Axis Bank - Resilient performance in challenging times! - Prabhudas Lilladher

Axis bank's Q2FY14 results do highlight risks to growth, especially when the key growth engine (retail) is likely to slowdown. However, stable NIMs and low treasury losses addresses equally large investor concerns regarding Axis' B/S on both Liabilities/Assets. Increased delinquency guidance indicates similar run-rate to H1FY14, which we believe, is manageable, especially with Axis judiciously building by a contingency buffer. We, thus, maintain our 'BUY' rating. However, the recent 30-35% return from Aug-13 lows diminishes near term risk-reward equation.

- Slowdown getting apparent but margins and opex provide significant cushion: Slowing growth at 14% YoY (FX adj.) and core fee growth of <10% YoY highlights potential slowdown in top-line alongwith management guidance for a moderation in retail growth (37% YoY), growth offsets to severe corporate activity slowdown (just 7% YoY loan growth) seems limited. Margins (just <10bps QoQ contraction) and slow opex growth is providing the PPOP flexibility and management's confidence in higher margins indicate that this trend is likely to sustain as well in H2FY14. Our ~5bps NIM margin accretion assumption seems conservative as H1FY14 margins is ~30bps higher than FY13 and will help to offset some growth pressures.

- Restructuring inches up; Delinquency guidance seems manageable: Slippages at Rs6.1bn was within expectations but restructuring of Rs10.8bn was higher driven by some bulky restructuring in education/textiles. Revised guidance of ~Rs60bn of slippages plus restructuring (15-20% higher than Rs50bn) is largely in line with expectations and implies run-rate similar to H1FY14 (Rs13bn slippages + Rs17bn restructuring). Axis has used one-off gains to build up on contingency provisions which pleasantly surprised (Rs1.5bn in Q2, stock of Rs5.3bn).

- Other highlights: (1) Rs2.8bn of translation gain booked on repatriation of profits - It was little opportunistic but largely used to offset Rs1.15bn of treasury losses plus the Rs1.5bn of contingency provision made (2) Treasury - Loss booked on AFS to HTM transfer of Rs1.15bn and only Rs400m provisions for MTM losses indicate AFS buffer held previously and addresses some investor concerns on large corporate bond book.

Source : Equity Bulls

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