CMP Rs1,023, Target Rs1,350, Upside 31.9%
Robust growth in retail segment; SME share continues to dwindle
On expected lines, Axis Bank’s advances were largely flat qoq but represented a healthy growth of 24-25% yoy (adjusted for the sharp rupee depreciation). A marked trend in the bank’s annual growth pattern has been a marginal expansion in first half followed by robust growth in the second half. Retail loans grew by robust 8% qoq and 50% yoy increasing its share in overall advances to 23.7% (up 160bps qoq 320bps yoy). This is in sync with the bank’s stated objective of taking the retail share to 29-30% by FY15. In our view, apart from lower delinquencies, the changing deposit mix (rising share of retail TDs) could be accelerating this movement. Axis Bank has been witnessing strong growth in key retail products of mortgages and auto loans (combined 88% of retail book). Corporate loans grew by 2% qoq and 32% yoy aided by working capital loans and disbursements on sanctioned project loans. Bank’s continued caution in the SME segment (-8% qoq and 11% yoy) has led to its share declining to multi-quarter low of 12.8%.
CASA declines sharply; strong growth in retail term deposits
On daily average basis, CASA ratio for the quarter stood at 36% representing a material decline of 200bps from the previous quarter. There was a steep 14% qoq decline in current account balance attributable to seasonality and systemic issue of tight liquidity and higher short-term rates. The pace of savings deposits growth moderated marginally (2% qoq and 23% yoy) but is likely to remain resilient backed by improving maturity of substantial branches added during 2009 and 2010. In our view, the CASA ratio of the bank is near its cyclical bottom. With higher rates being offered, retail TD mobilization has been strong (12% qoq and 44% yoy). Bulk deposits were stable sequentially at 37% of total deposits but their share is expected to decline gradually as CASA improves.
NIM contraction on expected lines; likely to bounce back over next two quarters
There is a structural annual seasonality in Axis Bank’s NIMs; it corrects by 20-30bps over Q3 to Q1 on the back of change in loan mix. So the margin contraction of 18bps qoq in Q1 FY13 was on expected lines. Segmentally, it was driven by 21bps correction in domestic NIM of the bank. The adverse change in deposits mix and higher wholesale rates during the end of Q4 FY12 drove an increase in CoF by 25bps qoq. As per the bank, the funding cost is unlikely to increase further. Axis Bank is confident of achieving NIM near 3.5% for FY13, at the higher end of its stated guidance. Structural drivers of margin improvement would be favorable shift in loan mix and improvement in CASA.
Fee growth was weak; C/I ratio improves on opex decline
Core fee income growth (9% yoy) remained weak for second succeeding quarter impacted by sharp slow down in corporate fees (flat yoy; comprises 35% of total fee income). On the other hand, fee growth has been strong in retail, agri/SME and business banking segments. Though the bank is hopeful that fee growth would track balance sheet growth for the year, we expect it to be slower on account of sustained weakness in corporate fees. Opex declined by 8.5% qoq driving a small improvement in C/I ratio.
Asset quality remains resilient; maintains full-year credit cost guidance at 80-85bps
Axis Bank’s GNPL increased 16% qoq to Rs20.9bn (1.1% of gross advances) on the back of muted recoveries/upgradations. Slippages were modest at Rs4.6bn with annualized delinquency ratio at 1.1%. Slippage from the restructured book was negligible at Rs20mn. Bank restructured assets worth Rs6.3bn which included an infra account (but not a power asset) of ~Rs3.5bn. The outstanding restructured book stood at Rs38.3bn, 2% of advances. Of this, assets amounting to Rs12.3bn have displayed a satisfactory repayment track-record of two years. The bank continues to expect incremental stress assets (slippages + addition to restructured assets) at ~Rs10bn per quarter. Credit cost for the quarter was 69bps and the bank has maintained full-year guidance at 80-85bps. As per the bank, current Tier-I capital of 9.5% (including Q1 FY13 profit) would be adequate to support 20% balance sheet growth in the medium term.
Maintain BUY with 9-month target price of Rs1,350
We retain constructive stance on Axis Bank on account of expected structural improvement in profitability and its relatively attractive valuation (55-60% discount to HDFC Bank). We believe bank’s valuation would re-rate quickly in case of any beneficial reform actions relating to the power sector. Our 9-month price target is Rs1,350.