Q2FY19 RESULT UPDATE Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 RETAIL EQUITY RESEARCH Axis Bank Banking BSE CODE: 532215 NSE CODE: AXISBANK Bloomberg CODE: AXSB:IN SENSEX: 36,170 HOLD Rating as per Large Cap 12 months investment period CMP Rs. 630 TARGET Rs. 650 RETURN 3% 30 th November, 2018 On the path to normalization Axis Bank is the third largest private sector bank in India. The Bank has a large footprint of 3,882 domestic branches (including extension counters) and 12,660 ATMs spread across the country. Axis Bank reported decent loan growth of 11% YoY led by strong traction in retail advances ( 21% YoY). NII increased at a healthy pace of 15% YoY (in line with our expectation) mainly due to 11 bps YoY improvement in NIM to 3.5%. Gross/Net NPA ratios improved by 56/55 bps sequentially to 6.0%/2.5% on the back of lower slippages ( 69% YoY and 36% QoQ). We expect operating profit to grow at a CAGR of 19% over FY18-20E supported by higher NII coupled with lower operating expenses. With bulk of the stress being recognized, we believe that worst is behind and hence, expect it to clock RoA of 1.2% and RoE of 14% by FY20E. Hence, we maintain HOLD rating with a TP of Rs650. (P/ABV of 2.4x for FY20E). Retail segment continues to drive business growth Axis bank reported decent loan growth of 11% YoY mainly driven by 21% YoY growth in retail segment. As a result, share of retail loans in the total loan book increased to 49% as compared to 45% in Q2FY18. Within retail loans, small business loans ( 76% YoY), personal loans & credit cards ( 40%) and auto loans ( 33%) witnessed robust growth. Corporate loan book grew at a muted pace of 1% YoY as the bank continues to focus on better rated corporates (95% on incremental basis) and working capital loans (up 21% YoY). On liabilities front, deposits grew at a faster pace of 15% YoY mainly led by retail term deposits ( 21% YoY). Going forward, we estimate the bank s advances and deposits to increase at a CAGR of 16% and 12%, respectively over FY18-20E. Margin improvement drives NII growth Axis Bank s net interest income (NII) grew at a healthy pace of 15% YoY (in line with our expectation) mainly due to 11 bps YoY increase in net interest margin (NIM) to 3.5%. With better pricing power and lower interest income reversals, we expect NIM to improve further by 10-15 bps to 3.6% over FY18-FY20E. Other income grew by 4% YoY as the bank reported lower trading income ( 64% YoY). Fee income growth was modest at 9% YoY wherein retail fee grew at a strong pace of 23% YoY, but corporate fee declined by 37% YoY. Though provisions declined by 7% YoY, we expect it to remain elevated in H2FY19 as the bank continues to provide further for its stressed pool in FY19. Net profit jumped by 83% YoY mainly on the back of the low base of Q2FY18. Going forward, we expect operating profit to increase at a CAGR of 19% over FY18-20E led by higher NII and lower operating expenses. Asset quality issues receding Slippages declined sharply ( 69% YoY and 36% QoQ) to Rs 2,780cr which was lowest in the last 10 quarters. 88% of the slippages were from identified stress pool. As a result, Gross/Net nonperforming asset (NPA) ratios improved by 56/55 bps sequentially to 6.0%/2.5%. Provision coverage ratio (PCR) also improved remarkably by 400 bps QoQ to 73%. Notably, the share of vulnerable pool is now at a meagre 1.7% of customer assets which provides great comfort to us. Further, the bank has already provided for 81% of its exposure to Insolvency and Bankruptcy Code (IBC) accounts (List 1 and 2). Besides, the bank s exposure to IL&FS stood at Rs 825cr (0.2% of