We maintain ?buy? on Axis Bank, with the stock being our top pick in the sector. The stock trades at 1.5x FY15
adjusted book and more than 10% discount to its five-year average attractive, given RoA and RoE of 1.9% and 19%, respectively. Also, it is well positioned to capture maximum upside to improvement in macros. Utilising a customised model, deriving intrinsic profitability of each segment, we value Axis Bank at R2,238.
Axis Bank?s net profit rose 22% y-o-y to R1,550crore, surpassing our estimate of R1,500 crore. A steady revenue growth and controlled opex propelled core earnings. As against past trends of sequential decline, NIMs came in steady (adjusting for capital raising), led by lower cost of funds. This, coupled with a strong fee income growth (up 22% y-o-y), led to a revenue growth of 25% y-o-y.
Additionally, controlled opex (up only 10% y-o-y) led to 35% y-o-y growth in core operating profits.
Also incremental stress build-up (slippages of R400 crore and restructuring at R790 crore) came within the guided range. This is an encouraging sign (FY13 at R4,100 crore against R5,000-crore guidance) even while provisioning coverage continues to be healthy at 79% (including prudential write-offs). It maintains guidance of 85-90bps on credit cost, with restricting slippages and restructuring at R1,000-1,200 crore per quarter.
Retail banking continues to impress as well. Retail assets form 27.4% of loans post the 45% y-o-y growth. Given the focus on secured lending, both housing (up 25% y-o-y) and auto (up 55% y-o-y) saw healthy traction. At the current pace, the target of retail assets forming 30% of loan book will be met much before the FY15 timeline.
Retail liability further strengthened with healthy savings accounts (up 23% y-o-y) and retail term deposits (up 24% y-o-y). SA and retail TD now form 49% of deposits against 45% a year ago. Retail fees also picked up steam and grew 32% y-o-y, forming 29% of the total fees.
Margins during the quarter came in at 3.7% (up 13 bps q-o-q). However, adjusting for benefit on account of capital raising, the margins would have been flat sequentially ? a positive surprise considering the bank historically witnesses some compression in margins in Q4.
