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Axis Bank Ltd
Strong near term outlook but reducing TP due to high
presence in risky segments
We recently interacted with the management of Axis Bank (AXSB). The
management continues to guide for a credit growth of 1.3x the industry growth
rate in the medium term. While the bank’s reported NIMs would come off from
3.8% in Q3FY11, compression of NIMs is likely to be restricted to
~20bps. Fee income growth would likely be in line with asset growth, as the
impact of changes in the accounting policy on commissions is already in the
base. Asset quality is likely to improve further in the near term, as slippages
from restructured assets are expected to decline. Lower loan loss provisions are
likely to boost earnings in the coming quarters. However, in the medium term,
higher exposure to infrastructure and power sectors remains a concern, as
higher losses in SEBs and execution risks in upcoming projects could weigh on
valuations. Hence, we are maintaining our estimates and BUY rating on the
stock but lowering our valuation multiple to 16x FY12E EPS and 3.1x FY12E BV.
Our target price thus stands revised to Rs 1,675 (from Rs 1,800 earlier).
NIMs likely to remain at 3.6% plus: The management continues to guide for a
~20bps compression in NIMs in Q4FY11 (Q3 NIMs at 3.81%) due to a sharp
increase in deposit rates in the last six months. On a full-year basis, we expect
NIMs to remain largely stable in FY12. Mobilisation of CASA deposits could
remain under pressure in Q4 due to migration of saving deposits to term deposits
with a sharp increase in rates. C/D ratio could decline marginally in Q4FY11
(from a level of 79.3% in Q3FY11).
Improvement in asset quality to boost near-term earnings: An improving trend
of slippages, as seen in Q3FY11, is likely to continue in Q4FY11 as well, as
slippages from the restructured assets pool have already peaked with 17% of
these loans already turning into NPLs. The bank’s credit costs are likely to have
peaked and lower incremental credit costs could boost earnings in the coming
quarters. However, higher exposure to infrastructure and power sectors (~12%
and 10% of total industry exposure respectively) remains a concern in the longer
term given the deterioration in profitability of a few large SEBs (in the near term,
we do not expect any restructuring or default from this segment). AXSB currently
does not have any exposure to SEBs; however, absence of any structural reforms
could hit the entire chain, in our view.
Fee income to grow in line with assets: Fee income from distribution of third
party financial products is likely to remain under pressure in Q4FY11 also;
however, reported fee income growth is likely to trend upwards from Q4 as the
impact of changes in the accounting policy on commissions is already in the
base (the bank effected these changes in Q4FY10). We expect fee income to
grow by 27% CAGR through FY13 (albeit on a lower base of FY11).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Axis Bank Ltd
Strong near term outlook but reducing TP due to high
presence in risky segments
We recently interacted with the management of Axis Bank (AXSB). The
management continues to guide for a credit growth of 1.3x the industry growth
rate in the medium term. While the bank’s reported NIMs would come off from
3.8% in Q3FY11, compression of NIMs is likely to be restricted to
~20bps. Fee income growth would likely be in line with asset growth, as the
impact of changes in the accounting policy on commissions is already in the
base. Asset quality is likely to improve further in the near term, as slippages
from restructured assets are expected to decline. Lower loan loss provisions are
likely to boost earnings in the coming quarters. However, in the medium term,
higher exposure to infrastructure and power sectors remains a concern, as
higher losses in SEBs and execution risks in upcoming projects could weigh on
valuations. Hence, we are maintaining our estimates and BUY rating on the
stock but lowering our valuation multiple to 16x FY12E EPS and 3.1x FY12E BV.
Our target price thus stands revised to Rs 1,675 (from Rs 1,800 earlier).
NIMs likely to remain at 3.6% plus: The management continues to guide for a
~20bps compression in NIMs in Q4FY11 (Q3 NIMs at 3.81%) due to a sharp
increase in deposit rates in the last six months. On a full-year basis, we expect
NIMs to remain largely stable in FY12. Mobilisation of CASA deposits could
remain under pressure in Q4 due to migration of saving deposits to term deposits
with a sharp increase in rates. C/D ratio could decline marginally in Q4FY11
(from a level of 79.3% in Q3FY11).
Improvement in asset quality to boost near-term earnings: An improving trend
of slippages, as seen in Q3FY11, is likely to continue in Q4FY11 as well, as
slippages from the restructured assets pool have already peaked with 17% of
these loans already turning into NPLs. The bank’s credit costs are likely to have
peaked and lower incremental credit costs could boost earnings in the coming
quarters. However, higher exposure to infrastructure and power sectors (~12%
and 10% of total industry exposure respectively) remains a concern in the longer
term given the deterioration in profitability of a few large SEBs (in the near term,
we do not expect any restructuring or default from this segment). AXSB currently
does not have any exposure to SEBs; however, absence of any structural reforms
could hit the entire chain, in our view.
Fee income to grow in line with assets: Fee income from distribution of third
party financial products is likely to remain under pressure in Q4FY11 also;
however, reported fee income growth is likely to trend upwards from Q4 as the
impact of changes in the accounting policy on commissions is already in the
base (the bank effected these changes in Q4FY10). We expect fee income to
grow by 27% CAGR through FY13 (albeit on a lower base of FY11).
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