advances) of which Rs 238cr was fund based and the bank has provided for 20% of the fundbased exposure. We believe fresh slippages to normalise from H2FY19 onwards. Hence, we expect Gross/Net NPA ratios to improve to 3.4%/1.2% by FY20E. Outlook & Valuation With bulk of the stress being recognized, we believe that worst is behind and expect moderation in slippages going ahead. Further, with falling credit costs, higher loan growth and room for margin expansion, we expect earnings to rebound and project ROE/ROA of 13.8%/1.2% in FY20E. Besides, we like the bank on the back of its fundamental strengths such as high CASA ratio, distribution network and high and growing share of retail loans. However, valuation at P/ABV of 2.3x for FY20E leaves little room for further upside. Hence, we continue to maintain HOLD rating on the stock with a target price (TP) of Rs650 (P/ABV of 2.4x for FY20E). Key thing to watch out: Though management uncertainty has been addressed with the appointment of Mr Amitabh Chaudhry, some churn in senior management cannot be ruled out. Company Data Market Cap (cr) Rs. 161,944 Outstanding Shares (cr) 256.9 Free Float 65% Dividend Yield - 52 week high Rs. 677 52 week low Rs. 477 6m average volume (cr) 1.0 Beta 1.4 Face value Rs. 2 Shareholding (%) Q4FY18 Q1FY19 Q2FY19 Promoters 27.6 26.2 25.9 FII s 49.9 50.3 50.0 MFs/Insti 13.4 14.7 15.3 Public 9.1 8.8 8.8 Others - - - Total 100.0 100.0 100.0 Price Performance 3 Month 6 Month 1 Year Absolute Return -4.0% 15.5% 14.8% Absolute Sensex -6.6% 3.5% 7.6% Relative Return* 2.6% 12.0% 7.1% *over or under performance to benchmark index 700 600 500 400 300 Axis Bank Sensex (rebased) Standalone (Rs.cr) FY18A FY19E FY20E Net Interest Income 18,618 21,917 25,959 Growth (%) 3% 18% 18% NIM (%) 3.4 3.4 3.6 Pre Pro Profit 15,594 17,828 22,260 Growth (%) -11% 14% 25% Net Profit 276 4,530 9,999 Growth (%) -93% 1543% 121% EPS 1.1 17.6 38.9 Growth (%) -93% 1542% 121% P/E 586.8 35.7 16.2 P/BV 2.5 2.4 2.1 P/ABV 3.6 2.9 2.4 RoE (%) 0.5 6.9 13.8 RoA (%) 0.0 0.6 1.2
Quarterly Financials (Standalone) Profit & Loss Account (Rs cr) Q2FY19 Q2FY18 YoY Growth % Q1FY19 QoQ Growth % Interest Income 13,281 11,235 18.2 12,777 3.9 Interest on advances 9,955 8,406 18.4 9,612 3.6 Income on Investments 2,802 2,432 15.2 2,682 4.4 Others 524 397 32.2 483 8.6 Interest Expense 8,049 6,695 20.2 7,610 5.8 Net Interest Income 5,232 4,540 15.3 5,167 1.3 Non-Interest Income 2,678 2,586 3.6 2,925 (8.4) Total Net Income 7,910 7,125 11.0 8,092 (2.2) Operating Expenses 3,816 3,348 14.0 3,720 2.6 Employee Cost 1,175 1,083 8.5 1,228 (4.3) Other Operating Exp. 2,642 2,265 16.6 2,492 6.0 Total Income 15,959 13,821 15.5 15,702 1.6 Total Expenditure 11,865 10,043 18.1 11,330 4.7 Pre-Provisioning profit 4,094 3,777 8.4 4,372 (6.4) Provisions 2,927 3,140 (6.8) 3,338 (12.3) Profit Before Tax 1,167 637 83.2 1,034 12.8 Tax 377 205 84.3 333 13.1 Net Profit 790 432 82.6 701 12.6 EPS - Diluted (Rs) 3.1 1.8 70.6 2.7 12.9 Business Performance (Rs cr) Q2FY19 Q2FY18 YoY Growth % Q1FY19 QoQ Growth % Advances 456,121 410,171 11.2 441,074 3.4 Deposits 479,680 416,431 15.2 447,079 7.3 Business 935,801 826,601 13.2 888,154 5.4 Gross NPA 30,938 27,402 12.9 32,662 (5.3) Net NPA 12,716 14,052 (9.5) 14,902 (14.7) Key Ratios (%) Q2FY19 Q2FY18 YoY bps Q1FY19 QoQ bps Net Interest Margin 3.5 3.4 11 3.5 (1) Cost of Funds 5.2 5.0 26 5.1 18 Yield on Advances 8.9 8.5 42 8.7 15 Yield on Investments 7.2 6.8 42 7.0 27 Yield on Funds 8.2 7.8 35 8.0 17 Cost to Income 48.2 47.0 126 46.0 228 Credit to Deposit 95.1 98.5 (341) 98.7 (357) CASA 47.7 50.4 (273) 46.9 82 Capital Adequacy 16.2 16.0 20 16.6 (40) Tier