Axis Bank - Not out of the woods - one offs supported bottom line - IDBI Capital

Axis Bank has delivered in line set of numbers during current quarter however result had been more of a mixed bag. Continues momentum toward growing retail asset base as well as gaining pace in improving retail liability franchise is a positive tone, however slowing fee income growth and piling of stressed asset base has been a cause of concern. Since last quarter, we have indicated our concerns over slowing growth, declining margins and deteriorating asset quality, all of which have come to pass during current quarter results as well.

The Bank has reported NII of 29,840 mn against our estimate of Rs29,898 mn (growth of 19.6% YoY) however the same was more attributable to relatively higher growth in credit compared to sluggish growth in deposit base for the bank. The bank is witnessing a trend of slowing NII growth since past few quarters which again remains anther cause of concern however management consider such consolidation as an exercise to reduce capital burning for augmenting growth momentum during improving economic environment.

With impact of capital raised easing, margins during the quarter declined to 3.71% against 3.79% in Q2FY14. The bank witnessed decline in other income which de-grew by 6.9% sequentially and has remained flat on YoY basis which was mainly on account of slowing fee base income of the bank both on retail as well as corporate segment. The bank has also included repatriation of profit from Hongkong branch worth Rs1.24 bn excluding which the situation would have far more stressful. The bank had seen sharp decline in provisioning charges which de-grew by 70.2% sequentially and 47.7% on YoY basis resulting better than expected bottom line for the bank. This was mainly on the back of write back worth Rs1.7 bn on account of mark to market gain on investment book of the bank.

Outlook

The bank witnessed fresh slippages to the tune of Rs1.2 bn whereas recoveries and upgrades were worth Rs1.2bn and write offs were to the tune of Rs1.9 bn which all resulted in nominal movement in NPA ratios of the bank. Considering the weak domestic environment along with bank's exposure towards large corporate as well as SME/MSME segment, we continue to remain cautious on the asset quality of the bank. We assume fresh slippage ratio of 1.1% in FY14 which is slightly higher than the previous year. The bank has already revised its incremental impairment asset target to Rs60 bn which we assume is justified. Hence, being on conservative side, we maintain our credit cost assumption to 100bps for FY14 and 90bps for FY15.

We assume 16.4% CAGR growth in PAT from FY13-15E driven by 21.2% CAGR in NII, 19% CAGR in advances and margins at 3.5% in FY14-FY15. We value the bank on ERoE basis with cost of equity at 16%. Considering improved margins for FY14 as well as considering previous quarter one offs as revenue items, we revise our Target Price upwards to Rs1,294 from Rs1,221 earlier. However, we maintain ACCUMULATE rating on the stock. The bank is trading at 1.3x Price to Adj Book (100% NPA + 25% Restructured book) at our FY15 numbers. At our target price, the stock would trade at 1.5x Price to Adjusted FY15 book and 8.6x Price to FY15 Earnings.

Source : Equity Bulls

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