Axis Bank - Underperformance to linger - Centrum

Axis Bank's Q3FY14 results were in line with our estimates on the operational front. However, led by lower NPA provisioning and MTM reversals, net profit at Rs16.0bn, was ahead of our / consensus estimates. Lower than expected stress asset addition at Rs12.6bn (2.4% of loans) and further improvement in retail franchise were key positives. However, margin compression, weakening of operating profit metrics and risk to asset quality make us believe that underperformance will continue for a few more quarters. Retain HOLD. Prefer ICICI Bank to Axis Bank.

Stress asset addition lower; guidance retained on higher side: Though stress asset addition for the quarter was lower at Rs12.6bn, management retained the guidance for FY14 at Rs60bn and it implies that the run-rate for Q4FY14 would be at 3.1% of loans. Provisioning on net slippages was lower at 63%. Restructured portfolio stood at Rs49bn (2.3% of loans). With perceived risk of asset quality, we are factoring in slippages/ credit cost at 130bps/ 80bps respectively over FY14-16E.

NIM contraction along expected lines; growth in PPOP feeble: Q3FY14 NIM at 3.4% (calc) declined 7bps but was along expected lines. We continue to believe that the negative dollar gap (12% of assets in less than 1-year bucket), growth moderation and fading of capital float benefit will curtail NIM at 3.2% levels over FY14-16E. Growth in fee income was mere 4% yoy led by moderation across all segments. With elevated operating costs (2.3% of average assets), growth in operating profit slowed down to 11% yoy.

Retail franchise continues to gain momentum - the silver lining: We are impressed by the bank's strategy on enhancing retail franchise. In Q3FY14, retail deposits (savings deposits + domestic term deposits) comprised 58% of total deposits. On the asset side, retail loans formed 30% of the portfolio, with 86% lending over secured assets. Loan growth at 17.8% yoy was primarily in the nature of retail (+33% yoy) and SME (+25% yoy). Deposit growth at 7% yoy was due to 14% yoy growth in CASA deposits.

Retain Hold: Q3FY14 results vindicate our neutral stance on the bank given growth moderation and its impact on profitability. Growth in operating profit at 11% yoy was the lowest in the past 10 quarters and restricts the bank's ability to provide for any severe NPA shocks. We expect the trend to continue and factor in lower 17% / 15% CAGR in NII / PPOP over FY13-16E. Increased risk of asset quality and consecutively higher provisioning will curtail PAT growth to 14% CAGR and return ratios to 1.6% / 17% (RoA /RoE) over the same period. While valuations at 1.2x Dec'15E ABV of R973 seems reasonable, with limited near term catalysts, we expect the underperformance to continue. HOLD with a revised target price of Rs1,170.

Source : Equity Bulls

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