Axis Bank (AXIBAN) 445

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1 Result Update January 24, 217 Rating matrix Rating : Hold Target : 46 Target Period : 12 months Potential Upside : 3% What s Changed? Target Changed from 48 to 46 EPS FY17E Changed from 16.1 to 13.9 EPS FY18E Changed from 33.1 to 27.7 Rating Unchanged Quarterly Performance Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) NII 4,334 4, , Other income 3,4 2, , PPP 4,64 3, , PAT 58 2, Key Financials crore FY15 FY16 FY17E FY18E NII 14,224 16,833 17,875 2,467 PPP 13,385 16,14 17,374 18,448 PAT 7,358 8,223 3,37 6,591 Valuation summary FY15 FY16 FY17E FY18E P/E Target P/E P/ABV Target P/ABV RoE RoA Stock data Market Capitalisation Crore GNPA (Q3FY17) 2466 crore NNPA (Q3FY17) 8295 crore NIM (Q3FY17) week H/L 638 /373 Net worth Crore Face value 2 DII Holding (%) 11. FII Holding (%) 49.4 Price performance (%) 1M 3M 6M 12M HDFC Bank Axis Bank KMB Indusind Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Axis Bank (AXIBAN) 445 Higher credit cost impacts performance... Headline asset quality numbers like GNPA ratio jumped to 5.22% ( 2467 crore) from 4.17% in Q2FY17. Outstanding restructured book was at 619 crore (1.6% of total advances). Slippages were higher at 456 crore, led by ~ 2579 crore that slipped from watchlist while ~ 1631 crore were fresh slippages. The bank s watchlist fell 19.5% over the previous quarter and was at 1191 crore. Total SDR & 5-25 were at 136 crore & 2992 crore, respectively Fresh slippages primarily came from iron & steel sectors. Provisioning expense stayed high at 456 crore in Q3FY17 ( 3623 crore QoQ) resulting in PAT declining 73% YoY to ~ 58 crore Credit growth witnessed a slowdown at 1.1% YoY to crore, led by single digit growth in corporate and SME advances The management guided credit cost will remain at similar level in H1FY17 while slippages will moderate ahead Loan growth ahead of industry in past; pace to reduce but stay ahead Axis Bank is the third largest private bank in terms of loans & profitability. The loan book as on Q3FY17 was at crore. Due to its growing network and strong corporate relationships, the loan book grew at 3% CAGR, higher than 19% CAGR in industry. It has largely been a corporate lender though the trend is now changing. Until FY12, the corporate segment accounted for 54% of total loans. However, owing to higher risk in corporate portfolio and reduced demand as fallout of a strained economic environment, Axis Bank started focusing on the retail segment, with its proportion increasing to 43% while the corporate book reduced to 45%. We expect loan traction of 13.3% CAGR in advances in FY17-18E to crore, with the major driver being retail. Healthy liability franchise; margins to remain healthy One of the biggest strengths of Axis Bank is its strong liability franchise. CASA deposits at crore account for ~48% of deposits as on Q3FY17. The CASA ratio has been ~44% for almost a decade. This has been due to constant investment in branches and ATMs, strong brand recognition & quality services. Savings account balance has increased more than 18x since FY5 to crore by FY16. This has enabled it to maintain healthy margins of >3% since FY8 despite a challenging environment. Over FY17-18E, we expect NIMs to stay stable at ~3.6%. Asset quality pressure gets enhanced in past few quarters GNPA ratio for the past seven years has been in the range of 1-1.3% until Q3FY16 wherein it rose to 1.7%. It further increased to 5.22% by Q3FY17. Credit costs have stayed below.8% for the past three years but have gone past 1 bps now. The management had categorised 22 crore as exposure under watch list in FY16. Factoring in incremental NPA seen in 9MFY17, we expect the balance sheet to remain under pressure with credit cost factored in at >25 bps in FY17E. Asset quality risks persist; revise estimates & TP lower; maintain HOLD The operational performance has been strong with PPP increasing at 2% CAGR in the past six years to 1614 crore as on FY16. RoEs have stayed in the 17-18% range. However, owing to higher-than-expected stressed asset formation and anticipated slower pace of improvement in stressed assets, we revise our credit cost estimate upwards for FY17-18E. Accordingly, we estimate PAT will grow in a negative trajectory in FY17E to 337 crore. Accordingly, we revise our target price lower to 46 (earlier 48) valuing at 2.x FY18E ABV. We maintain HOLD rating. