Despite stable macro in FY14Q1, impairments at Axis Bank have continued to pick up. With macro backdrop taking a turn for the worse in FY14Q2 (rising downside risk to GDP growth, higher interest rates), impairments can continue to trend higher. We maintain ?underweight? on the stock and revise our target price to R1,050, which is a 15% downside.
We have reduced our earning estimates for FY14 and FY15 by 5% each, while, for FY16, we have reduced it by 4% on account of higher credit costs. The first quarter of current fiscal year saw strong net interest margins, but other trends were weak.
Loan growth was aided by growth in high yield segments. Corporate fees declined y-o-y and retail fee growth moderated. Impaired loan creation continued to pick up. Margins were up 16 bps q-o-q to 3.86% on spike in loan-to-deposit ratio and hence, lower funding costs.
Further, loan yields were helped by strong growth in high yielding (and relatively risky) segments like loan against property and unsecured loans. However, margins will likely be moderate from here (management guided to 3.25-3.5% NIMs for FY14) ? we are at 3.65%. Loan growth in non-retail segment remained weak at 8% y-o-y. While fees from large corporate declined (8% y-o-y), retail fee income growth slowed to 23% y-o-y from 37% last quarter. Debt capital markets fees were strong (+38% y-o-y), but tough to sustain.