COMPANY UPDATE Saday Sinha saday.sinha@kotak.com +91 22 6621 6312 AXIS BANK PRICE: RS.498 RECOMMENDATION: BUY TARGET PRICE: RS.560 FY16E P/E: 14.8X, P/ABV: 2.5X We recently met with the management of Axis Bank. We are turning more positive on Axis bank on account of improving macros as well as steps being taken to the govt to resolve various bottlenecks associated with the infrastructure segment where it has large exposure. We continue to like Axis bank with favorable ALM, superior liability franchise and diversified feebased income. It has consistently delivered superior NIM primarily on back of funding cost advantage underpinned by robust CASA mobilization. Although headline NPLs (GNPA: 1.34% in Q2FY15) have been holding well contrary to street expectations, high exposure to non-operational power portfolio remains a potential risk, in our view. Nonetheless, fresh impairments (slippages + restructuring) did see some uptick, it came well within the management's guidance range. We expect earnings to grow 13.1% CAGR during FY14-16E along with healthy return ratios (RoE: 17-18%, RoA: 1.7%). At CMP, stock trades reasonable at 2.5x its FY16E ABV and hence, we retain BUY rating on the stock with revised TP of Rs.560 (2.8x FY16E ABV) as against Rs.446 (2.5x FY16E ABV). Liability franchise one of the best in the industry; retail banking segment has been key drivers of its growth strategy Axis bank has built a robust liability franchise, displayed in its CASA mobilization. Its CASA mix (40-46% during FY06-14) has been one of the highest in the industry on back of its three-pronged strategy: Strategy of expanding its network to hinterland, where competition is relatively lower. Better customer segmentation strategy, which helps in developing customized products. Focus on transactional banking products which help in getting higher floats from the customers along with generating consistent fee-based income. Trend in CASA mix (%) Improvement in the liability franchise has helped Axis bank over the years to reduce its funding costs. Even though the banking system was witnessing migration from CASA deposits, Axis bank's average CASA share remained robust at 44.5% (Q2FY15) while CASA share on daily average basis improved from 39% in Q2FY14 to 40% in Q2FY15. Apart from low cost CASA deposits, improvement in the retail TDs has helped the bank in containing its cost of funds. 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 2
The bank's balance sheet has continued to grow at moderate pace during last 4 quarters (12-13% YoY) while loan book grew at relatively faster pace (17-20% YoY) during the same period. However, retail segment continued to witness robust growth (excluding the impact of lending against FCNR deposits) and now accounts 38% (Q2FY15) of net advances. Management has been guiding that this would trend northwards and is likely to touch 40-45% in next 4-5 years. Break-up of advances FY10 FY11 FY12 FY13 FY14 Q2FY14* Q2FY15* Large & Mid Corporate 50.3% 53.3% 53.6% 49.9% 44.4% 48.4% 45.5% SME Advances 17.5% 15.0% 14.0% 15.2% 15.4% 16.3% 15.6% Agriculture 12.2% 12.2% 10.2% 7.5% 7.8% Retail 20.0% 19.5% 22.1% 27.4% 32.4% 35.3% 38.9%^, * indicates reclassification of loan book, ^ indicates retail book including FCNR linked advances In retail segment, bank has been focusing on both housing as well as auto loans. However, our interaction with the management suggests that the share of higher yielding unsecured portfolio is likely to rise marginally but is likely to remain below 20% of loan book, in near future. We are of the view that competition has been intensifying in retail space during last couple of quarters. We are of the view that although NIM of Axis bank has held-up well in recent quarters, competitive pressure in retail segment could put pressure on its margins, going forward. Reported NIM much above the guidance, recent 10bps cut in base rate to show results in H2FY15. Axis bank has also been consistently beating the NIM guidance over last several