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments NII growth came in weak at 4.1% YoY, led by slower credit offtake as well as one-time NII 4,334 3,944 4, , interest reversal of 317 crore related to SDR guidelines NIM (%) bps bps NIM dip was largely due to interest reversals related to SDR guidelines Other income growth remained healthy at 45.4% YoY; supported by robust trading income Other Income 3,4 2,61 2, , Net Total Income 7,734 6,553 6, , Staff cost Other Operating Expenses 2,12 2,43 1, , PPP 4,64 3,52 3, , Provision 3,796 1, , Higher slippages led to higher provisioning expenses PBT 844 1,578 3, Tax Outgo , PAT 58 1,45 2, Higher provision led to lower-than-expected PAT Key Metrics GNPA 2,467 17,198 5, , Fresh slippages in Q3FY17 remained higher at 456 crore, though lower on a sequential basis. Of total slippages, ~ 2579 crore has been contributed by watchlist exposure while ~ 1631 crore has been fresh slippages NNPA 8,295 8,537 2, , Total Restructured assets 6,19 6,92 7, , Restructured book is now at 1.6% of loans vs. 1.9% in Q2FY17 Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Net Interest Income 18,33 17, ,955 2, We have lowered NII estimates as we expect to margins to come under pressure due to asset quality woes Pre Provision Profit 16,862 17, ,613 18, NIM(%) (calculated) bps bps PAT 3,846 3, ,887 6, Higher provisions to impact earnings. ABV per share ( ) Assumptions Current Earlier FY15 FY16 FY17 FY18 FY17E FY18 Credit growth (%) Deposit Growth (%) CASA ratio (%) NIM Calculated (%) Cost to income ratio (%) GNPA ( crore) 4,11 6,87 21,95 23,27 2,351 22,773 NNPA ( crore) 1,317 2,522 1,951 6,378 11,462 7,281 Slippage ratio (%) Credit cost (%) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Expect loan growth to be better than industry but pace to decline. Axis Bank s advances growth in the past decade has consistently been ahead of the industry. In the past eight years, the increase has been at 3% CAGR compared to 19% CAGR for the industry. This was due to a sustained increase in the branch network (>25% CAGR increase in branches in the past decade) and the bank s strong corporate relationships. One must note that in the last few years the difference between the bank and industry s growth has reduced. Until FY12, the bank s loan book was largely skewed towards the corporate segment. However, later it shifted its focus towards the retail & SME segments owing to a lack of quality growth opportunities in the corporate segment. Since then, the retail loan proportion has increased sharply to 41% as on FY16 from 22% in FY12. We expect 13.3% CAGR in advances over FY17-18E to crore Credit growth has been moderate in Q3FY17, led by a slowdown in corporate and SME segments. Therefore, we revise our estimate downwards and expect 13.3% CAGR in advances in FY17-18E to crore. We believe adequate capital adequacy ratio of 16.59% and a strong branch network will aid higher growth of retail segment in the overall pie. Exhibit 1: Advances expected to grow at 13.3% CAGR in FY17-18E ( crore) ,83 284, , , ,851 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 FY16 Q1FY17 Q2FY17 Q3FY17 FY17E FY18E Advances Growth (RHS) (%) 1 5 Exhibit 2: Proportion of retail segment on the rise to ~43% as on Q3FY17 12 (%) FY14 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Corporate SME Retail Agri ICICI Securities Ltd Retail Equity Research Page 3

