Add ratings to Axis Bank shares: Kotak Institutional Equities

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Axis Bank's pace of shift to retail loans has been quite surprising with the share of retail loans increasing to 30% of total loans. Axis Bank's pace of shift to retail loans has been quite surprising with the share of retail loans increasing to 30% of total loans.
SummaryLimited earnings growth seen in medium term on high credit costs.

short-term rates increased sharply in recent months and the shift in assets to the low-yielding retail segment. Its ability to transfer high costs is high as less than 10% of loans are fixed rate in nature (auto, personal loans and credit cards).

Book quality vulnerable to stressed companies: Axis Bank continues to report a fairly strong loan portfolio with low loan impairment (gross NPLs or restructuring). The management has maintained that the broad additions to NPLs/restructured loans and credit costs would be similar to those seen over the past few quarters. Half of Axis Bank’s loans to large companies, out of which 17% is to stressed sectors (metals, infrastructure), including power (5%). Out of the bank’s total funded exposure, 3% is to power at R97 bn and non-funded exposure is another R160 bn. As the commissioning cycle gathers pace, almost 50% of private companies in the power sector (25% of the total power-sector exposure) will probably not have sufficient cash flows to meet their debt and interest obligations, which places the bank at increased risk of deterioration in asset quality. We believe some of these companies will be able to refinance debt through foreign currency loans or access fresh lines of credit to replace maturing ones over the next few quarters, at least, thereby delaying stress in the bank.

Besides, the bank has moderated growth in loans to large companies to less than 10% over the past few quarters, against over 20% before FY12. The bank has also reduced concentration of loans to the top 10 sectors to 40% from 60% in FY11.

Retail business drives fee income growth: Axis Bank has the highest share of fee income to assets among its peers at 1.5% of loans, which we think would be difficult to sustain given the slowdown in business, cautious outlook on select off-balance sheet exposure in the corporate portfolio and the high competition in retail loans.

We expect fee income growth of less than 15% CAGR (compound annual growth rate) over FY13-15e (estimates) against less than 20% CAGR over FY09-13. The contribution of retail banking fees to total fees is 31%, up from 25% in FY12 following a shift in management focus to the retail business.

—Kotak Institutional Equities

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