Axis Bank (AXSB IN) Asset quality stress coming off gradually. Q2FY19 Result Update. Rating: ACCUMULATE CMP: Rs611 TP: Rs681.

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1 (AXSB IN) Rating: ACCUMULATE CMP: Rs611 TP: Rs681 November 2, 2018 Q2FY19 Result Update Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating ACCUMULATE ACCUMULATE Target Price NII (Rs. m) 216, , , ,240 % Chng Op. Profit (Rs. m) 173, , , ,889 % Chng EPS (Rs.) % Chng. (5.9) 5.9 Key Financials FY18 FY19E FY20E FY21E NII (Rs bn) Op. Profit (Rs bn) PAT (Rs bn) EPS (Rs.) Gr. (%) (92.8) 1, DPS (Rs.) Yield (%) NIM (%) RoAE (%) RoAA (%) P/BV (x) P/ABV (x) PE (x) CAR (%) Key Data AXBK.BO AXSB IN 52-W High / Low Rs.678 / Rs.478 Sensex / Nifty 35,012 / 10,553 Market Cap Rs.1,567bn/ $ 21,610m Shares Outstanding 2,569m 3M Avg. Daily Value Rs m Shareholding Pattern (%) Promoter s Foreign Domestic Institution Public & Others Promoter Pledge (Rs bn) Stock Performance (%) 1M 6M 12M Absolute Relative Pritesh Bumb priteshbumb@plindia.com Asset quality stress coming off gradually Quick Pointers Higher upgrades than downgrades in BB & Below which is 1.7% of assets which led to another quarter of lower slippages of Rs27.8bn TDs growth has been much higher leading to higher CoF but 54% of loans are on MCLR which will help repricing faster, steadying NIMs profile Axis bank s earnings of Rs7.9bn (PLe: Rs8.2bn) saw marginal miss but NII profile was better and decent fee income helped core PPOP grow at 16% YoY. Highlight of the quarter was continued lowered slippage of Rs27.8bn (annualized 2.5% of loans v/s 3.9% in Q1FY19) and decent recovery/upgrades helping improve overall asset quality and reducing stress levels. Bank is also continuously improving its PCR especially on NCLT a/c at ~90%. Going ahead, power resolutions will be important (large part of BB & Below) to drive asset quality, but despite that we will see gradual improvement in core operations as credit cost normalized, positive bias on NIMs and improving loan growth. We revise our TP to Rs681 (from Rs624) based on 2.3x Sep-20 ABV (from 2.4x Mar-20 ABV). NII better but NIMs yet to see marked improvement: NII growth of 15% YoY was slightly better than expectation but NIMs at 3.36% are yet to see marked improvement as MCLRs are yet to catch up (54% of total loans of which 65% in 3-6Mth duration) and bank has been growing TDs>CASA and loan growth keeping cost of funds also up. Margins should start moving up as yields catch up with improving asset quality. Management guided NIMs range of bps in medium to longer tenure led by domestic NIMs with pricing power is partly moving back in corporate and partly in ex-mortgage retail. Improving asset quality has been relief: Slippages were at Rs27.8bn with corporate slippages at Rs10.9 bn and predominantly from BB & Below book which is now 1.7% of assets (from 2.1% in Q1FY19). This led GNPAs/NNPAs to come off by 60bps QoQ to 6.0%/2.5% respectively. Importantly bank has been improving its PCR profile with currently at 58.9% (73% incl. technical w.off) up ~ bps sequentially and 90% on the NCLT exposures (RBI referred). Bank maintained credit cost be much lower in H2FY19 and should trend downwards to 110bps of normalized credit cost on long period average. Loans growth momentum intact for non-corporate: Overall loan book grew slightly slower at 11% which has been on slowing corporate loans (take outs and consolidation), while retail/sme continues to clock strong growth. Bank remains focused on unsecured, small biz loans, education loans in retail and working capital loans in SME & corporate segments. Valuations premium to peers: Valuations at 2.2x/1.9x FY20/21 is higher to immediate peers which should restrict higher upside, while risk in near term remains on the power sector resolutions as power is large part of watch list for axis but with much comfortable PCR credit cost should normalize helping ROE seeing gradual improvement by 15% in FY21. November 2,

