Axis Bank - The axiom of profitable growth; visit note; Buy :: Edelweiss PDF link

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Axis Bank (AXSB IN, INR 1,001, Buy)

The top brass of Axis Bank organized an analyst meet to discuss the business strategy and its progress besides allaying investor concerns. The team reiterated its focus on the corporate banking, centering on the infra space however articulated its strategy of ramping up retail assets to provide diversity. We also take stock of key highlights from the Annual Report FY12 which reflects an improving liability profile coupled with the reduced share of non-fund business, especially the guarantees.

Asset quality in check, retail to be growth driver

As per the management, asset quality (slippages at 1.2%/restructuring at ~85bps) would trend at a run-rate similar to that of FY12. Granular details of power sector exposure (overstating of non-funded exposure) coupled with limited exposure to gas based projects allayed concerns. Having focused on building the right infrastructure in terms of systems and people, retail assets will be the next big growth driver (30% of loans by FY15 from 22% of FY12), thereby improving the risk adjusted NIMs.

Improving liability profile

In FY12, Axis Bank has progressed much in improving its liability profile. The share of retail deposits (including SA) got bettered from 40% to 45%, further reducing its dependence on wholesale deposits. The concentration risk also came down (top 20 down in both deposits- 14% from 18% and advances - 12% from 14%). Non-fund based exposure, a highlighted concern, fell from 25% to 23% (credit equivalent as a % of assets), especially in the guarantees segment. Within the non-fund based exposure, power sector has moved up. Given the management’s clarification that 20% of the exposure is being backed by a letter of comfort, we deem the risks have been curtailed.

Outlook and valuations: Profitable growth; maintain ‘BUY’

Over the last year, the bank has underperformed Bankex by 7% as street was a battle of nerves over its power and SME exposure. Concerns, over asset quality however, seem unfounded as it has consistently delivered commendable performance in FY12, trimming GNPLs below 1%. The stock trades at 1.6x FY13 P/ABV – 30% discount to 5-year avg. and >50% discount to HDFCB (5 year avg. discount stands at 35%) – attractive given it is expected to deliver RoAs of 1.5-1.6%, RoEs of ~20% and is well positioned to capture maximum upside to improvement in macros. We reiterate ‘Top pick’.

Axis Bank - The axiom of profitable growth; visit note; Buy

Regards,