>Axis Bank (ICICI Direct)

Asset quality at risk amid strong performance…
Axis Bank (AXB) declared a robust set of results beating our estimates. AXB reported 60% YoY PAT growth to Rs 581 crore (I-direct estimate of Rs 435 crore). The buoyancy in the PAT can be attributed to huge treasury gains of Rs 166 crore coupled with better operating efficiency that lead to a 2% QoQ decline in operating expenses. The growth of the total business moderated to 35% in Q4FY09 as compared to 50%+ growth rates registered by AXB in previous quarters. The core fee income also grew robustly at 42% YoY. The large & mid-corporate segment, agri & SME banking and treasury segment mainly contributed to this. On the asset quality front, the GNPA and NNPA stood at 0.96% and 0.35%, respectively.

Highlight of the quarter
Advances and deposits growth moderated to 37% and 34%, respectively, with NII growing 25% YoY. NIMs in Q4FY09 stood at 3.37%, an up tick of 25 bps YoY. The heartening factor for Q4FY09 was the increase in the CASA ratio to 43%, which provided a cushion to margins in a falling interest rate environment. On the asset quality front, AXB cumulatively restructured loans worth Rs 996.1 crore, which constitutes 1.74% of gross customer assets.

Valuations
At the CMP of Rs 495, the stock is trading at 1.5x and 1.3x its FY10E and FY11E ABV, respectively. Going forward, the bank will moderate its business growth target in the wake of economic uncertainty and rising threat to the asset quality as a whole. We believe AXB will be able to grow its advances and deposits at a CAGR of 26% and 25%, respectively, over FY09-FY11E. The key monitorable for the bank would be the asset quality as it has grown its advances book aggressively in the past few years and the current restructured assets that are 2x the current GNPA of the bank. We believe that after building in higher slippages and credit cost, AXB will be able to deliver RoEs in the range of 18-19% over FY09-FY11E with comfortable CAR of 13 %( FY09).

Business momentum continues even in difficult times
On the core business front, Axis Bank has been delivering consistently in the past few quarters and beating all expectations on the higher side. This quarter was no exception. The total business mix for AXB in Q4FY09 grew 35% YoY to Rs 198931 crore from Rs 147288 crore in Q4FY08. The impetus to the business mix was provided by 34% growth in deposits to Rs 117364 crore and 35% rise in advances to Rs 81557 crore. On the advances front, the growth was lead by the agri segment and SME segment, which grew 39% YoY and 49% YoY, respectively. The growth in retail advances has come down to 18% in Q4FY09 as this is the most risky segment during economic downturns. Going forward, we believe exposure to corporates and the agri segment will be key focus areas. The major highlight of the quarter was the YoY uptick of 25 bps in NIMs. This was mainly due to the increase in the CASA ratio, which as of FY09 stood at 43%. Also, shedding of wholesale deposits has helped the bank to arrest the fall in margins vis-à-vis the recent cut in PLRs.

Other income growth exhibits robust YoY growth
The core fee income of the bank grew 42% YoY to Rs 664 crore whereas for FY09 the fee income grew 64% to Rs 2447 crore. Also, the significant jump in PAT for Q4FY09 can be attributed to a 272% jump in trading profits, which stood at Rs 166 crore in Q4FY09 vs. Rs 45 crore in Q4FY08. Within the fee income segment the main drivers for the robust performance were the large & mid corporate segment, agri segment and treasury segment, which grew 48%, 72% and 56% YoY, respectively. Going forward, we estimate the core fee income growing at a CAGR of 18% over FY09-FY11E on the back of a slowdown in loan growth and moderation in growth of retail assets.

Asset quality: The driver for valuation multiple
For Q4FY09, the GNPA and NNPA stood at 0.96% and 0.35%, respectively. On an absolute basis, the GNPA has increased QoQ and stood at Rs 898 crore as against Rs 788 crore in Q3FY09. Provisions have increased during this quarter and the provision coverage ratio stood at 64% in Q4FY09 vs. 50% in Q4FY08 and 56% in Q3FY09. Going forward, we have built in higher slippages and provisions for the bank. We expect the GNPA to be at 1.35% in FY10E and 1.4% in FY11E. Also, in FY09, the bank has restructured loans worth Rs 996 crore, which constitutes 1.74% of the gross customer assets. So, any further deterioration of these restructured assets in FY10E, due to non payment of principal or interest, may pose a threat to the asset quality and will cap the investment multiple of the stock.

Valuations
At the CMP of Rs 496, the stock is trading at 1.5x and 1.3x its FY10E and FY11E ABV, respectively. Going forward, we believe the bank will moderate its business growth target in the wake of economic uncertainty and rising threat to the asset quality as a whole. We believe the bank will be able to grow its advances and deposits at a CAGR of 26% and 25%, respectively, over FY09- FY11E. Also, we have trimmed down the expectations on the core fee income front and expect it to grow at a CAGR of 18%. The key data the bank would monitor would be the asset quality as it has grown its advances book aggressively in the past few years. The current restructured assets are 2x the current GNPA of the bank. This, we believe, will cap the investment multiple of the stock until there is some clarity on the economic environment. We believe that after building in higher slippages and credit cost the company will be able to deliver RoEs in the range of 18-19% over FY09-FY11E with comfortable CAR of 13% (FY09). We, therefore, value the stock at 1.8x its FY10E ABV to arrive at a price target of Rs 575 and rate the stock as PERFORMER.

To see full report: AXIS BANK