Axis Bank Ltd: 'Concerns priced-in' – BUY
CMP Rs1,246, Target Rs1,500, Upside 20.4%
CMP Rs1,246, Target Rs1,500, Upside 20.4%
System outperforming loan growth to continue over FY11-13
After delivering industry-best loan growth of 36% in FY11, Axis Bank has guided to outgrow system by 30-40% in FY12. Based on an internal estimate of 18% growth for the system, bank expects its credit growth at 24-25%. The credit growth estimate is tailored around its target of 25%+ CASA growth. Significant improvement in branch productivity should drive strong CASA accretion, increasing its share in total deposits. C/D ratio would remain elevated with deposit growth expected to be slightly lower than advances. We build-in 25% loan CAGR for Axis Bank over FY11-13. In Q1 FY12, loan book may shrink sequentially with some short-term loans running-off.
NIM to moderate further in Q1 FY12; FY12 guidance at 3.25-3.5%
Bearing the brunt of its heavy reliance (~40%) on wholesale deposits, Axis Bank's NIM contracted sharply in Q4 FY11. Margin is expected to further moderate in the current quarter despite material lending rate increases in recent past. About 70% of advances are linked to Base Rate and BPLR. Bank anticipates NIM to stabilize in Q2 FY12 on expectations of re-pricing of current peak-cost deposits at lower rates. Margin is expected to recover gradually over Q3-Q4 FY12. For full-year FY12, Axis Bank has guided for NIM range of 3.25-3.5% capturing the extreme liquidity scenarios.
Bearing the brunt of its heavy reliance (~40%) on wholesale deposits, Axis Bank's NIM contracted sharply in Q4 FY11. Margin is expected to further moderate in the current quarter despite material lending rate increases in recent past. About 70% of advances are linked to Base Rate and BPLR. Bank anticipates NIM to stabilize in Q2 FY12 on expectations of re-pricing of current peak-cost deposits at lower rates. Margin is expected to recover gradually over Q3-Q4 FY12. For full-year FY12, Axis Bank has guided for NIM range of 3.25-3.5% capturing the extreme liquidity scenarios.
Asset quality to remain strong; capital raising likely in FY13
GNPL ratio is anticipated to be stable with slippages run-rate expected below Rs3.5bn/quarter in the medium-term. Further, bank does not foresee any large restructuring in short-term except for the Andhra Pradesh-based MFI exposure (~0.4% of overall book). The impact of enhanced provisioning levels is likely to be marginal as provisioning by Bank has been conservative. Credit charge for FY12 is estimated at 0.9%, 10bps lower yoy. With Tier-1 ratio near 9%, bank plans to raise equity capital during CY12 that would suffice 2.5-3 years of growth. We broadly estimate equity raising of Rs60-70bn during early FY13.
GNPL ratio is anticipated to be stable with slippages run-rate expected below Rs3.5bn/quarter in the medium-term. Further, bank does not foresee any large restructuring in short-term except for the Andhra Pradesh-based MFI exposure (~0.4% of overall book). The impact of enhanced provisioning levels is likely to be marginal as provisioning by Bank has been conservative. Credit charge for FY12 is estimated at 0.9%, 10bps lower yoy. With Tier-1 ratio near 9%, bank plans to raise equity capital during CY12 that would suffice 2.5-3 years of growth. We broadly estimate equity raising of Rs60-70bn during early FY13.
Valuation attractive post recent price correction
We believe that recent underperformance (despite strong Q4 FY11 results) has made Axis Bank's valuation attractive both in absolute and relative terms. The impact of spike in wholesale rates, which has been the key concern, is largely factored in current valuation (2x FY13E P/BV). Rather, stock would have a higher delta to any signs of rates easing. We also notice that HDFC Bank's valuation premium over Axis has expanded steeply in recent past and currently stands near 2-year high. Recommend BUY on Axis Bank with a 9-month price target of Rs1,500.
We believe that recent underperformance (despite strong Q4 FY11 results) has made Axis Bank's valuation attractive both in absolute and relative terms. The impact of spike in wholesale rates, which has been the key concern, is largely factored in current valuation (2x FY13E P/BV). Rather, stock would have a higher delta to any signs of rates easing. We also notice that HDFC Bank's valuation premium over Axis has expanded steeply in recent past and currently stands near 2-year high. Recommend BUY on Axis Bank with a 9-month price target of Rs1,500.
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