been around 150bps (annualised). This is much lower than the
220bps seen during 2009. Restructured assets quantum is also increasing
steadily at the rate of Rs3bn per quarter for the past two quarters. We do expect
a pick up in restructured assets going forward. Stressed assets as a proportion
of net worth is expected to increase to 25% by end of FY14 from 12% seen at
the end of FY11.
 Moving up the risk curve, that’s a worrying sign: If we look at the ratings of
corporates that Axis Bank discloses, we see that the bank has been moving
toward lower rated corporates both in large & mid corporate and SME sector.
This perhaps has resulted in its ability to keep margins at high levels of 3.7%.
However we would be wary of such a move in such a weak economic scenario.
 Fee income growth is very encouraging and expected to be strong: What
impresses is the continued momentum in fee income growth. When overall fee
income growth for the sector itself is slowing down, Axis Bank continues to
impress us on fees owing to its diversified product suite and debt syndication
abilities. Fee income growth continues to be above balance sheet growth. The
third party distribution fees from its tie up with Max New York Life insurance is
also helping fee income growth.
 Could benefit from falling wholesale rates: Though liquidity is currently very
tight, it is expected to improve in 1Q FY13 and that should help to protect
margins in the near term as nearly 40% of Axis Bank’s deposits is constituted
by wholesale/bulk/corporate deposits and wholesale rates are expected to
come down in 1Q FY13 by when even RBI is expected to cut benchmark rates.
Hence current high level of margins could continue for some time and could be
above the management guided range of 3.25% to 3.50% in the near term.
Earnings and target price revision
 We are increasing FY13E earnings by 13% mainly on account of higher fees
and margins both of which have surprised us positively.
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.