Axis Bank: Impressive growth leading to healthy earnings numbers :: Kotak Securities

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Impressive growth leading to healthy earnings numbers. Axis Bank reported a
stable earnings growth of 18% yoy on the back of 22% revenue growth. Loan growth
was well ahead of industry average at 23% yoy while the impact of the recent base rate
cut was negligible qoq. The transition to retail is going well both from loans and
contribution to fees perspectives. Improving macro is giving us comfort to maintain our
positive view on the bank. Maintain ADD with TP revised to `550 (from `525 earlier).

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Strong overall performance; sharp decline in fresh impairments
Axis Bank reported a strong performance with earnings growth of 18% yoy led by an
impressive 22% yoy revenue growth. Provisions were higher as 2QFY14 had high reversal from
the investment portfolio. Despite base rate cut in the previous quarter, NIM was maintained qoq
at 4%. Loan growth was healthy at 23% yoy with strong performance across various segments.
Non-interest income grew 24% yoy led by high contribution from treasury income and fee
income growth of 16% yoy. Fresh impairment ratios were lower with slippages at 1.2% and
fresh restructuring at 0.2% of loans, the lowest in the past 12 quarters. The bank has not
changed its guidance on credit costs at ~80 bps and fresh impairment of `65 bn for FY2015.
Fresh impairments for 9MFY15 were `34 bn and credit costs were at 80 bps annualized.
Business in a sweet spot; we see less risk in this sharp growth in the retail business
We are pleasantly surprised at the pace of transition towards the retail business and would be
positive at this stage of the economic cycle. Retail loans grew 24% yoy and contribute ~40% of
the loans. Retail fees grew 32% yoy for 9MFY15 and contribute ~40% of the fee business. We
maintain our positive view as we believe the shift to retail business is progressing comfortably.
A strong liability franchise that makes this transition easier, a solid acquisition model through its
subsidiary with greater focus through internal customers and a strong analytics team is likely to
result in lower risk and maintain profitability, in our view. While we expect loan growth trends
to continue at current levels, we expect a shift towards unsecured loans to maintain return ratios.
Maintain ADD; well-placed in the current environment
Despite the recent outperformance, we find valuations comfortable and value the bank at 2.4X
book and 14X EPS (September 2016E) for RoEs in the range of 17% and ~15% earnings growth.
Tier-1 ratio is comfortable at 12%. The bank is well-positioned to capture growth across various
segments. We maintain ADD; TP revised to `550 from `525 earlier factoring earnings changes.
It still remains an interesting idea among frontline banks, in our view. We think that the bank is
well-placed as the improving macro should ease concerns in the corporate loan portfolio while
the transition to retail is making business across the frontline private banks quite similar.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily19012015tn.pdf