I Capital 12.8 12.0 75 13.1 (32) Gross NPA 6.0 5.9 6 6.5 (56) Net NPA 2.5 3.1 (58) 3.1 (55) Provision Coverage 73.0 60.0 1300 69.0 400 Credit Cost 3.6 4.1 (48) 1.0 259 RoE (Ann.) 4.9 3.1 183 4.4 49 RoA (Ann.) 0.4 0.3 17 0.4 4 Change in estimates Old estimates New estimates Change % Year / Rs cr FY19E FY20E FY19E FY20E FY19E FY20E Net Interest Income 21,917 25,959 21,917 25,959 0.0 0.0 Pre-Provisioning Profit 18,364 22,260 17,828 22,260-2.9 0.0 Net Profit 5,052 9,999 4,530 9,999-10.3 0.0 EPS (Rs) 19.7 38.9 17.6 38.9-10.5 0.1 Source: Company, Geojit Research
Standalone Financials Profit & Loss Account Y.E March (Rs cr) FY16A FY17A FY18A FY19E FY20E Interest Income 40,988 44,542 45,780 52,960 61,196 Interest Expense 24,155 26,449 27,163 31,044 35,237 Net Interest Income 16,833 18,093 18,618 21,917 25,959 % Change 18.3 7.5 2.9 17.7 18.4 Non-Interest Income 9,371 11,691 10,967 11,936 15,155 Net Income 26,204 29,784 29,585 33,853 41,114 Operating Expenses 10,101 12,200 13,990 16,025 18,854 Total Income 50,360 56,233 56,747 64,897 76,351 Total Expenditure 34,256 38,649 41,153 47,069 54,091 Pre-Provisioning Profit 16,104 17,585 15,594 17,828 22,260 % Change 20.3 9.2 (11.3) 14.3 24.9 Provisions 3,710 12,117 15,473 10,965 7,112 Profit Before Tax 12,394 5,468 122 6,863 15,148 Tax 4,170 1,788 (154) 2,333 5,149 Tax Rate (%) 34 33-34 34 Net Profit 8,224 3,679 276 4,530 9,999 % Change 11.8 (55.3) (92.5) 1543.2 120.7 No. of Shares (cr) 238 240 257 257 257 EPS (Rs) 34.5 15.4 1.1 17.6 38.9 % Change 11.2 (55.5) (93.0) 1542.3 120.7 Balance Sheet Y.E March (Rs cr) FY16A FY17A FY18A FY19E FY20E Liabilities Capital 477 479 513 514 514 Reserves & Surplus 52,688 55,284 62,932 67,702 75,853 Deposits 357,968 414,379 453,623 501,092 567,276 Borrowings 99,226 105,031 148,016 178,498 207,427 Other Liabilities & Provisions 15,109 26,295 26,245 32,624 34,969 Total Liabilities 525,468 601,468 691,330 780,430 886,038 Assets Cash & Balances 33,325 50,256 43,455 48,002 54,342 Investments 122,006 128,793 153,876 170,371 181,528 Advances 338,774 373,069 439,650 509,994 592,649 Fixed Assets 3,523 3,747 3,972 4,210 4,463 Other Assets 27,839 45,602 50,377 47,852 53,056 Total Assets 525,468 601,468 691,330 780,430 886,038 Ratios Y.E March (Rs) FY16A FY17A FY18A FY19E FY20E EPS 34.5 15.4 1.1 17.6 38.9 DPS 5.0 5.0 5.0 6.6 7.2 BV 223.1 232.8 247.2 265.6 297.4 ABV 212.5 196.8 175.2 216.9 266.3 Valuation (%) P/E 18.3 41.0 586.8 35.7 16.2 P/BV 2.8 2.7 2.5 2.4 2.1 P/ABV 3.0 3.2 3.6 2.9 2.4 Div. Yield 0.8 0.8 0.8 1.0 1.1 Spreads (%) Yield on Advances 9.7 9.3 8.4 8.4 8.5 Yield on Investments 7.4 7.7 7.1 7.1 7.1 Yield on Funds 8.7 8.5 7.7 7.8 7.9 Cost of Funds 5.6 5.4 4.8 4.8 4.8 Capital (%) CAR 15.3 15.0 14.7 14.9 14.7 Tier I 12.5 11.9 11.6 11.9 11.7 Tier II 2.8 3.1 3.1 3.0 3.0 Asset (%) GNPA 1.7 5.0 6.8 5.2 3.4 NNPA 0.7 2.1 3.4 1.9 1.2 PCR 72.0 65.0 65.0 67.5 70.0 Management (%) Credit/ Deposit 94.6 90.0 96.9 101.8 104.5 Cost/ Income 38.5 41.0 47.3 47.3 45.9 CASA 47.3 51.4 53.8 52.6 52.5 Earnings (%) NIM 3.9 3.8 3.4 3.4 3.6 ROE 16.8 6.8 0.5 6.9 13.8 ROA 1.7 0.7 0.0 0.6 1.2
Recommendation Summary (last 3 years) Dates Rating Target 800 14 January 2016 BUY 611 700 16 August 2016 BUY 650 26 October 2016 BUY 538 600 27 January 2017 HOLD 476 500 08 May 2017 HOLD 518 17 August 2017 HOLD 543 400 30 January 2018 HOLD 650 300 30 November 2018 HOLD 650 200 100 0 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0%-10%. Reduce - Downside is more than 10%. Neutral - Not Applicable *Initiating Coverage Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Absolute is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit s research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Kaushal Patel, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.
