Axis Bank - NIMs strong but asset quality risks surface - Religare

AXSB's Q2FY14 PAT at Rs 13.6bn (+21% YoY) came in higher than our estimates, but was driven by one-off other income. Impaired asset formation surprised negatively at Rs 16.5bn (3.8% on annu. basis), and management raised the FY14 guidance by 15-20%. NII was in line and NIMs (at 3.79%) were down only 7bps as the cost of funds remained stable QoQ. While valuations (1.4x FY14 BV) are reasonable, we remain neutral on the stock due to a challenging macro and the bank's high corporate exposure.

- Impaired asset formation high; guidance raised further: While slippages were lower at Rs 6.2bn (1.2% on annualised basis), incremental restructuring rose from Rs 6.9bn in Q1FY14 to Rs 10.1bn in Q2FY14. Moreover, management indicated some stress in its corporate/power sector books, and raised its FY14 guidance on impaired asset formation by 15-20% (vs. its earlier guidance of Rs 50bn). We remain cautious on AXSB's asset quality as India's GDP growth may recover only gradually.

- NIMs decline by 7bps QoQ only; advances growth subdued: NIM compression was limited to 7bps QoQ despite a lower C/D ratio (-430bps to 78.8%) as the cost of funds remained stable QoQ at 6.25%. As per management, NIMs are likely to remain at 3.5%+ for FY14 (as against its earlier guidance of 3.25-3.5%). Overall, advances growth was subdued at 1.6% QoQ (17% YoY) as corporate advances declined by 2.4% QoQ (only 5.8% YoY growth). The retail business continued to grow at a healthy pace. The average CASA proportion remained stable QoQ at 39%.

- Aggressive accounting boosts non-interest income: Core fee income growth was subdued at 6% YoY as fee income from the large/mid-corporate segment declined 3% YoY. Total other income growth was relatively higher at 11% YoY as the bank booked income of Rs 2.8bn on repatriation of accumulated profits from overseas operations. AXSB also booked losses of Rs 1.14bn as it transferred treasury securities of Rs 75.7bn from AFS to HTM portfolio (as per RBI guidelines) at a loss.

Source : Equity Bulls

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