Axis Bank - Company Update 28Mar11

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Axis Bank Ltd Company Update 28 March 2011

1Siddharth Teli Ishank Kumar Nikhil Rungta

(91-22) 6766 3463 (91-22) 6766 3467 (91-22) 6766 3451

[email protected] [email protected] [email protected]

Religare Capital Markets ranked the No. 1 Brokerage House at the StarMine Awards for 2010-11. | RCML Research is also available on Bloomberg FTIS and Thomson First Call

Company Update 28 March 2011

Financial highlights

(Rs mn) FY10 FY11E FY12E FY13E

NII 50,045 65,902 80,511 95,625

Growth (%) 35.8 31.7 22.2 18.8

PPP 52,406 63,417 77,062 92,411

Growth (%) 40.7 21.0 21.5 19.9

FDEPS (Rs) 62.1 81.2 103.9 125.4

Growth (%) 22.7 30.8 28.0 20.7

Profitability and return ratios

(%) FY10 FY11E FY12E FY13E

Net interest margin 3.2 3.4 3.4 3.3

Non-int inc/Total inc 44.1 40.2 40.6 41.6

Cost/Inc ratio 41.4 42.5 43.1 43.6

RONW 19.2 18.9 20.7 21.1

ROA 1.5 1.6 1.7 1.7

Net NPA 0.4 0.4 0.4 0.4

Axis Bank LtdStrong near term outlook but reducing TP due to highpresence in risky segmentsWe recently interacted with the management of Axis Bank (AXSB). Themanagement continues to guide for a credit growth of 1.3x the industry growthrate in the medium term. While the banks reported NIMs would c ome off from3.8% in Q3FY11, compression of NIMs is likely to be restricted to~20bps. Fee income growth would likely be in line with asset growth, as theimpact of changes in the accounting policy on commissions is already in thebase. Asset quality is likely to improve further in the near term, as slippagesfrom restructured assets are expected to decline. Lower loan loss provisions arelikely to boost earnings in the coming quarters. However, in the medium term,higher exposure to infrastructure and power sectors remains a concern, ashigher losses in SEBs and execution risks in upcoming projects could weigh onvaluations. Hence, we are maintaining our estimates and BUY rating on thestock 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 sharpincrease in deposit rates in the last six months. On a full-year basis, we expectNIMs to remain largely stable in FY12. Mobilisation of CASA deposits couldremain under pressure in Q4 due to migration of saving deposits to term depositswith 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, asslippages from the restructured assets pool have already peaked with 17% of these loans already turning into NPLs. The banks credit costs are likely to havepeaked and lower incremental credit costs could boost earnings in the comingquarters. However, higher exposure to infrastructure and power sectors (~12%and 10% of total industry exposure respectively) remains a concern in the longerterm 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 currentlydoes not have any exposure to SEBs; however, absence of any structural reformscould hit the entire chain, in our view.

Fee income to grow in line with assets: Fee income from distribution of thirdparty financial products is likely to remain under pressure in Q4FY11 also;

however, reported fee income growth is likely to trend upwards from Q4 as theimpact of changes in the accounting policy on commissions is already in thebase (the bank effected these changes in Q4FY10). We expect fee income togrow by 27% CAGR through FY13 (albeit on a lower base of FY11).

Whats New? Target Rating Estimates

CMP TARGET RATING RISK

Rs 1,384 Rs 1,675 BUY MEDIUM

BSE NSE BLOOMBERG

532215 AXISBANK AXSB IN

Company dataMarket cap (Rs mn / US$ mn) 561 / 12.5

Outstanding equity shares (mn) 405

Free float (%) 62.7

Dividend yield (%) 0.7

52-week high/low (Rs) 1,609 / 1,100

3-month average daily volume 1,788,019

Stock performanceReturns (%) CMP 1-mth 3-mth 6-mth

AXSB 1,384 13.6 7.4 (8.0)

Bankex 13,082 10.6 0.9 (6.2)

Sensex 18,943 6.3 (5.3) (5.5)

Valuation matrix(x) FY10 FY11E FY12E FY13E

P/BV @ CMP 3.5 3.0 2.5 2.1

P/BV @ Target 4.2 3.6 3.1 2.6P/E @ CMP 22.3 17.1 13.3 11.0


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Fig 1 - Advances to grow at 23% CAGR over FY11-FY13

30

40

50

6070

80

90

01020304050607080

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

C/D ratio (R) Credit growthdeposit growth

(%) (%)

Source: Company, RCML Research

Fig 2 - NIMs likely to remain stable through FY12

1.5

1.9

2.3

2.7

3.1

3.5

05

101520253035

404550

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

CASA NIMs (R)(%) (%)


Fig 3 - Break-up of advances Dec 10

Corporateloan57%

SME14%

RetailBusiness

20%

Agriculture9%


Fig 4 - Break-up of industry advances Dec 10Financial

Companies13% Infra11%

Power10%

Metals8%Engineering

6%Telecom

5%

Trade5%

Real Estate4%

Others38%


Fig 5 - Trend in asset qualityQ2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11

