Return of loan growth and sustained above-average margins were key highlights of Axis Bank?s Q4FY10 results. PAT was at Rs 7.6 billion (up 32% y-o-y), above our expectations, aided by strong NII growth (up 41% y-o-y) and lower credit costs.
Growth is back; momentum to sustain at 25% in FY10-12: After a lull period during the 9mFY10, the bank finally grew its loan book 28% yo-y and 23% q-o-q. Supported partly by the general momentum of the last quarter and overall robust growth in sanctions (18-20%), traction was strong propelling utilisations by 7%. Drawing support from deposit re-pricing and stellar CASA (47%), cost of funds declined further by 30bps q-o-q, expanding reported NIMs by 9bps to 4.09%. With the re-pricing benefit largely over, margins are likely to draw support from the CASA franchise. We estimate NIMs of 3.3% over FY11-12.
Significant decline in credit costs: Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards corporate advances than retail (as compared with its private peers). Retail advances contributed 20% to the total loan portfolio. Thus, it has better scope for aggressively expanding across segments where it has a low presence. Gross NPAs increased 12% q-o-q to Rs 13.2 billion (though incremental slippages annualised declined to 1.1% against 2.5% for 9mFY10) as delinquencies remained high in the SME and unsecured retail book. However, on account of higher provisioning, net NPAs declined by 2% to Rs 4.2 billion. Positive surprise came from the 44% q-o-q decline in credit costs due to accelerated provisioning (especially in unsecured book) done in earlier quarters. We expect LLPs (Loan Loss Provisions) to settle at 1% in FY11-12. Restructured book stood at Rs 22.8 billion (2.2% of advances).
Outlook and valuations: We have revised our earnings for FY11E and FY12 by ~10% (each) on the back of positive outlook on the loan book and steady margins. The bank is now focused on achieving a more rational target (4-5% above industry) rather than beating the industry (grew 2x the industry earlier). This strategy will allow it to build a more formidable retail franchise and achieve consistently higher ROA.
We believe the bank can sustain higher ROA of 1.5-1.6% against 1.0-1.2% a few years back, allowing ROE to move closer to 20% in a capital efficient manner. As the bank closes on the gap between ROA of HDFC Bank and delivers consistent earnings, the current discount of ~30% could narrow down to 15-20%. This would translate into a trading range of 3.0-3.2x and price target closer to Rs 1,600-an upside of 35% over the next 12-18 months. The stock is attractive at 2.2x FY12E adjusted book and 11.5x FY12E earnings. We maintain ?BUY?, and rate it ?Sector Outperformer? on relative returns. Axis Bank continues to be one of our top picks in the space.
Fee income flat: Fee income remained flat q-o-q, but grew 17% y-o-y, to Rs 7.8 billion. Fee income from large and mid corporate credit grew 112% y-o-y, followed by that from treasury (20% y-o-y) and retail (2% y-o-y); however, it declined 5% y-o-y in SME and agri, 8% y-o-y in business banking and 33% in capital markets. During the quarter, the bank changed its accounting policy to recognise fee income on bank guarantees on a pro-rata basis over the period of the guarantee. As a result, fee income for the year was lower by Rs 1.4 billion.
Other highlights: Operating expenses grew 5% q-o-q (staff expenses: 8%, non-staff: 3%); while cost to income ratio stood at 42%. Capital adequacy stood comfortable with tier 1 at 11.2% (despite the strong 20%+ q-o-q growth in advances) and overall capital adequacy at 15.8%.
Company description: Axis Bank is the third-largest private sector bank in India in terms of asset size, with a balance sheet of Rs 1.5 trillion. It has a network of over 900 branches and extension counters across the country. The bank earns a substantial fee income from transaction and merchant banking activities.
The key promoter UTI-I (special undertaking) holds 24%, LIC holds 10.4%, and the rest is widely held by FIIs and public.