4 We expect deposit CAGR of 12.8% in FY17-18E to crore. We expect CASA ratio above 44% Outstanding retail advances, including retail agriculture, were at crore as on Q3FY17 against crore as on Q3FY16 growing at 19% YoY. It accounted for 43% of net advances of the bank. SME advances (including non-retail agriculture) grew in single digit at 5% and were at 4328 crore. It accounted for 12% of net advances. Corporate traction was at 4% YoY to crore as on Q3FY17. Deposit franchise to remain healthy, supporting margins Axis Bank s major strength is its healthy deposit franchise. CASA deposits at crore account for 48% of total deposits of 3779 crore as on Q3FY17, which is one of the best in the class. This has been due to constant investment in branches and ATMs, strong brand recognition and quality services. Currently, CASA + retail term deposits constitute ~8% of total deposits. Savings account (SA) balances have increased more than18x since FY5 to crore as on FY16. Axis Bank has the best SA/branch in the industry of ~ 36 crore. Going ahead, we expect the CASA ratio to sustain above 44% though the pace of SA accretion could slow down. We expect total deposits to increase at 12.8% CAGR over FY17-18E. Exhibit 3: Deposit traction to be higher than industry ( crore) Q3FY FY Q1FY Q2FY Q3FY FY Q1FY Q2FY Q3FY FY Q1FY Q2FY Q3FY FY17E FY18E Deposits Growth (RHS) Exhibit 4: SA proportion to remain steady, going ahead 12 1 (%) FY13 FY14 Q1FY15 Q2FY15 Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 FY16 Q1FY17 Q2FY17 Q3FY17 FY17E FY18E CA SA Term deposit ICICI Securities Ltd Retail Equity Research Page 4

5 A strong deposit franchise has enabled the bank to maintain healthy margins of >3% since FY8 despite a challenging environment. In the past two years, owing to increased focus on the retail & SME segment, yields have improved. This has further given a boost to margins, which increased to ~3.6% as on FY16 from 3.3% in FY12. In Q3FY17, NIM dipped to 3.43%, owing to one-time cost related to interest reversal on SDR exposure. However, in FY17-18E, we expect NIM to revive and stay healthy at ~3.6%. Exhibit 5: Margins to stay at healthy levels of ~3.6% over next two years (%) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E NIM (calculated) Asset quality pressure continues in Q3FY17 Concerns on Axis Bank s asset quality frequently come up owing to its exposure to certain troubled corporates and certain stressed sectors like power, iron & steel, infrastructure, etc (~2% of advances). However, if we see the past five or six years, the GNPA ratio has stayed in the range of.8-1.3% while the NNPA ratio has consistently stayed at ~.4%, which is acceptable. However, in Q3FY16, the GNPA ratio increased to 1.7% due to higher slippages of 282 crore. The PCR of the bank has been healthy at >7%. This, we believe, is owing to increased exposure to the retail segment (of which ~5% is mortgages), which has provided higher diversification to the loan book. Watchlist now stands at 1191 crore, largely attributable to the iron, steel and power sectors. In Q3FY17, headline asset quality numbers like GNPA ratio jumped to 5.22% ( 2467 crore) from 4.17% in Q2FY17. Fresh slippages in Q3FY17 remained higher at 456 crore, though lower on a sequential basis. Of total slippages, ~ 2579 crore has been contributed by watchlist exposure while ~ 1631 crore has been fresh slippages. The bank s watchlist reduced 19.5% over the previous quarter and was at 1191 crore. The outstanding restructured book was at 619 crore or 1.6% of total advances. Total SDR and 5-25 amount were at 136 crore and 2992 crore, respectively. Fresh slippages primarily came in from iron & steel and textile sectors. In Q3FY17, there were two accounts worth 5 crore, which were refinanced under SDR scheme. The bank s sale of loans to ARCs was 24 crore and got cash of 5 crore; thereby taking the total outstanding security receipts to 14 crore. The management has guided at credit cost (provisions as percentage of advances) in H2FY17 at levels similar to H1FY17. Going ahead, slippages from the exposure in watchlist provided by the bank are expected to continue but the pace is expected to be lower than that in 9MFY17. ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 6: Asset quality sees enhanced pressure in Q3FY17 ( crore) FY13 FY14 FY15 (%) Q1FY16 Q2FY16 Q3FY16 FY16 Q1FY17 Q2FY17 Q3FY17 FY17E FY18E GNPA NNPA GNPA ratio NNPA ratio Exhibit 7: Bank network increases consistently at healthy pace FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Branches ATM Despite a strong increase in the network, Axis Bank has managed its cost well. The cost to income ratio (CIR) has fallen below 4% in FY16 from 49% in FY8. Non interest income of Axis Bank accounts for 37-4% of its operating income. It mainly comprises fee income, which was 753 crore of the total other income of 9371 crore during FY16. Fee income relates to corporate banking, business banking, retail and SME banking. Over FY11-16, the non interest income has seen traction of 12% CAGR. Going ahead, we expect non interest growth of 1% in FY17-18E to crore. ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation The operational performance has been strong with PPP increasing at 2% CAGR in the past six years to 1614 crore as on FY16. RoEs have stayed in the 17-18% range. However, owing to higher-than-expected stressed asset formation and anticipated slower pace of improvement in stressed assets, we revise our credit cost estimate upwards for FY17-18E. Accordingly, we estimate PAT will grow in a negative trajectory in FY17E to 337 crore. Accordingly, we revise our target price lower to 46 (earlier 48) valuing at 2.x FY18E ABV. We maintain HOLD rating. Exhibit 8: Valuation NII Growth PAT Growth P/E ABV P/ABV RoA RoE ( cr) (%) ( cr) (%) (x) ( ) (x) (%) (%) FY15 14, , FY16 16, , FY17E 17, ,36.6 (59.8) FY18E 2, , ICICI Securities Ltd Retail Equity Research Page 7

8 Recommendation history vs. Consensus ( ) (%) Jan-15 Mar-15 Jun-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Oct-16 Jan-17. Price Idirect target Consensus Target Mean % Consensus with HOLD Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event FY99 Axis comes out with a public issue of 73.5 crore at 21 per share Dec-5 Bank sets up Axis Securities with sales to market credit cards and retail asset products FY6 The bank raises $239.3 million through GDR FY8 Bank again raises $218.7 million through GDR Jan-8 Sharp stock price appreciation as Axis benefits from strong economic growth. During FY4-8, its credit, PAT grew at 59%, 4% CAGR, respectively Jan-9 The bank sets up Axis asset management company to carry on the activities of managing a mutual fund business Apr-9 Shikha Sharma (51 years age), the chief of ICICI group's life insurance business, appointed CEO of Axis Bank Nov-1 Axis Bank merges Enam Securities, one of the major players in investment banking segment. All stock deal of 267 crore with Enam holding 3.3% of Axis Jun-12 ADDL, accelerates bookbuild, secondary share offering to raise 19 crore. Jun-12 HSBC sells its 4.75% stake in Axis Bank at per share in order to raise funds FY13 Axis inducts Schroders as a 25% partner in Axis AMC. Also, joins hand with Axis Capital and Baird to offer investment banking services Jan-13 Begins a share sale to raise as much as 555 crore at the price of 139 Mar-13 Indian private banks stuck in money laundering case by agencies, post which PSU banks also get embroiled Jul-13 RBI tightens liquidity by raising MSF rate by 3% and various other measures. Axis impacted due to high AFS book of ~35%, reliance on bulk deposit Sep-13 Arrival of new RBI Governor changes