BUY Axis Bank -- Healthy quarter on operational front…. :: ICICI Securities

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Healthy quarter on operational front….
• PAT at | 1611 crore (up 18.2% YoY) was in line with our estimates.
NII growth was higher-than-expected at 20% YoY to | 3525 crore
owing to higher-than-expected NIMs of 3.97% and 20% YoY credit
growth to | 242198 crore
• Credit traction was mainly led by the retail (up 33% YoY) and SME
segments (15% YoY)
• Fresh stressed asset addition (restructured asset at | 570 crore +
slippages at | 911 crore) in Q2 came in higher at | 1481 crore vs.
| 1106 crore in Q1 but was below management guidance of | 1625
crore per quarter. GNPA ratio was flat QoQ to 1.34%
Loan growth ahead of industry in past; pace to reduce but stay ahead
Axis Bank is the third largest private bank in terms of loans & profitability.
The loan book as on FY14 was at | 230067 crore. On the back of its rising
network and strong corporate relationships, the bank grew its book above
the industry pace. In the past eight & five years, CAGR has been 34% &
24%, compared to industry CAGR of 19% & 17%, respectively. Axis Bank
has largely been a corporate lender though the trend is now changing.
Until FY12, the corporate segment accounted for 54% of total loans.
However, owing to higher risk in the corporate portfolio and reduced
demand as fallout of a strained economic environment, the bank changed
its strategy and focused on the retail & SME segments. Accordingly, their
proportion increased to 32% and 15.4%, respectively, while corporate
exposure reduced to 44% as on FY14. We expect loans traction of 16%
CAGR in the next two years with major drivers being retail & SME.
Healthy liability franchise; margins to stay benign
One of the biggest strengths of Axis Bank is its strong liability franchise.
CASA deposits at | 126462 crore account for 45% of deposits as on FY14.
The CASA ratio has been ~40% for almost a decade. This has been due
to constant investment in branches and ATMs, strong brand recognition &
quality services. Savings account (SA) balances have increased 16 times
since FY05 to | 77771 crore as on FY14. Axis Bank has the best
SA/branch in industry of | 32 crore. This has enabled the bank to maintain
healthy margins of >3% since FY08 despite a challenging environment.
Over FY14-16E, we expect NIMs to stay at healthy levels of ~3.5%.
Asset quality concerns lingers but no major glitch yet
Concerns about the bank’s asset quality are generally raised owing to its
exposure to certain stressed sectors and troubled corporates. However,
no major shocks have been reported yet. The GNPA ratio for the past
seven years has been in the range of 1-1.2%. Further, PCR of ~78%
provides comfort. Credit costs have stayed below 0.8% for the past three
years. We estimate asset quality will slightly deteriorate but stay
acceptable with credit cost factored at ~0.7% over FY14-16E.
Strong operational performance provides comfort; maintain BUY
The operational performance has been strong with pre-provisioning profit
(PPP) increasing at 31% CAGR in the past six years to | 11457 crore as on
FY14. This is due to strong loan growth, healthy margins & fee income
growth and strong cost control (CIR down to 40% from 49% in FY08).
RoEs have stayed in the range of 18-20% while RoAs have increased
consistently to 1.7% now. Going ahead, we expect return ratios to stay at
current healthy levels. We remain cautious on the NPA front. We maintain
our target price of | 481 (valuing at 2.3x FY16E ABV) and BUY rating.

LINK
http://content.icicidirect.com/mailimages/IDirect_AxisBank_Q2FY15.pdf