AxisBank : Underperformance to linger :centrum

Underperformance to linger
Axis Bank’s Q3FY14 results were in line with our estimates on the operational
front. However, led by lower NPA provisioning and MTM reversals, net profit at
Rs16.0bn, was ahead of our / consensus estimates. Lower than expected stress
asset addition at Rs12.6bn (2.4% of loans) and further improvement in retail
franchise were key positives. However, margin compression, weakening of
operating profit metrics and risk to asset quality make us believe that
underperformance will continue for a few more quarters. Retain HOLD. Prefer ICICI
Bank to Axis Bank.

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 Stress asset addition lower; guidance retained on higher side: Though stress
asset addition for the quarter was lower at Rs12.6bn, management retained the
guidance for FY14 at Rs60bn and it implies that the run-rate for Q4FY14 would be at
3.1% of loans. Provisioning on net slippages was lower at 63%. Restructured
portfolio stood at Rs49bn (2.3% of loans). With perceived risk of asset quality, we
are factoring in slippages/ credit cost at 130bps/ 80bps respectively over FY14-16E.
 NIM contraction along expected lines; growth in PPOP feeble: Q3FY14 NIM at
3.4% (calc) declined 7bps but was along expected lines. We continue to believe that
the negative dollar gap (12% of assets in less than 1-year bucket), growth
moderation and fading of capital float benefit will curtail NIM at 3.2% levels over
FY14-16E. Growth in fee income was mere 4% yoy led by moderation across all
segments. With elevated operating costs (2.3% of average assets), growth in
operating profit slowed down to 11% yoy.
 Retail franchise continues to gain momentum - the silver lining: We are
impressed by the bank’s strategy on enhancing retail franchise. In Q3FY14, retail
deposits (savings deposits + domestic term deposits) comprised 58% of total
deposits. On the asset side, retail loans formed 30% of the portfolio, with 86%
lending over secured assets. Loan growth at 17.8% yoy was primarily in the nature
of retail (+33% yoy) and SME (+25% yoy). Deposit growth at 7% yoy was due to 14%
yoy growth in CASA deposits.
 Retain Hold: Q3FY14 results vindicate our neutral stance on the bank given growth
moderation and its impact on profitability. Growth in operating profit at 11% yoy
was the lowest in the past 10 quarters and restricts the bank’s ability to provide for
any severe NPA shocks. We expect the trend to continue and factor in lower 17% /
15% CAGR in NII / PPOP over FY13-16E. Increased risk of asset quality and
consecutively higher provisioning will curtail PAT growth to 14% CAGR and return
ratios to 1.6% / 17% (RoA /RoE) over the same period. While valuations at 1.2x
Dec’15E ABV of R973 seems reasonable, with limited near term catalysts, we expect
the underperformance to continue. HOLD with a revised target price of Rs1,170.