2 Q2FY19 Financials Better NII helps PPOP; lower slippages help on lesser provisions (Rs m) Q2FY19 Q2FY18 YoY gr. (%) Q1FY19 QoQ gr. (%) Interest Income 132, , , Interest Expenses 80,489 66, , Net interest income (NII) 52,321 45, , Other income 26,784 25, ,250 (8.4) Total income 79,105 71, ,918 (2.2) Operating expenses 38,165 33, , Staff expenses 11,747 10, ,278 (4.3) -Other expenses 26,418 22, , Operating profit 40,940 37, ,720 (6.4) Core operating profit 39,580 34, ,690 (7.3) Total provisions 29,274 31,404 (6.8) 33,377 (12.3) Profit before tax 11,666 6, , Tax 3,770 2, , Profit after tax 7,896 4, , Balance sheet (Rs m) Deposits 4,796,796 4,164, ,470, Advances 4,561,213 4,101, ,410, Ratios (%) Profitability ratios RoaA NIM (9) 3.5 (10) Cost of Funds Asset Quality Gross NPL 309, , ,624 (5.3) Net NPL 127, ,523 (9.5) 149,016 (14.7) Gross NPL ratio (56) Net NPL ratio (58) 3.1 (55) Coverage ratio (Calc) , Business & Other Ratios Low-cost deposit mix (200) Cost-income ratio Non int. inc / total income (243) 36.1 (229) Credit deposit ratio (341) 98.7 (357) CAR (25) Tier-I (18) November 2,

3 Loan growth came of slightly on consolidation in large corporate loan book, while retail continued to grow strong (Rs m) Q2FY19 Q2FY18 YoY gr. (%) Q1FY19 QoQ gr. (%) Large & mid-corporate 1,741,490 1,731, ,724, SME Advances 602, , , Retail 2,217,100 1,842, ,116, Housing Loans & LAP 864, , , Personal loans 243, , , Auto loans 243, , , Margins was steady (excl one-off in last quarter) with improving trends in some part of portfolio than TD growth CASA ratio was steady but CASA growth slower 4.1% 4.0% 3.9% NIM (%) 54% 52% 50% Low Cost deposits(%) 3.8% 48% 3.7% 46% 3.6% 3.5% 3.4% 3.3% 44% 42% 40% MCLR loans share is inching up sharply Base Rate MCLR Fixed LIBOR 14% 15% 16% 14% 14% 14% 14% 13% 14% 12% 17% 17% 16% 15% 16% 17% 19% 20% 21% 21% 11% 18% 29% 36% 40% 43% 49% 50% 54% 65% 57% 50% 42% 34% 29% 24% 18% 15% 13% November 2,

4 4Q14 Axis Bank Retail fees dominate with higher transaction and loan related fees Retail (non card) Retail (card) Transc. Bnking SME Treasry & DCM Corp Fees 25% 20% 20% 20% 18% 21% 17% 18% 13% 12% 5% 4% 5% 4% 2% 1% 1% 1% 4% 1% 2% 4% 1% 2% 1% 6% 5% 5% 5% 4% 20% 20% 22% 22% 22% 20% 19% 20% 20% 20% 18% 20% 20% 20% 21% 21% 22% 26% 24% 20% 31% 31% 32% 33% 33% 34% 35% 34% 35% 38% Source: Company Data, PL Research income C/I slightly deteriorated on higher other opex and lower other 54% 52% 50% 48% 46% 44% 42% 40% 38% 36% 34% cost-income 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Asset quality improves on lower slippages and better recoveries Gross NPA (%) Net NPA (%) Coverage Ratio (%) - RHS 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 80% 70% 60% 50% 40% 30% 20% 10% 0% November 2,

