Axis Bank Limited - Macro headwinds suggest caution - Antique

Axis Bank reported strong earnings for 1QFY13 with net profits at INR14.08bn (22% YoY growth), above consensus and our estimates on better than expected core operating profit progression (NII and trading profits). Contrary to investor skepticism, asset quality for the bank continued to hold up well with slippages and restructured book accretion at INR 11.8bn marginally above management guidance. However, domestic macro environment going forward is likely to be even more challenging for the bank with slowing GDP and credit growth to compound asset quality problem. Hence we downgrade the stock to Hold from Buy with a Target price of 1327INR/share.

Loan growth moderation continues; Retail loan growth continues to drive overall loan growth

In line with management guidance, loan growth for the bank (excluding retail continued to moderate to 8% YoY. Retail loan growth continued to accelerate at 40% YoY driven by housing, personal loans and card segment. Share of Retail loans now constitute 28.6% of overall loan book (vs. 27.4% in 4Q). Distribution of ratings across corporate segment remained stable while ratings in SME loan segments witnessed a marginal decline during the quarter.

Margins expand 16bps QoQ due to capital raise; Guidance at 3.25-3.5% for FY14E.

Reported Margins for the bank expanded 16bps QoQ to 3.86% due to lower cost of funds. Reported cost of funds declined 19bps QoQ to 6.26% as the bank benefited from INR55bn equity capital raised in 4Q. Average CASA balances expanded 300bps QoQ to 39% (Reported CASA at 42%). Going forward, management is guiding margins to remain stable at 3.25-3.5% levels for FY14e.

Asset quality stable; Outlook on FY14E credit costs maintained at 85-90bps

Asset quality for the bank continued to remain stable with GNPA and NNPA at 1.1% and 0.35% respectively. Slippages for the bank came in at INR 6.8bn leading to annualized delinquency ratio at 1.4% (vs. 0.8% in 4Q).The bank added INR 6.8bn of restructured assets in 1Q taking total restructured book to 2.2% of advances. Bank has upgraded INR4.85b of restructured assets due to satisfactory performance. Going forward management continues to remain confident about asset quality and is guiding credit costs at 85-90bps for FY14e and (slippages +restructuring) at INR50bn.We have increased our credit cost assumptions from 100bps to 120bps in FY14E.

Valuation and outlook

We have downgraded our earnings for Axis Bank by 6% and 5.5% for FY14E and FY15E respectively to factor in slowing growth and higher credit costs in context of deteriorating domestic macro. We reduce our Target price from 1580/share to INR1327/share (1.5 FY15E P/ABV) and downgrade the stock to Hold.

Source : Equity Bulls

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