RESULT UPDATE Saday Sinha saday.sinha@kotak.com +91 22 6621 6312 AXIS BANK PRICE: RS.581 RECOMMENDATION: BUY TARGET PRICE: RS.685 FY17E P/E: 13.7X, P/ABV: 2.5X Q1FY16 results: Marginal uptick in fresh impairment while core performance came ahead Axis bank reported strong core performance on back of better than expected NIM (3.81%) and healthy loan growth (23.5% YoY). Although operating profit saw strong growth on back of healthy revenue growth along with containment of opex, PAT (18.7% YoY) grew at moderate pace (in-line with our expectations) on back of higher provisions. Although headline NPLs have been holding well contrary to street expectations, high exposure to non-operational power portfolio remains a potential risk, in our view. Fresh impairment during Q1FY16 (Rs.19.3 bn; 3.35% annualized) remained elevated, however management has maintained its guidance of lower fresh impairments during FY16 as compared to that of FY15. As stock trades at reasonable valuation (2.5x its FY17E ABV) with healthy return ratios (RoE: 19-20%, RoA: 1.8%), we retain BUY rating on the stock with upward revised TP of Rs.685 (Rs.670 earlier; 3.0x FY17E ABV). Quarterly Performance (Rs mn) Q1FY16 Q1FY15 YoY (%) Interest on advances 70,738 60,853 16.2 Interest on Investment 24,751 21,023 17.7 Interest on RBI/ banks' balances 881 558 57.8 Other interest 2,992 460 550.6 Total interest earned 99,361 82,894 19.9 Interest expense 58,799 49,789 18.1 Net interest income 40,562 33,105 22.5 Other income 22,983 16,911 35.9 Operating Revenue (NII + Other income) 63,545 50,015 27.1 Operating Expenses 22,624 21,059 7.4 Payments to / Provisions for employees 8,093 7,518 7.7 Other operating expenses 14,532 13,541 7.3 Operating Profit before Prov. & Cont. 40,921 28,957 41.3 Provisions & contingencies 11,218 3,866 190.2 Provision for taxes 9,919 8,423 17.8 Net profit 19,784 16,668 18.7 EPS (Rs) 8.3 7.1 18.0 Core earnings marginally ahead of our expectations; margin continued to remain higher than management's guidance. Core performance (NII growth at 22.5% YoY) was marginally ahead of our expectations on back of strong NIM (3.81% in Q1FY16) and healthy loan growth (23.5% YoY). Net revenue grew 27.1% YoY, fastest in last 8 quarters largely due to healthy core performance and robust non-interest income (35.9% YoY). Non-interest income was aided by strong treasury gains (2.5x YoY) as well as recovery from W/O accounts (91% YoY), while fee-based income grew at healthy pace (12.5% YoY). 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 26
Break-up of Fee Income Rs. Bn 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 Total Fee Income 13.17 14.32 14.56 17.80 13.78 15.91 16.86 21.24 15.51 Large & Mid corporate 3.80 4.31 4.44 5.38 3.36 4.59 4.23 5.91 3.70 Treasury & DCM 3.29 3.15 3.35 3.56 3.31 3.02 3.54 4.25 2.17 Agri & SME Banking 0.51 0.71 1.16 1.60 0.49 0.86 1.01 1.27 0.62 Business Banking 1.32 1.15 1.16 1.25 1.38 1.27 1.52 1.37 2.95 Capital Markets 0.13 0.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Retail Banking 4.18 4.87 4.38 5.95 5.18 6.02 6.59 8.19 6.08 Although Axis bank has witnessed strong contribution of fee-based income to total income (35-37%), we are modeling lower contribution from fees, going forward, as off-balance sheet growth has seen moderation in recent times. Fee-income business is progressively witnessing higher contribution from non-lending activities. Retail business contribution in fee-income continues to be at ~39% (Q1FY16) while Corporate segment saw muted growth as demand from corporate segment has remained subdued. Contribution to Net Revenue FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII 56% 56% 59% 60% 60% 62% 63% 63% 64% Fee Income 38% 34% 35% 37% 35% 36% 31% 32% 33% Trading Profit 4% 8% 3% 1% 4% 2% 4% 4% 2% Other non-interest