5 AA rated exposures sees improvement AAA/AA/A BBB <BB or unrated 8% 9% 9% 9% 11% 11% 11% 12% 16% 15% 14% 12% 10% 11% 9% 5% 6% 5% 31% 30% 31% 29% 29% 28% 27% 26% 20% 22% 23% 22% 22% 19% 17% 18% 16% 16% 61% 61% 60% 62% 60% 61% 62% 62% 64% 63% 63% 66% 68% 70% 74% 77% 78% 79% Stable scenario in SME ratings SME 1-3 SME 4 SME 5-8 8% 8% 7% 7% 8% 7% 8% 8% 9% 8% 7% 7% 6% 5% 5% 6% 6% 5% 14% 12% 11% 9% 9% 8% 8% 8% 8% 8% 8% 9% 9% 8% 8% 6% 6% 6% 78% 80% 82% 83% 85% 83% 85% 85% 86% 87% 88% 88% 89% Net Stressed loan outside the NPA increase to 2.1% of Net customer assets Stressed Loans (Rs Mn) Gross slippages 14,740 36,380 87,720 45,600 48,110 35,190 89,360 44, ,360 43,370 27,770 Recoveries+ Up gradations 7,800 1,400 10,730 3,500 28,040 3,060 10,480 40,080 34,010 29,170 21,860 Write-offs 3, ,730 1,220 11,940 24,620 25,170 28,220 38,870 30,070 23,150 Slippages (%) 1.80% 4.26% 10.05% 5.21% 5.34% 3.71% 8.98% 4.26% 15.37% 3.94% 2.48% BB & Below Book 194, , , , , , , ,200 89, ,960 88,600 % of customer assets 5.7% 7.4% 5.7% 5.5% 4.8% 4.6% 3.5% 3.5% 1.8% 2.2% 1.7% Watch List 226, , , ,910 94,360 79,410 60,520 53,090 4,280 Corp Restructured Advances 84,790 76,650 68,830 62,420 54,890 54,320 38,600 35,250 10,810 11,588 11,987 SDR / S4A / 5-25 Advances 41,890 52,630 51,580 43,510 46,090 49,720 52,770 52,880 10,890 16,882 15,573 Total Restructured Dispensation 124, , , ,200 96,450 73,900 69,850 20,650 28,470 27,560 % of loans 3.6% 3.3% 3.0% 2.7% 2.5% 1.8% 1.7% 0.5% 0.6% 0.5% Total stress (adjusted for overlaps) 303, , , , , , , ,260 91, , ,280 % of Customer Assets 9.0% 9.7% 7.6% 6.8% 5.6% 4.5% 3.9% 3.5% 1.9% 2.5% 2.1% November 2,

6 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Axis Bank Estimates Changes We tweak on margins, lower other income and slightly increase credit cost for PCR improvement (Rs mn) Old Revised % Change FY19E FY20E FY19E FY20E FY19E FY20E Net interest income 214, , , , Operating profit 172, , , , Net profit 50,481 86,540 47,527 91,644 (5.9) 5.9 EPS (Rs) (5.9) 5.9 ABVPS (Rs) Price target (Rs) Recommendation ACCUMULATE ACCUMULATE Source: Company Data, PL Research We revise our TP to Rs681 (from Rs624) based on 2.3x Sep-20 ABV (from 2.4x Mar-20 ABV) PT calculation and upside Terminal growth 5.0% Market risk premium 6.0% Risk-free rate 8.0% Adjusted beta 1.05 Cost of equity 14.3% Fair price - P/ABV 681 Target P/ABV 2.3 Target P/E 16.6 Current price, Rs 602 Upside (%) 13% Dividend yield (%) 1% Total return (%) 14% AXSB s historical P/ABV trends 3.6 P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD November 2,

