>AXIS BANK (GOLDMAN SACHS)

Capital raising plan ahead of timeline

News
Axis Bank (Axis) notified the stock exchanges that its board of directors had approved issuance of new equity shares by way of GDR/qualified institutional placement (QIP) and preferential issue to the promoters of the bank. Axis has proposed to issue 71.4 mn new shares (20% dilution) and would likely seek shareholders’ approval through postal ballot. The notification did not provide details of the offer structure, pricing, use of proceeds and the likely timeframe for the share issuance.

Analysis
We believe the capital raising plan is unlikely to surprise the market and consensus expectation, given the strong loan growth rate that the bank has had in recent years and statements in the past that it may consider potential capital raisings. However, the timing of such an announcement is likely to surprise expectations negatively. Given a Tier I capital ratio of 9.4% as at end June 2009—much higher than the target ratio of 7.5%-8%, we believe the market was more likely factoring in capital raising in 2010E when given current loan growth forecast Tier 1 would approach its target ratio. We await the details for the rationale behind raising such additional capital, however, we can think of some reasons for making such a proposal at this time, including: 1) the bank may be indicating its preparedness to leverage any resumption in growth momentum; 2) intention to diversify into other areas of financial services such as life/nonlife insurance and; 3) the need to strengthen its capital position given its large exposure to corporate banking segment—this could help the bank absorb potential shocks from any adverse loan concentration risks.

Implications
We believe the market could get concerned about the potential dilution impact on EPS in the near term. However, we would not rule out the potential for accretion, depending on how the proceeds will be used. We reiterate our Buy rating and 12-m target price of Rs970, based on GS CAMELOT 3-stage DDM. Risks: significant deterioration in asset quality.

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