Axis Bank - Strong core performance - Centrum

Axis Bank's bottom-line came in line with our estimates, despite a stronger than expected core performance, as the provisions spiked during the quarter. NIM (calculated) expanded ~15bps helped by contraction in wholesale funding costs as well as better loan yields. However, slippage rate inched up to 1.5% (from 1.1% for Q1FY13), though GNPA increased by 5% QoQ (due to aggressive write offs). Meanwhile, restructured assets increased by 6% QoQ and now stand at 2.4% of loans. While incremental restructuring and slippages are likely to remain high for a few quarters, current valuations and our assumptions adequately factor in the concerns. We maintain Buy rating and price target of Rs1,300 (1.8x FY14E).

- NIM expands by ~15bps QoQ, Loan growth ~23%: NII grew by a healthy 16% YoY to Rs23.3bn led by a healthy credit growth (23% YoY) while reported NIM expanded by ~15bps sequentially. Loan yields benefitted from higher share of the retail segment (at 26% of loans) while cost of funds eased by 10 bps QoQ; but a lower CD ratio limited the benefit. Given the easing in liquidity situation as well as reduction in term deposit rates, the pressure on cost of funds will ease gradually. However, on a full year basis, we are factoring in flattish NIM (3.25%) YoY for FY13.

- Asset quality: a mixed bag: Asset quality performance was mixed for Q1FY13 as 1) slippage rate inched up to 1.5% from 1.1% avg in the previous quarter 2) restructured loans increased by just 6% QoQ to 2.4% of loans though pipeline seems fat and 3) GNPA rise was contained at 5% QoQ on back of aggressive write offs. Despite higher provisions sequentially, PCR eroded by 90bps QoQ to 70%. The management continues to guide for credit cost in 85-95 bps and GNPA in 100-125bps range.

- Healthy credit growth, focus on retail evident: The advances book grew by a healthy 23% YoY to Rs1,721 bn. As per the outlined strategy, retail segment witnessed a robust growth (51% YoY) and now forms 26% of the loan book. Among retail products, mortgages continue to remain the key driver though growth in Auto and personal loans has been quite high (albeit on a low base). The deployment pace (CD ratio) normalized to 73% vs 77% average for the last two quarters.

- Strong fee income growth: The growth in core fee income (20% YoY) came in as a pleasant surprise given the lackluster growth in the last two quarters. In addition, treasury gains jumped up materially (Rs2070mn vs 280mn year ago), which helped shore up non-interest income. The treasury gains also include one time income realized from the sale of stake in AMC business to Schroder.

- Maintain Buy: At the current market price of Rs1,150, the stock trades at 8.1x FY2014E EPS and 1.5x FY2014E ABVPS. We are maintaining Buy recommendation and our price target of Rs1300, (based on 1.8x FY14E ABVPS) indicating an upside of 13%. Axis Bank remains one of the key beneficiaries of the potential revival in investment cycle led by government's reform initiatives and anticipated reduction in policy rates going ahead.

Source : Equity Bulls

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