RESULT UPDATE Saday Sinha saday.sinha@kotak.com +91 22 6621 6312 AXIS BANK PRICE: RS.1422 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.1535 FY14E P/E: 10.0X, P/ABV: 1.9X Q3FY13 results: Earnings marginally ahead of our expectations; stable asset quality and focus on retail banking piece continues. NII growth (16.6% YoY) was better than expectations on back of 11bps QoQ improvement in margins, although it was down 18 bps (YoY); net profit grew 22.2% YoY mainly aided by lower provisions (decline of 8.4% YoY) and moderate rise in salary expense (13.5% YoY). CASA mix remained healthy at ~40% at the end of Q3FY13 on back of strong performance on saving account deposits. Although current a/c float grew at marginal pace (2.0% YoY), retail liabilities (SA & retail TD) remained strong at 47% of deposits as compared to 44% a year back. Asset quality remained stable - gross and net NPAs stand at 1.1% and 0.33%, respectively, at the end of Q3FY13. However, incremental stress build-up (slippages + restructuring) remained below the guided range, positive in our view. We have tweaked the earnings estimate and expect Axis bank to report earnings growth of 17.4% CAGR during FY12-14E along with healthy return ratios (RoE: ~20%, RoA: ~1.6%). As stock is trading near its fair value, we maintain ACCUMULATE rating on the stock with revised TP of Rs.1535 (Rs.1440 earlier) based on P/ABV of 2.1x its FY14E adjusted book value. Result Performance (Rs mn) Q3FY13 Q3FY12 YoY (%) Interest on advances 49,067 39,636 23.8 Interest on Investment 20,143 17,752 13.5 Interest on RBI/ banks' balances 247 155 59.5 Other interest 193 227-15.1 Total interest earned 69,649 57,770 20.6 Interest expense 44,701 36,367 22.9 Net interest income 24,948 21,403 16.6 Other income 16,154 14,298 13.0 Operating Revenue (NII + Other income) 41,102 35,701 15.1 Operating Expenses 17,487 15,109 15.7 Payments to / Provisions for employees 6,151 5,420 13.5 Other operating expenses 11,336 9,689 17.0 Operating Profit Before Prov. & Cont. 23,615 20,592 14.7 Provisions & contingencies 3,868 4,223-8.4 Provision for taxes 6,275 5,346 17.4 Net profit 13,472 11,023 22.2 EPS (Rs.) 31.6 26.7 18.1 Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 7
Earnings came marginally above our expectations; NIM surprised on positive side by 11bps QoQ improvement NII (Rs.24.95 bn, 16.6% YoY) was better than expectations on back of 11bps QoQ improvement in margins (although it was down 18 bps YoY) along with healthy loan growth (20.7% YoY). Net profit grew 22.2% YoY (Rs.13.47 bn) mainly aided by lower provisions (decline of 8.4% YoY) and moderate rise in salary expense (13.5% YoY). NIM saw 11bps QoQ improvement on back of 19bps (calculated) improvement in the yields of advances on back of rise in share of retail book along with improvement in LDR, while cost of funds declined 2bps QoQ. Management continues with its guidance of maintaining NIMs around 3.5%, going forward. However, we are modeling NIM to come around 3.4% during FY13-14E as compared to 3.6% witnessed during FY12 as bank has to build PSL book during Q4FY13 to meet the regulatory requirements. Trends in NIM (%) Non-interest income grew 13.0% YoY during Q3FY13 on back of strong trading profit (Rs.1.6 bn, 35.6% YoY). During the same period, fee-based income saw healthy growth at 14.9% YoY. We are modeling fee-based income to grow at 16.3% CAGR during FY12-14E as against 40% CAGR achieved during FY08-12. Healthy business growth; retail piece & SMEs remained the main driving force The bank's balance sheet grew 18.4% YoY at the end of Q3FY13 largely on back of faster growth in loan book (20.7% YoY). Retail book saw robust growth (44.5% YoY; 8.5% QoQ) as a part of conscious management strategy to realign its loan portfolio by increasing the share of retail segment. The share of retail segment has gone up by 440bps to 26.8% during last one year. As a conscious strategy, focus on secured lending continues - both housing (42.6% YoY) and auto loans (33.3% YoY) saw healthy traction. We believe, if this trend continues, the target of retail assets forming ~30% of loan book would be met much before the FY15. However, the competition has heated up in the retail space during last couple of months with the aggressive approach taken by many players to garner the market share in absence of off-take of corporate loans. We expect some margin pressure in the retail segment, going forward. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 8