Income 1% 2% 3% 2% 2% 1% 1% 1% 1% Total net Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100%, Kotak Securities - Private Client Research We are modeling moderate growth in non-interest income at 15.0% CAGR during FY15-17E as against ~30% CAGR witnessed during FY08-15 as slow business growth along with moderate traction in off-balance sheet items are likely to impact this stream of revenue. Although operating profit saw strong growth (41.3% YoY) on back of healthy revenue growth along with containment of opex (C/I ratio fell by 250bps QoQ), PAT (Rs.19.8 bn; 18.7% YoY) grew at moderate pace (in-line with our expectations) on back of higher provisions (2.9x YoY). No branch was added during Q1FY16 which is reflected in moderate rise in opex (7.4% YoY; C/I ratio at 35.6%). We do take cognizance of its continued focus on business re-engineering to reduce transaction costs. However, we expect C/I ratio to rise to 40-41% during FY16/17E. Cost / Income ratio (%), Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 27
Reported NIM remained close to the upper-band of management's guidance, largely aided by sharp rise in LDR. Reported NIM remained stable (QoQ) at 3.81% (Q1FY16), much ahead of management's medium term guidance of ~3.50%, largely aided by improvement in LDR (530bps YoY). Although yield on advances declined 38bps QoQ (calculated), decline in cost of funds (14bps; reported) and higher yield on investment book (29bps; calculated) neutralized the effect (QoQ). Trends in NIM (%) 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. Nonetheless, we also take cognizance of its favorable ALM profile, where 38% of deposits have less than one year maturity, while 21% of advances would be re-priced within one year (as per AR FY15 disclosures). 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 3.7%/3.6% during FY16E/17E as compared to 3.9% witnessed during FY15, after factoring in amplified competitive intensity capping the asset yield. Moderate traction in balance sheet; however, retail banking piece continued to impress Axis bank's balance sheet continued to grow at moderate pace (19.3% YoY) despite strong loan growth (23.5% YoY). Retail segment continued to witness robust growth - 26.3% YoY while corporate segment also witnessed healthy growth (27.2% YoY) on refinancing opportunities. In retail segment, focus continues on both housing as well as auto loans. However, we believe share of higher yielding unsecured portfolio is likely to rise in the future (12-14% from the current levels of 10%), as per management's earlier guidance. Our interaction with the bankers suggests that competition has intensified in the retail segment and hence, we opine that its NIM which has been holding-up well in the recent quarters could see some downward pressure, going forward. Break-up of advances FY12 FY13 FY14 Q2FY14* Q2FY15* Q3FY15* Q4FY15* Q1FY16* Large & Mid Corporate 53.6% 49.9% 44.4% 48.4% 45.5% 46.6% 45.3% 45.8% SME Advances 14.0% 15.2% 15.4% 16.3% 15.6% 15.3% 14.6% 13.5% Agriculture 10.2% 7.5% 7.8% Retail 22.1% 27.4% 32.4% 35.3% 38.9%^ 38.1%^ 40.2%^ 40.7%^, * indicates reclassification of loan book, ^ indicates retail book including FCNR linked advances Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 28
