>AXIS BANK (ICICI SECURITIES)

Axis Bank’s Q3FY10 results surprised positively – net profits rose an impressive 31% YoY propped by 45% YoY NII rise and 35% YoY surge in other income, despite tepid advances growth at 12.5% YoY. Expansion-related costs pushed up overall operating expenses 28% YoY. Cost-to-income at 41.2% was stable QoQ and declined 408bps YoY. Asset quality was healthy with GNPAs and NNPAs at 1.23% and 0.46% respectively. Restructured accounts were at Rs23.1bn or 2.42% of gross advances (2.53% in Q2FY10). We raise FY11E earnings 7.4% to factor in higher-than-expected margin and lower FY11 loan-loss provision. We raise our target price to Rs1,228/share based on 2.7x FY11E BV (implying 16.6x FY11E EPS). Maintain BUY. Sluggish credit growth and NPL rise are the key risks.

Firm on its axis

■ Margins rise even as credit growth remains tepid. Subdued 12.5% YoY credit growth in Q3FY10 was a result of just 4% YoY corporate credit growth. Deposits grew 7.7% YoY with large-scale deposit repricing and strong accretion to CASA, which in turn led to 46% CASA ratio in Q3FY10. These coupled with the effect of capital raising led to margin expanding a sharp 48bps to 4% QoQ. We expect margin to come off from ~4%, but it will likely expand 18-20bps YoY in FY10E to 3.18%, leading to 21% NII CAGR through FY11E.

■ Strong core fee performance; costs up. Other income grew a strong 35% YoY, led by 29% YoY rise in fee & commission income. Trading income rose 49% YoY to Rs1.7bn. Despite a sharp 28% YoY rise in operating expenses, cost-to-income was stable QoQ at 41.2% in Q3FY10. We expect FY11E cost-to-income ratio at 42-44%.

■ Asset quality surprises positively. GNPAs & NNPAs rose 2bps & 1bp to 1.23% & 0.46% respectively. Accretion of Rs870mn from restructured accounts in Q3FY10 led to total restructured accounts at 2.42% of gross advances (2.53% in Q2FY10). We reduce FY11E loan-loss provisions to 105bps to factor in likely lower slippages.

■ Earnings upgrade, maintain BUY. Axis Bank is a strong play on pick-up in corporate credit growth, which will materialise as system credit growth picks up hereon. We anticipate this to lead to stronger YoY margin expansion and healthy other income growth through FY11. We FY11E earnings 7.4% to reflect better-than anticipated margin accretion, higher other income growth and lower loan-loss provisions. We raise our target price to Rs1,228/share based on 2.7x FY11E BV (implying 16.6x FY11E EPS). Reiterate BUY. Continued sluggishness in credit growth and re-emergence of slippages are the key risks.

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