Axis Bank - Resilient asset quality and NIM are the bright spots - Avendus

Resilient asset quality and NIM are the bright spots

A decline in provisions led by improvement in the asset quality was the key driver of profitability. NPL ratios at the end of Mar12 were the lowest in the last three years. Sequential NIM contraction was in line with management guidance, but the slowdown in fees was offset by trading gains. Retail loans grew faster led by housing and auto loans. The management guided the trend to sustain in FY13f with entry into new segments such as commercial vehicles. We lower our assumption for incremental NPL in FY13f–FY14f up to 20-bp and raise our PAT estimates for FY13f–FY14f up to c5%. Furthermore, we rollover the TP to Mar13f and raise it marginally to INR1,462. The TP values the stock at 1.95x the one-year forward adjusted book value. We maintain a Buy rating. A higher-than-estimated NPL provision is a risk factor.

NPL ratios lowest in 3 years; recovery exceeds slippage in the quarter

The 6% q-o-q drop in outstanding gross NPL in the Mar12 quarter was driven by recovery at cINR6bn, exceeding the slippage. Gross and net NPL ratios declined up to 16-bp to 0.94% and 0.25%, respectively. NPL ratios were lowest in the last three years. While we lower the assumption for incremental NPL by upto 20-bp for FY13f–FY14f, it is 27-bp higher than in FY12. The NPL provision/loans forecast at 100-bp is above the management guidance of c60-bp. Restructured loans were 1.8% of the total loans (INR5.8bn was added during the quarter).

NIM holds above 3.5% despite stress at both ends

The 20-bp sequential fall in NIM to 3.55% was in line with management guidance. High cost of funds at 6.45% during the quarter and a 73-bp sequential fall in yields contracted the NIM. Strong growth in NII (26% y-o-y) and trading gains (152% y-o-y) offset the weakness in fees (8% y-o-y) and led to a c18% y-o-y growth in the operating income. After moderation in the last four quarters, there was a rebound in the savings deposits growth to 26.5% and an 81-bp increase in its proportion to 23.5% at the end of Mar12.

Retail loans grow faster, driven by select segments

While total loan growth moderated to 19% y-o-y, retail loans grew faster by 35% y-o-y. It was led by housing and auto loans. The proportion of housing and auto loans rose 700-bp and 200-bp, respectively, since the end of Mar11. Personal loans continued to contract. The share of retail loans was c22% at the end of Mar12. The management indicated that while the trend of faster growth in retail is likely to sustain, it may enter into the commercial vehicle segment in FY13f.

Rollover TP to Mar13 and raise it marginally to INR1,462; maintain Buy

We lower our assumption for incremental NPL in FY13f–FY14f by 20-bp. Consequently, we also lower our estimates for loan loss provisions and raise the PAT estimate up to c5% for FY13f–FY14f. We rollover the TP to Mar13f and raise it marginally to INR1,462. The TP values the stock at 1.95x the one-year forward book value. We maintain a Buy rating. The lower-than-expected rise in slippages and NPL provisions over the last few quarters may narrow the valuation gap between AXSB and peers. Sharp rises in slippage and NPL provisions are the key risk factors.

Risk factors

- NPL ratios may rise due to higher-than-estimated incremental NPL. Thus, loan loss provisions are likely to be higher, leading to a downward risk on earnings.

- A higher-than-estimated NIM may result in an upside risk to net profit estimates.

Source : Equity Bulls

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