Axis Bank (Q1 FY15)

• Loan growth in-line at 16% yoy; continues to be driven by Retail and SME segments while Corporate credit growth moderates further

• C/D ratio improves; CASA declines 250bps qoq 

• NIM resilience surprises again; outlook is healthy too

• Fee growth moderated further on sharp decline in corporate fees; C/I ratio deteriorates

• Impaired assets addition lesser-than-expected at Rs11bn; credit cost modest at annualized 58bps

• Valuation has scope to re-rate further, Retain BUY

Loangrowth in-line at 16% yoy; continues to be driven by Retail and SME segments whileCorporate credit growth moderates further

Overall loan growth at 16% yoywas in‐line with our expectation; on sequential basis, the loan book was flatdue to seasonality. Axis Bank has been executing well on the lines of itsstated loan mix strategy. Core retail loan growth (excluding FCNR relatedlending) continued to be strong at 28% yoy. The retail segment share in theoverall credit stood at 40% including the portion of agri portfolio which wasre-classified as retail based on the nature of borrower. The retail bookremains robust in quality with mortgages accounting for 61% and overall securedproducts forming 88%. The growth in Retail portfolio is expected to remainstrong supported by widening distribution of products and the bank expects itscontribution to reach 45% in the longer term. SME loan growth was also strongat 22% yoy including agri loans re-classified here. Corporate loan growth furtherdecelerated to 2% yoy on account of lackluster capex activity and slowerdrawdown on the funded infra/power projects.

/Dratio improves; CASA declines 250bps qoq 

Deposits grew lower thanadvances at 14% yoy and therefore the C/D ratio improved to 85%. Aided byaggressive branch addition over the past two years, the share of retaildeposits (savings + retail TDs) in total domestic deposits has been rising(stood at 73% at the end of Q1 FY15). This execution has complimented bank’seffort of strengthening retail franchise and the declining contribution of lumpycorporate loans on the asset side. On daily average basis, overall CASA andsavings deposits grew by 16% yoy and 20% yoy respectively. The end-quarter CASAratio declined by sharply by 250bps qoq to 42.4% on account of steep de-growthin current deposits (withdrawal of year-end floats).      

NIM resiliencesurprises again; outlook is healthy too

NIM was stable at 3.9% againstour expectation of 10bps correction. The uptick in loan/deposit ratio is likelyto have supported margin. Though slightly better than previous quarter, theblended yield on advances remained depressed impacted by lower-priced PSLlending. Flat cost of funds was surprising despite the fall in CASA andmarginal increase in wholesale funding cost during Q4 FY14. We expect Axis Bankto sustain NIM in an elevated range of 3.6‐3.9% in themedium term supported by benign wholesale funding rates and improvement in CASAratio. Bank continues to guide NIMs at north of 3.5%.

Feegrowth moderated further on sharp decline in corporate fees; C/I ratiodeteriorates

Fee income growth moderatedfurther to just 5% yoy from 10% yoy in the previous quarter. This was primarilydriven by 12% contraction in corporate fees (23% contribution) which in turnwas impacted by deceleration in corporate loan growth. Retail fees (37%contribution) grew strongly by 22% yoy supported by the strong growth momentumin retail loans. Bank expects fee growth to improve in H2 FY15 on the back ofrevival in corporate disbursements (corporate loan growth expected to improveto 10% yoy). Miscellaneous income this quarter was nominal at Rs530mn in theabsence of any repatriation of accumulated profits from overseas operations (aswas seen in previous quarters). Opex growth increased to 17% yoy driven bysignificant investments made in network expansion through FY14 (added ~450branches, ~25% to FY13 base). Cost/Income ratio increased by 250bps qoq to42.1% on account of lower non-interest income and acceleration in cost growth.In the longer term, we see the ratio stabilizing in the range of 40-42%. 

Impairedassets addition lesser-than-expected at Rs11bn; credit cost modest atannualized 58bps

Fresh delinquencies (Rs6.3bn,annualized ratio at 1.1%) and restructuring (Rs4.8bn) combined was lower thanour expectations at Rs11bn. It was even lower than the quarterly run-rateimplied by the annual impaired assets creation guidance of Rs65bn and the averageRs14bn addition seen over the past four quarters. Consequently, credit based onLLP was modest at 58bps and the PCR was sustained at 77%. However, the bank hasnot lowered its annual impaired assets addition and credit cost guidance,probably choosing to wait for sustenance of such assuaging trends. We expectcredit cost to moderate in FY15 and FY16 driven by reducing stress on assetquality.

Valuationhas scope to re-rate further, Retain BUY

Except for sluggish feegrowth, Axis Bank’s operational performance in Q1 FY15 was much better than ourexpectations. Robust NIMs, marginal improvement in cost/income ratio and ameasured reduction in credit cost should enable the bank to deliver RoAs in therange of 1.6-1.8% over FY14-17. Though valuation has re-rated quitesignificantly over the past six months (from 1.2x to 1.9x FY16 P/ABV), webelieve there is further room as the bank could trade at above averagemultiples in an improving macro environment. Retain Buy rating and raise 9‐12month target to Rs2,350.

Financial Summary