quarters. Reported NIM came at 3.97% in Q2FY15, much above the management guidance of ~3.50%, largely aided by improvement in asset yields during Q2FY15 while cost of funds remained stable QoQ. Improvement in the yield on advances has come on the back of change in asset mix (higher unsecured retail portfolio) as well as improvement in LDR (~650bps YoY). Cost of funds has been contained as a part of conscious strategy of mobilizing retail TD along with shedding high cost bulk deposit (down from 30.6% in Q2FY14 to 21.1% in Q2FY15). Trends in NIM (%) Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
Going forward, we expect NIM to trend downward, as there is limited scope to further increase LDR from current levels. We believe mobilizing deposits would be the key to fund its future loan growth. Recently, bank has also cut the base rate by 10bps which could impact YoA by 6-7bps as 85% of domestic book is linked with the base rate. Nonetheless, we also take cognizance of its favorable ALM profile, where 47% of deposits have less than one year maturity, while 17% of advances would be re-priced within one year (as per FY14 disclosure). We believe this would support margins in the falling interest rate environment as larger amount of deposits as compared to advances would come for re-pricing at lower interest rates. We are modeling NIM to come at 3.8%/3.7% during FY15E/16E as compared to 3.81% witnessed during FY14 (3.93% in H1FY15), after factoring in amplified competitive intensity capping the asset yield. Fee Income has been healthy contributor to total revenue stream; focus on operating efficiency continues For Axis bank, contribution of fee-based income to total income has been consistently in the range of 35-37%, healthy in our view. Its fee income remains well diversified with 32% coming from retail banking, 30% from corporate banking and balance contributed by treasury, BB, SME and agri segments. Contribution to Net Revenue FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E NII 59% 56% 56% 59% 60% 60% 62% 63% 63% Fee Income 35% 38% 34% 35% 37% 35% 36% 32% 33% Trading Profit 5% 4% 8% 3% 1% 4% 2% 3% 2% Other non-interest Income 1% 1% 2% 3% 2% 2% 1% 2% 2% Total net Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% Breakup of Fee Income 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 Total Fee Income 11.54 13.43 14.05 16.18 13.17 14.32 14.56 17.80 13.78 15.91 Large & Mid corporate 4.09 4.35 4.61 4.75 3.80 4.31 4.44 5.38 3.31 4.59 Treasury & DCM 2.38 2.13 2.81 3.24 3.29 3.15 3.35 3.56 3.31 3.02 Agri & SME Banking 0.63 0.62 0.84 0.97 0.51 0.71 1.16 1.60 0.49 0.86 Business Banking 1.10 1.00 1.12 1.29 1.32 1.15 1.16 1.25 1.38 1.27 Capital Markets 0.12 0.13 0.14 0.16 0.13 0.14 0.00 0.00 0.00 0.00 Retail Banking 3.22 4.21 4.53 5.17 4.18 4.87 4.38 5.95 5.11 6.02 Composition of Net revenue (peer comparison) FY14 (%) Axis Bank HDFC Bank ICICI Bank NII 62% 70% 61% Fee Income 36% 27% 30% Trading Profit 2% 0% 2% Other non-interest Income 1% 3% 7% Total Income 100% 100% 100% Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
Despite rapid expansion in its branch network, it has managed its operating efficiency well. Its cost / Income ratio improved from 52.9% in FY05 to 40.8% in FY14 and ~42% in H1FY15. Bank has continued to focus on business re-engineering to reduce transaction costs besides ensuring smoothness in operations and enhancing its productivity. The moderate rise in opex was largely due to growth in bank's network and other infrastructures while salary paid to employees fell 2.8% YoY in FY14. We are modeling C/I ratio to come at ~42% levels in next two years (FY15/ 16E). Cost / Income ratio (%) Although headline NPLs suggest comfort, high exposure to nonoperational power portfolio remains a potential risk, in our view. Asset quality has been holding well contrary to street expectations - gross and net NPAs stand at 1.34% and 0.44%, respectively, at the end of Q2FY15. During FY14, fresh impairments (Rs.56.9 bn; slippages + restructuring) remained well within the management's guidance range (Rs.60 bn). Even during Q2FY15, incremental stress build-up (slippages + restructuring) came at Rs.14.81 bn, well within the management's guidance range (Rs.65 bn for the FY15). Trend in Asset Quality NPA (Rs. Bn) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Gross NPA 21.91 22.75 23.93 24.90 27.35 30.08 31.46 34.63 36.13 % of Gross Advances 1.10 1.10 1.06 1.10 1.19 1.26 1.22 1.34 1.34 Net NPA 6.54 6.79 7.04 7.90 8.38 10.03 10.24 11.13 11.80 % of Net Advances 0.33 0.33 0.32 0.35 0.37 0.42 0.40 0.44 0.44 Provision Coverage Ratio (%) 80.0% 81.0% 79.0% 80.0% 80.0% 78.0% 78.0% 77.0% 78.0% Trend in addition to impaired assets Rs. Bn Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Restructuring 6.28 3.23 3.68 7.91 6.86 10.31 6.70 11.15 4.80 5.70 as a % of loan book 1.48% 0.76% 0.87% 1.86% 1.39% 2.09% 1.36% 2.26% 0.83% 0.99% Slippage 4.56 6.28 5.41 4.43 6.81 6.18 5.89 3.01 6.26 9.11 Slippage Ratio (%) 1.07% 1.48% 1.27% 0.90% 1.38% 1.26% 1.20% 0.61% 1.09% 1.58% Addition to impaired assets (%) 2.55% 2.24% 2.14% 2.76% 2.78% 3.35% 2.56% 2.88% 1.92% 2.57% Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
Its outstanding restructured book is relatively comfortable at Rs.66.9 bn (2.76% of net advances) as per the new classification. Although risk of asset impairment remains elevated due to its high exposure to infrastructure and other stressed sectors, its share has seen gradual decline over the years. In its power portfolio, only ~50% of assets are operational in nature while rest will see DCCO (Date of Commencement of Commercial Operations) during next two years. We believe healthy provision coverage ratio at ~78% (including prudential write-offs) at the end of Q2FY15 provides some comfort, in our view. Exposure to Stressed Segments (Funded) - (%) (%) FY10 FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 Infrastructure Construction 8.2 8.2 6.8 7.6 7.4 7.6 7.8 Power Generation & Distribution 5.1 5.7 4.7 4.9 5.2 5.2 5.2 Metals & Metal Products 6.0 7.4 4.3 4.2 4.6 4.6 5.2 Engineering & Electronics 2.9 3.7 3.4 3.5 3.3 3.3 3.3 Financial Companies 11.0 14.3 12.7 7.0 4.6 4.3 4.5 Trade 6.5 4.5 3.2 2.9 3.6 3.6 3.6 Food Processing 6.4 4.4 4.1 4.1 3.6 3.7 3.5 Real Estate 5.4 3.2 2.6 3.3 3.3 3.3 Shipping, Transportation & Logistics 2.9 2.5 2.3 2.3 2.3 2.1 Telecom 5.0 1.4 Petroleum & Petroleum Products 2.7 0.5 0.5 Chemicals 3.3 1.8 1.6 Total Exposure to 10 sectors 54.2 59.4 46.7 40.7 39.4 38.4 39.0 We recommend BUY on Axis Bank with a price target of Rs.560 Valuations & recommendation At CMP, stock trades reasonable at 14.8x its FY16E earnings and 2.5x its FY16E ABV. We have tweaked the earnings estimate for FY15/16E and now expect earnings to grow 13.1% CAGR during FY14-16E along with healthy return ratios (RoE: 17-18%, RoA: 1.7%). We are retaining BUY rating on the stock with revised TP of Rs.560 (Rs.446 earlier; 2.8x its FY16E adjusted book value). We are assigning higher multiple (2.8x vs. 2.5x) on improving macros as well as steps being taken to the govt to resolve various bottlenecks associated with the infrastructure segment where it has large exposure. Rolling 1-year forward P/ABV band Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6
Rolling 1-year forward P/E band Key data Rs. bn 2013 2014E 2015E 2016E Interest income 271.8 306.4 349.8 401.4 Interest expense 175.2 186.9 209.5 241.8 Net interest income 96.7 119.5 140.3 159.5 Growth (%) 20.6 23.6 17.4 13.7 Other income 65.5 74.1 80.9 91.4 Gross profit 93.0 114.6 128.0 145.1 Net profit 51.8 62.2 70.2 79.2 Growth (%) 22.1 20.0 12.8 12.8 Gross NPA (%) 1.1 1.2 1.5 1.5 Net NPA (%) 0.3 0.4 0.5 0.5 Net interest margin (%) 3.5 3.8 3.8 3.7 CAR (%) 17.0 16.1 15.7 14.6 RoE (%) 19.1 17.4 17.3 17.3 RoA (%) 1.7 1.7 1.7 1.7 Dividend per share (Rs) 18.0 20.0 22.0 22.0 EPS (Rs) 22.1 26.5 29.9 33.7 Adjusted BVPS (Rs) 138.5 158.3 178.2 199.1 P/E (x) 22.5 18.8 16.7 14.8 P/ABV (x) 3.6 3.1 2.8 2.5 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 7