Axis Bank - Margin woes remain; surge in NPA, RA... - ICICIDirect

In line profit led to earnings trajectory remaining strong but higher GNPA rising 16% QoQ to Rs.2092 crore and increase in restructured assets (RA) to Rs.3827 crore from Rs.3060 crore in Q4FY12 took the sheen out of results. We believe credit & deposit growth will settle at 20% and 19.2% for FY13E post strong Q1FY13 numbers of 29.8% and 21.3%, respectively. We believe the recent stock underperformance has been factoring in asset quality concerns that can impact future provisions. However, return ratios have been maintained with 79% provision coverage ratio. We have revised PAT to incorporate higher NPA provisions and lowered NIM to 17% CAGR vs. 19.3% earlier over FY12-14E, respectively. Maintain BUY.

Business growth strong, NPAs rise, core performance healthy

Business growth was strong with advances rising 29.8% YoY mainly driven by retail (up 50% YoY) and corporate advances (up 32% YoY) while deposits rose 21.3% YoY. The CASA ratio declined to 39.1% (41.5% in Q4FY12) owing to slower current account balance mobilisation. The asset quality was under pressure with absolute GNPA and NNPA rising QoQ as well as YoY. Fresh restructuring during the quarter amounted to Rs.628 crore with outstanding restructured assets forming 2.2% of loan book compared to 1.8% in Q4FY12. Consequently, provisions came in higher. Core performance was healthy with NII maintaining strong growth YoY while cost-to-income ratio declined to 44.1% (45.4% in Q4FY12 and 46.1% in Q1FY12). Margins declined 18 bps sequentially to 3.37% due to rise in cost of funds as indicated by management to stay at 3.25-3.5%.

Though the quarterly performance indicates pressure on the asset quality side and margins, the bank has been able to maintain its profitability growth above 20%+ even in the current challenging environment. Going forward, the management expects margins to be maintained as the CoF has peaked while we believe uptick in restructured asset can be seen.

Valuation multiple maintained to factor in stable return ratios

In spite of higher credit cost factored in estimates, we believe return ratios will remain stable with RoA and RoE at 1.6% and 19%, respectively. We have revised profit estimates downwards by 6% to incorporate higher NPA and RA provisions. We continue to value the bank at 1.6x its FY14E ABV but have revised the target price to Rs.1210. We maintain BUY rating.

Source : Equity Bulls

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