Trend in Asset Quality Its deposit growth has continued to grow at relatively moderate pace (13.2% YoY) vis-à-vis loan book while saving deposits grew at healthy pace (13.7% YoY). CASA mix stands healthy at 42.8% (Q1FY16) while CASA share on daily average basis remained stable (QoQ) at 40% in Q1FY16. Although headline NPLs suggest comfort, high exposure to nonoperational power portfolio remains a potential risk, in our view. Despite marginal uptick in headline NPLs during Q1FY16 (GNPA rose 3.4%), its asset quality has been holding well contrary to street expectations. In percentage terms, gross and net NPAs remain healthy at 1.38% and 0.48%, respectively, at the end of Q1FY16. Although fresh impairment during Q1FY16 (Rs.19.3 bn; 3.35% annualized) remained elevated, management has maintained its guidance of lower fresh impairments during FY16 as compared to that of FY15. NPA (Rs. Bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Gross NPA 24.90 27.35 30.08 31.46 34.63 36.13 39.02 41.10 42.51 % of Gross Advances 1.10 1.19 1.26 1.22 1.34 1.34 1.34 1.34 1.38 Net NPA 7.90 8.38 10.03 10.24 11.13 11.80 12.51 13.17 14.61 % of Net Advances 0.35 0.37 0.42 0.40 0.44 0.44 0.44 0.44 0.48 Provision Coverage Ratio (%) 80.0% 80.0% 78.0% 78.0% 77.0% 78.0% 78.0% 78.0% 78.0% Trend in addition to impaired assets Rs. Bn Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Restructuring 6.86 10.31 6.70 11.15 4.80 5.70 1.32 15.40 7.40 as a % of loan book 1.39% 2.09% 1.36% 2.26% 0.83% 0.99% 0.23% 2.68% 1.29% Slippage 6.81 6.18 5.89 3.01 6.26 9.11 7.08 6.10 11.85 Slippage Ratio (%) 1.38% 1.26% 1.20% 0.61% 1.09% 1.58% 1.23% 1.06% 2.06% Addition to impaired assets (%) 2.78% 3.35% 2.56% 2.88% 1.92% 2.57% 1.46% 3.74% 3.35% Its outstanding restructured book is relatively comfortable at Rs.85.2 bn (2.8% of net advances). We also note that risk of asset impairment remains elevated for Axis bank due to its high exposure to infrastructure and other stressed sectors, however, 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. Nonetheless, we believe healthy provision coverage ratio at ~78% (including prudential write-offs) provides some comfort. Exposure to Stressed Segments (Funded) (%) FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Infrastructure Construction 8.2 6.8 7.6 7.4 7.6 7.8 7.8 7.2 6.8 Power Generation & Distribution 5.7 4.7 4.9 5.2 5.2 5.2 5.3 6.0 6.7 Metals & Metal Products 7.4 4.3 4.2 4.6 4.6 5.2 5.3 5.9 5.9 Engineering & Electronics 3.7 3.4 3.5 3.3 3.3 3.3 3.3 3.2 3.3 Financial Companies 14.3 12.7 7.0 4.6 4.3 4.5 5.5 4.7 4.4 Trade 4.5 3.2 2.9 3.6 3.6 3.6 3.5 3.4 3.1 Food Processing 4.4 4.1 4.1 3.6 3.7 3.5 3.5 3.1 3.1 Real Estate 3.2 2.6 3.3 3.3 3.3 3.3 3.2 3.3 Shipping, Transportation & Logistics 2.9 2.5 2.3 2.3 2.3 2.1 2.1 Telecom 5.0 1.4 Petroleum & Petroleum Products 0.5 0.5 0.4 0.5 0.6 Chemicals 3.3 1.8 1.6 Total Exposure to 10 sectors 59.4 46.7 40.7 39.4 38.4 39.0 40.1 37.0 37.2 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 29
We recommend BUY on Axis Bank with a price target of Rs.685 Valuations & recommendation At CMP, stock valuations are reasonable at 13.7x its FY17E earnings and 2.5x its FY17E ABV. We have tweaked the earnings estimate for FY16/17E and now expect earnings to grow 17.1% CAGR during FY15-17E along with healthy return ratios (RoE: 19-20%, RoA: 1.8%). We are retaining BUY rating on the stock with upward revised TP of Rs.685 (Rs.670 earlier; 3.0x FY17E ABV). We have been assigning higher multiple to Axis bank on improving macros as well as government's effort to resolve various bottlenecks associated with the infrastructure segment, where it has large exposure. Key data (Rs bn) 2014 2015 2016E 2017E Interest income 306.4 354.8 414.6 492.6 Interest expense 186.9 212.5 248.9 298.6 Net interest income 119.5 142.2 165.7 194.0 Growth (%) 23.6% 19.0% 16.5% 17.1% Other income 74.1 83.7 97.1 110.7 Gross profit 114.6 133.9 157.6 182.8 Net profit 62.2 73.6 85.2 100.9 Growth (%) 20.0% 18.3% 15.8% 18.4% Gross NPA (%) 1.2 1.3 1.5 1.4 Net NPA (%) 0.4 0.4 0.5 0.4 NIM (%) 3.8 3.9 3.7 3.6 CAR (%) 16.1 15.1 15.1 13.7 RoE (%) 17.7 18.0 18.2 19.3 RoA (%) 1.7 1.7 1.7 1.7 DPS (Rs) 4.0 4.6 4.8 5.0 EPS (Rs) 26.5 31.0 35.9 42.6 Adjusted BVPS (Rs) 158.3 182.9 204.0 227.9 P/E (x) 22.0 18.7 16.2 13.7 P/ABV (x) 3.7 3.2 2.8 2.5, Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 30