Axis Bank - Another steady quarter; favorable risk reward - K R Choksey

Axis Bank reported another steady quarterly performance with PAT of Rs1277 crore growing 25.2% y-o-y & 15.9% q-o-q, in line with our expectation. NII growth slowed down to 26.2% y-o-y and flat q-o-q. Net interest margins contracted 20bps q-o-q to 3.55%. Core fee income moderated to 7.8% y-o-y/ 8.5% q-o-q due to decline in capital market related fees and subdued corporate fee income. Trading gains increased 24.2% q-o-q to Rs146 crore contributing 7.7% to PBT. Provisions declined 67% q-o-q due to investment depreciation reversal and lower LLP. CASA deposits grew 17.6% y-o-y and 5.4% q-o-q driven by steady growth in saving deposits. Advances and deposit growth were 19.2% y-o-y and 16.3% y-o-y, higher than the system growth rates. Asset quality remained fairly stable with net NPA at 0.25% & PCR 74%. Maintain BUY.

Margins contraction led to flat NII q-o-q: NII grew 26.2% y-o-y & flat q-o-q driven by 20bps q-o-q margin compression and 14.1% q-o-q loan book growth.Reported NIMs marginally declined from 3.75% in Q3FY12 to 3.55% in Q4FY12 due to sharp built up priority sector book, increase in term deposits rates (up 25bps q-o-q across maturities). We believe Q1FY13 margins continue to be under pressure due to slack credit growth and full impact of strong growth in priority sector book in Q4FY12.

Steady fee income, higher trading gains boosted non interest income: Non-interest income increased 9.5% y-o-y to Rs 1,588 crore, driven by steady fee income (up 7.8% y-o-y & 8.5% q-o-q). Corporate fee income slowed down due to flat non funded corporate exposure q-o-q and moderation in credit growth. Trading gains increased 24.2% q-o-q to Rs146 contributing 7.7% to PBT vs. 7.2% in Q3FY12.

Loan book up 19.2% y-o-y; Deposits slowed down 16.3% y-o-y: Loan book grew 19.2% y-o-y & 14.1% q-o-q driven by sharp built up priority sector loan book. Deposits growth was at 16.3% y-o-y & 5.5% q-o-q reflecting industry trend. CASA ratio remained at healthy levels of 41.5%.

Asset quality remained stable: Gross NPAs were added to the tune of Rs514, largely coming from mid corporate, SME and agri whereas recoveries were Rs593 crore, significantly higher than quarterly run rate of ~ Rs125-130 crore, hence we expect recovery levels are likely to come down in coming quarters. The bank restructured loan amounting to Rs588 crore during the quarter, taking cumulative value of assets to Rs 3,060 cr (1.58% of customer assets).

Valuation & Recommendation

Axis Bank has delivered another steady operating performance during the quarter. Steady NII, healthy fee income growth, lower provisions supported PAT growth. However, higher loan restructuring and sharp 20bps margin contractions were key negatives during the quarter. We believe, healthy NIMs, higher than system growth outlook, strong and diversified fee income profile, stable asset quality and strong liability franchise have emerged key value drivers for the stock in medium term. We expect the bank to deliver 21.1% CAGR in net earnings over FY12-FY14. At Rs1,121, the stock is trading at 9.0x FY13 earnings and 1.8x FY13ABV, offering favorable risk reward given the superior medium term RoEs. We reiterate our BUY rating on the stock with target price of Rs1400.

Source : Equity Bulls

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