Axis Bank - Weak Operating Performance - Nirmal Bang

Axis Bank posted net earnings of Rs16bn, up 19.1% YoY, for 3QFY14 marred by weak operating performance and lower provisioning (write-back of investment depreciation). Against the backdrop of decelerating operating and net profit growth and CDR (corporate debt restructuring) referrals clocking all-time high in December 2013, Axis Bank posted only a 15.1% YoY growth in restructured loans, which looks unrealistic. Amid expectations of higher loan restructuring and greater stress emanating from a weak macro-economic recovery, we have revised downwards our target price on the stock to Rs1,200 (1.5x FY15E ABV) from Rs1,370 (1.8x FY14E ABV) earlier, retaining our Hold rating on it.

Concerns galore: In 3QFY14, Axis Bank witnessed muted restructured loan book growth of 15.1% YoY. The reported numbers came at a time when India's economy is weathering an acute slowdown (Industrial production contracted 2.1% in November 2013), CDR referrals touching an all-time high of Rs448bn in December 2013 and significant corporate restructurings going on currently. Notably, Axis Bank has been witnessing moderation in its net interest income (NII) and operating profit growth over the past couple of quarters, but strangely quantifiable pain is missing on its impaired assets. As the stress is likely to be higher going forward with the slowdown is expected to last longer, we see more severe shocks in store for new private sector banks and therefore we expect the multiples to cool off.

Operational performance: Axis Bank posted 3QFY14 earnings of Rs16,041mn backed by YoY growth of 19.6% in NII, above our estimate by 1.6% and from Bloomberg consenus estimate by 8.0%. The earnings growth was aided by lower provisioning as the bank took a write-back on its investment depreciation and repatriation of profits from its Hong Kong branch. Interest income witnessed a growth of 11.8% YoY, while interest costs rose 7.5% YoY and 2.8% sequentially to lead NII growth of 19.6% at Rs29,840mn. NII growth YoY slipped from 31.4% in 1QFY14 to 19.6% in 3QFY14. Other income growth remained muted, with a YoY growth of 1.8% and a decline of 6.9% sequentially. Consequently, operating profit witnessed a YoY growth of 10.7% at Rs26,150mn as overheads posted a growth of 19.8% YoY. Operating profit growth has been decelerating from 44.8% YoY growth in 1QFY14. Total provisioning other than tax came down by 48% YoY amid a write-back of investment depreciation of Rs2,395mn. Loan provisioning declined 24.5% YoY.

Source : Equity Bulls

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