Axis Bank: A steady performer :: Kotak Sec, links

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A steady performer. Our analysis of Axis Securities shows that a large share of
disbursements in retail (~60%) is originated from this subsidiary. Growth should remain
buoyant in the retail portfolio in the medium term as the bank is building scale with
distribution of retail assets increasing across its branches. Despite the recent
outperformance, we continue to like the transformation that we are seeing in the bank,
which initially was reflected in liabilities and now moving towards loans. Maintain ADD
with TP increased to `525 (from `430 earlier).

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A sneak peek into Axis Securities: the engine of growth for Axis Bank
Our analysis of Axis Securities offers some pretty good insights into the bank’s retail operations.
This subsidiary originates retail loans, distributes third-party products and helps the bank in its
resource management. From a retail loan standpoint, this subsidiary is extremely critical as it
contributes ~60% of the overall disbursements in key retail products for the bank. This would
include conversions of leads coming from different channels as well as self-origination. We have
seen different models adopted but discussions with various banks highlight that productivity
and quality are better through internal sources.
We are not yet out of the woods: a bit of caution still warranted
We continue to exercise caution on the impairment ratios of the bank. We still factor credit
costs at 90-100 bps in the medium term. While activities by various agencies are showing signs
of improvement at the margin, we still think that positive surprise on credit costs is still a few
quarters away. With a steady increase in the portfolio of loans starting their repayment cycle
and the regulatory forbearance on restructuring removed from FY2016, we believe that high
credit costs would be needed.
Relatively well-placed among peers; maintain ADD
We maintain our positive view as we believe the shift to retail business now appears to be
complete and the loan portfolios of the frontline private banks are mostly similar. This should
significantly ease concern over the long term. On the other hand, the liability franchise is
impressive with CASA ratio at a healthy ~45% levels, which can support low-risk growth,
especially in retail without materially deteriorating NIM from current levels. Tier-1 ratio is
comfortable at 13%. The bank is well-positioned to capture growth across various segments.
Despite the recent outperformance, we find valuations comfortable and value the bank at 2.3X
book and 14X EPS (September 2016) for RoEs in the range of 17% and ~15% earnings growth.
We maintain ADD (TP changed at `525 from `430 earlier) factoring moderate earnings
changes, roll forward of our TP and changes to the long-term assumptions on earnings growth
for the bank. It still remains an interesting idea among frontline banks, in our view.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05122014da.pdf