REGULATORY DISCLOSURES: Dion is engaged in the business of developing software solutions for the global financial services industry across the entire transaction lifecycle and interalia provides research and information services essential for business intelligence to global companies and financial institutions. Dion is listed on BSE Limited (BSE) and is also registered under the SEBI (Research Analyst) Regulations, 2014 (SEBI Regulations) as a Research Analyst vide Registration No. INH100002771. Dion s activities were neither suspended nor has it defaulted with requirements under the Listing Agreement and / or SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with the BSE in the last five years. Dion has not been debarred from doing business by BSE / SEBI or any other authority. In the context of the SEBI Regulations, we affirm that we are a SEBI registered Research Analyst and in the course of our business, we issue research reports /research analysis etc that are prepared by our Research Analysts. We also affirm and undertake that no disciplinary action has been taken against us or our Analysts in connection with our business activities. In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision: 1. Disclosures regarding Ownership Dion confirms that: (i) It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein at the time of publication of this report. (ii) It/its associates have no actual / beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. Further, the Research Analyst confirms that: (i) He, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject company at the time of publication of this report. (ii) He, his associates and his relatives have no actual/beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. 2. Disclosures regarding Compensation: During the past 12 months, Dion or its Associates: (a) Have not managed or co-managed public offering of securities for the subject company (b) Have not received any compensation for investment banking or merchant banking or brokerage services from the subject company (c) Have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject (d) Have not received any compensation or other benefits from the subject company or third party in connection with this report. 3. Disclosure regarding the Research Analyst s connection with the subject company: It is affirmed that I, Kaushal Patel, employed as Research Analyst by Dion and engaged in the preparation of this report have not served as an officer, director or employee of the subject company 4. Disclosure regarding Market Making activity: Neither Dion /its Research Analysts have engaged in market making activities for the subject company. Copyright in this report vests exclusively with Dion. Please ensure that you have read the Risk Disclosure Documents for Capital Market and Derivatives Segments as prescribed by the Securities and Exchange Board of India before investing. Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom, Kochi-682024, Kerala, India. Phone: +91 484-2901000, Website: www.geojit.com. For investor queries: customercare@geojit.com, For grievances: grievances@geojit.com, For compliance officer: compliance@geojit.com. Corporate Identity Number: L67120KL1994PLC008403, SEBI Stock Broker Registration No INZ000104737, Research Entity SEBI Reg No: INH200000345, Investment Adviser SEBI Reg No: INA200002817, Portfolio Manager: INP000003203, Depository Participant: IN-DP-325-2017, ARN Regn.Nos:0098, IRDA Corporate Agent (Composite) No.: CA0226.