sentiment, eases few of the tight liquidity measures Nov-13 Government seeks to raise funds by selling SUUTI stake in Axis Bank Mar-14 The stake sale overhang goes as the government sells 9% stake in the bank Mar-15 In the Union Budget the distinction between different types of foreign investments, especially between FPI and FDI was done away with to be replaced with composite caps. Earlier, the maximum foreign investment in private banks was capped at 74% of which FII holding was capped at 49% Top 1 shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 1 Life Insurance Corporation of India 3-Sep % M +16.8M Promoter UTI Asset Management Co. Ltd. 3-Sep % M FII Cinnamon Capital, Ltd. 3-Sep % 62.31M +4.87M DII GIC Private Limited 3-Sep % 41.38M M Others BlackRock Institutional Trust Company, N.A. 31-Dec % 4.36M -.84M 6 General Insurance Corporation of India 3-Sep % 39.89M -.41M 7 Lazard Asset Management, L.L.C. 3-Nov % 39.77M +6.54M 8 ICICI Prudential Life Insurance Company Ltd. 3-Sep % 38.92M -5.47M 9 Abu Dhabi Investment Authority 3-Sep % 38.76M M 1 T. Rowe Price International (UK) Ltd. 3-Nov % 37.44M +.17M Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares GIC Private Limited M M Reliance Nippon Life Asset Management Limited -1.5M -12.3M Abu Dhabi Investment Authority M M ICICI Prudential Life Insurance Company Ltd M -5.47M Fullerton Fund Management Company Ltd M M Goldman Sachs Asset Management International M -2.98M Life Insurance Corporation of India M +16.8M HSBC Global Asset Management (Hong Kong) Limited -2.57M -2.53M Lazard Asset Management, L.L.C M +6.54M Somerset Capital Management, L.L.P M -1.83M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement crore (Year-end March) FY15 FY16 FY17E FY18E Interest Earned 35,479 4,988 44,182 49,265 Interest Expended 21,254 24,155 26,37 28,798 Net Interest Income 14,224 16,833 17,875 2,467 growth (%) Non Interest Income 8,365 9,371 11,445 11,292 Fees and advisory 6,121 6,78 7,647 8,411 Treasury Income 995 1,19 2,37 1,19 Other income 1,249 1,645 1,761 1,862 Net Income 22,589 26,24 29,32 31,76 Staff cost 3,115 3,376 4,66 4,898 Other operating Expense 6,89 6,725 7,88 8,413 Operating Profit 13,385 16,14 17,374 18,448 Provisions 2,329 3,71 12,387 8,57 PBT 11,57 12,394 4,987 9,941 Taxes 3,699 4,17 1,681 3,35 Net Profit 7,358 8,223 3,37 6,591 growth (%) EPS ( ) Key ratios (Year-end March) FY15 FY16 FY17E FY18E Valuation No. of Equity Shares EPS (Rs.) BV (Rs.) ABV (Rs.) P/E P/BV P/ABV Yields & Margins (%) Net Interest Margins Yield on assets Avg. cost on funds Yield on average advances Avg. Cost of Deposits Quality and Efficiency Cost to income ratio Credit/Deposit ratio GNPA NNPA ROE ROA Balance sheet crore (Year-end March) FY15 FY16 FY17E FY18E Sources of Funds Capital Reserves and Surplus Networth Deposits Borrowings Other Liabilities & Provisions Total Application of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total Growth ratios (% growth) (Year-end March) FY15 FY16 FY17E FY18E Total assets Advances Deposit Total Income Net interest income Operating expenses Operating profit Net profit Net worth EPS (59.8) ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Banking) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Bank of Baroda (BANBAR) Hold 36, Punjab National Bank (PUNBAN) Hold 25, State Bank of India (STABAN) Buy 19, Indian Bank (INDIBA) Buy 12, Axis Bank (AXIBAN) Hold 15, City Union Bank (CITUNI) Buy 8, DCB Bank (DCB) Hold 3, Federal Bank (FEDBAN) Buy 13, HDFC Bank (HDFBAN) 1,248 1,5 Buy 312, IndusInd Bank (INDBA) 1,231 1,35 Buy 73, Jammu & Kashmir Bk(JAMKAS) Buy 3, Kotak Mahindra Bank (KOTMAH) Hold 134, Yes Bank (YESBAN) 1,381 1,4 Hold 57, ICICI Securities Ltd Retail Equity Research Page 1

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. 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ICICI Securities Ltd Retail Equity Research Page 12