7 Income Statement (Rs. m) Int. Earned from Adv. 341, , , ,099 Int. Earned from invt. 99, , , ,985 Others 16,595 18,697 19,887 21,347 Total Interest Income 457, , , ,432 Interest Expenses 271, , , ,548 Net Interest Income 186, , , ,884 Growth(%) (0.7) Non Interest Income 109, , , ,906 Net Total Income 295, , , ,790 Growth(%) Employee Expenses 43,130 48,305 53,860 60,323 Other Expenses 91, , , ,336 Operating Expenses 139, , , ,328 Operating Profit 155, , , ,462 Growth(%) (11.3) NPA Provision 165,987 94,525 65,677 57,650 Total Provisions 154, ,184 70,289 62,110 PBT 1,216 70, , ,353 Tax Provision (1,541) 23,409 44,528 59,629 Effective tax rate (%) (126.8) PAT 2,757 47,527 91, ,723 Growth(%) (92.5) 1, Balance Sheet (Rs. m) Face value No. of equity shares 2,567 2,612 2,612 2,612 Equity 5,133 5,224 5,224 5,224 Networth 634, , , ,123 Growth(%) Adj. Networth to NNPAs 165, ,381 82,792 75,298 Deposits 4,536,227 5,148,618 5,895,167 6,808,918 Growth(%) CASA Deposits 2,438,516 2,666,984 3,059,592 3,554,255 % of total deposits Total Liabilities 6,913,296 7,790,041 8,836,962 10,102,356 Net Advances 4,396,503 5,055,979 5,890,215 6,921,003 Growth(%) Investments 1,538,761 1,629,090 1,685,007 1,766,746 Total Assets 6,913,296 7,790,041 8,836,962 10,102,356 Growth (%) Asset Quality Gross NPAs (Rs m) 342, , , ,539 Net NPAs (Rs m) 165, ,381 82,792 75,298 Gr. NPAs to Gross Adv.(%) Net NPAs to Net Adv. (%) NPA Coverage % Profitability (%) NIM RoAA RoAE Tier I CRAR Source: Company Data, PL Research Quarterly Financials (Rs. m) Y/e Mar Q3FY18 Q4FY18 Q1FY19 Q2FY19 Interest Income 117, , , ,810 Interest Expenses 69,900 70,407 76,102 80,489 Net Interest Income 47,315 47,305 51,668 52,321 YoY growth (%) CEB 22,460 24,480 21,170 23,760 Treasury Non Interest Income 25,931 27,887 29,250 26,784 Total Income 143, , , ,594 Employee Expenses 10,629 10,789 12,278 11,747 Other expenses 24,079 27,680 24,920 26,418 Operating Expenses 34,708 38,469 37,198 38,165 Operating Profit 38,538 36,722 43,720 40,940 YoY growth (%) (16.9) (16.1) Core Operating Profits 36,538 34,562 42,690 39,580 NPA Provision 27,540 81,280 30,690 26,860 Others Provisions 28,110 71,795 33,377 29,274 Total Provisions 28,110 71,795 33,377 29,274 Profit Before Tax 10,428 (35,073) 10,343 11,666 Tax 3,163 (13,186) 3,333 3,770 PAT 7,264 (21,887) 7,011 7,896 YoY growth (%) 25.3 (278.7) (46.3) 82.6 Deposits 4,089,667 4,536,227 4,470,793 4,796,796 YoY growth (%) Advances 4,209,227 4,396,503 4,410,745 4,561,213 YoY growth (%) Key Ratios CMP (Rs) EPS (Rs) Book Value (Rs) Adj. BV (70%)(Rs) P/E (x) P/BV (x) P/ABV (x) DPS (Rs) Dividend Payout Ratio (%) Dividend Yield (%) Efficiency Cost-Income Ratio (%) C-D Ratio (%) Business per Emp. (Rs m) Profit per Emp. (Rs lacs) Business per Branch (Rs m) 2,412 2,396 2,407 2,438 Profit per Branch (Rs m) Du-Pont NII Total Income Operating Expenses PPoP Total provisions RoAA RoAE Source: Company Data, PL Research November 2,

8 Price Chart Recommendation History (Rs) Nov-15 May-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 13-Dec-17 BUY Dec-17 BUY Jan-18 BUY Jan-18 BUY Feb-18 BUY Mar-18 BUY Apr-18 BUY Apr-18 BUY Jul-18 BUY Jul-18 Accumulate Analyst Coverage Universe Sr. No. CompanyName Rating TP (Rs) Share Price (Rs) 1 Axis Bank Accumulate Bank of Baroda BUY Bank of India Reduce Federal Bank BUY HDFC Bank BUY 2,310 1,968 6 HDFC Standard Life Insurance Company BUY ICICI Bank BUY ICICI Prudential Life Insurance Company BUY IDFC Bank Accumulate IndusInd Bank BUY 2,000 1, Jammu & Kashmir Bank BUY Kotak Mahindra Bank Hold 1,291 1, Max Financial Services BUY Punjab National Bank Hold SBI Life Insurance Company BUY South Indian Bank BUY State Bank of India BUY Union Bank of India Reduce YES Bank Accumulate PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly November 2,

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