Gross NPA (Rs mn) 11,317 11,735 13,180 13,409 13,624 14,829Gross NPA (%) 1.2 1.2 1.1 1.1 1.1 1.1Net NPA (Rs mn) 4,167 4,296 4,190 4,134 4,094 3,855Net NPA (%) 0.5 0.5 0.4 0.4 0.3 0.3Provision coverage ratio (%) 63.2 63.4 68.2 69.2 70.0 74.0Provision coverage (incl. write-offs, %) 86.7 87.8 88.6 76.6 90.5 91.4Source: Company, RCML Research

Fig 6 - Price to 1-yr fwd BV

0

5

10

15

20

25

0

1

2

3

4

5

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Price/ 1-yr fwd book 12 mth rolling Core RoE (R)(x) (%)



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Standalone financialsProfit and Loss statement Key ratios Y/E March (Rs mn) FY10 FY11E FY12E FY13E

Interest earned 116,380 150,918 190,007 232,095

Interest expended 66,335 85,016 109,495 136,470

Net interest income 50,045 65,902 80,511 95,625

Non-interest income 39,458 44,338 54,917 68,194

Non-int income (ex-treasury) 32,317 38,838 48,917 61,694

Operating expenses 37,097 46,822 58,367 71,407

Pre-provisioning profits 52,406 63,417 77,062 92,411

Provision & contingencies 13,892 14,256 14,149 16,460

PBT 38,514 49,161 62,913 75,952

Income tax, interest tax 13,368 16,272 20,824 25,140

Net profit 25,145 32,889 42,089 50,812

Y/E March (Rs mn) FY10 FY11E FY12E FY13E

Valuation ratios (x)

P/E 22.3 17.1 13.3 11.0

P/BV 3.5 3.0 2.5 2.1

P/ABV 3.6 3.1 2.6 2.2

Return Ratios (%)

Spread analysis

Yield on advances 8.6 8.8 9.2 9.3

Yield on investments 6.7 7.1 6.9 6.8

Cost of funds 4.6 4.8 5.0 5.2

NIMs 3.2 3.4 3.4 3.3

Operating ratios

Operating cost to income 41.4 42.5 43.1 43.6

Operating expenses/Avg. assets 2.3 2.3 2.4 2.4

Proportion of CASA deposits 46.7 42.5 41.5 42.5

Non-int Inc/ Total income 44.1 40.2 40.6 41.6

Credit-Deposit ratio 73.8 78.4 79.7 80.7

Investment/Deposit 39.6 38.4 38.9 39.2

Asset quality & Capital

Gross NPA 1.3 1.3 1.3 1.3

Net NPA 0.4 0.4 0.4 0.4

Coverage ratio 68.2 73.5 69.0 68.8

CAR 15.8 15.0 14.0 13.6

Tier I 11.2 10.5 10.0 9.6

Growth ratios

Net interest income 35.8 31.7 22.2 18.8

Non-interest Income (Ex-treasury) 23.9 20.2 26.0 26.1

Pre-provisioning profit 40.7 21.0 21.5 19.9

Net profit 38.5 30.8 28.0 20.7

Assets 22.3 23.3 22.1 20.4

Advances 27.9 28.0 24.0 22.0

Deposits 20.4 20.5 22.0 20.5

Du pont analysis

Net interest income/assets 3.0 3.3 3.3 3.2

Non interest income/assets 2.4 2.2 2.2 2.3

Operating expense/Assets 2.3 2.3 2.4 2.4

Provisions/Assets 0.8 0.7 0.6 0.5

Taxes/Assets 0.8 0.8 0.8 0.8

ROA 1.5 1.6 1.7 1.7

Equity/Assets 8.0 8.6 8.2 8.0

ROAE 19.2 18.9 20.7 21.1

Balance sheet Y/E March (Rs mn) FY10 FY11E FY12E FY13E

Cash in hand & bal with RBI 94,739 104,213 112,550 121,554

Bal with banks, money at call 57,326 63,058 68,103 73,551

Investments 559,748 654,224 808,247 980,022

Advances 1,043,431 1,335,592 1,656,134 2,020,483

Fixed assets (net) 12,224 21,515 24,096 26,988

Other assets 39,011 48,763 51,104 53,557

Total assets 1,806,479 2,227,364 2,720,233 3,276,155

Equity capital 4,052 4,052 4,052 4,052

Reserves & surplus 156,393 182,704 216,375 257,024

Net worth 160,444 186,756 220,427 261,076

Deposits 1,413,002 1,702,668 2,077,254 2,503,092

CASA deposits 660,295 723,634 862,061 1,063,814

Term deposits 752,707 979,034 1,215,194 1,439,278

Borrowings (+sub-ord bonds) 171,696 261,137 326,581 392,058

Other liabilities & provisions 61,336 76,804 95,971 119,930

Total liabilities 1,806,479 2,227,364 2,720,233 3,276,155

Per share data Y/E March FY10 FY11E FY12E FY13E

Shares outstanding (mn) 405 405 405 405

FDEPS (Rs) 62.1 81.2 103.9 125.4

DPS (Rs) 12.0 13.9 17.8 21.5

Book value (Rs) 396 461 544 644

Adjusted book value (Rs) 389 453 533 630


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Important Global Disclosures

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Axis Bank - Company Update 28Mar11