Break-up of advances Q3FY13 FY12 FY11 FY10 FY09 Large & Mid Corporates 52.7% 53.6% 53.3% 50.3% 50.5% SME Advances 14.1% 14.0% 15.0% 17.5% 19.7% Agriculture 6.4% 10.2% 12.2% 12.2% 10.1% Retail 26.8% 22.1% 19.5% 20.0% 19.7% CASA mix remained healthy at ~40% at the end of Q3FY13 on back of strong performance on saving account deposits (21.6% YoY). Although current a/c float grew at marginal pace (2.0% YoY), retail liabilities (SA & retail TD) remained strong at 47% of deposits as compared to 44% a year back. Asset quality remained stable; however, incremental stress build-up (slippages + restructuring) remained below the guided range, positive in our view. Asset quality remained stable - gross and net NPAs stand at 1.1% and 0.33%, respectively, at the end of Q3FY13. Gross slippage came at 1.27% (annualized number), a tad below the previous quarter, while addition to restructured book came at 87bps. Now, the cumulative restructured book stands at Rs.42.6 bn (2.4% of net advances). During 9MFY13, incremental stress build-up (slippages + restructuring) has been at Rs.29.4 bn vis-à-vis the annual guidance of Rs.45-50 bn. During Q3FY13, incremental stress build-up (slippages at Rs.5.41 bn + restructuring at Rs.3.68 bn) remained well below the guided range and hence positive in our view. Trend in Asset Quality NPA (Rs. Bn) Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Gross NPA 15.73 17.44 19.15 18.06 20.92 21.91 22.75 % of Gross Advances 1.06 1.08 1.10 0.94 1.06 1.10 1.10 Net NPA 4.62 5.49 6.83 4.73 6.05 6.54 6.79 % of Net Advances 0.31 0.34 0.39 0.25 0.31 0.33 0.33 Provision Coverage Ratio (%) 80.0% 77.7% 75.3% 80.9% 79.0% 80.0% 81.0% Coverage ratio of the bank remains at healthy level at 81% (including prudential write-offs it is 90%) at the end of Q3FY13. However, we believe, asset quality could surprise negatively in the future due to its high exposure to infrastructure and other stressed sectors. Industry-wise Distribution (Q3FY13) (%) Total Fund Non-fund Power Generation & Distribution 9.83 5.11 19.01 Infrastructure Construction 9.25 8.17 11.35 Financial Companies 7.45 6.92 8.48 Engineering & Electronics 6.03 3.54 10.86 Metals & Metal Products 5.98 5.07 7.74 Food Processing 3.68 4.61 1.89 Trade 3.32 2.91 4.12 Shipping, Transportation & Logistics 2.33 2.25 2.47 Chemicals & Chemical Products 2.33 1.70 3.55 Real Estate 2.25 3.00 0.77 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 9
Although credit costs was largely in-line with our expectations, there are few red flags like decline in the share of large corporate advances having rating "A" and above from 70% at the end of Q3FY12 to 61% at the end of Q3FY13. This could be explained from the fact that disbursements to Infra greenfield SPV project mostly comes under "BBB" category and in recent times saw almost 10% rise in this bucket along with the rating downgrades. We maintain ACCUMULATE on Axis Bank with a price target of Rs.1460 Valuations & recommendation We have tweaked the earnings estimate and expect Axis bank to report earnings growth of 17.4% CAGR during FY12-14E along with healthy return ratios (RoE: ~20%, RoA: ~1.6%). As stock is currently trading near its fair value (1.9x FY14 ABV), we maintain ACCUMULATE rating on the stock with revised TP of Rs.1535 (Rs.1440 earlier) based on P/ABV of 2.1x its FY14E adjusted book value. Rolling 1-year forward P/ABV band, Kotak Securities - Private Client Research Rolling 1-year forward P/E band, Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 10
Key data Rs. bn 2011 2012 2013E 2014E Interest income 151.55 219.95 273.12 317.24 Interest expense 85.92 139.77 177.44 206.11 Net interest income 65.63 80.18 95.68 111.14 Growth (%) 31.1% 22.2% 19.3% 16.2% Other income 46.32 54.20 63.59 74.83 Gross profit 64.16 74.31 90.28 104.22 Net profit 33.88 42.42 50.44 58.48 Growth (%) 34.8% 25.2% 18.9% 15.9% Gross NPA (%) 1.0 0.9 1.3 1.2 Net NPA (%) 0.3 0.3 0.4 0.3 Net interest margin (%) 3.7 3.6 3.4 3.4 CAR (%) 12.7 13.7 13.8 13.2 RoE (%) 20.4 21.3 20.8 20.3 RoA (%) 1.60 1.61 1.63 1.61 Dividend per share (Rs) 14.0 16.0 20.0 24.0 EPS (Rs) 82.5 102.7 122.1 141.5 Adjusted BVPS (Rs) 428.4 516.4 629.1 729.7 P/E (x) 17.2 13.9 11.6 10.0 P/ABV (x) 3.3 2.8 2.3 1.9, Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 11