>AXIS BANK (INDIABULLS)

■ Satisfactory results, valuation discounts possible upside
Axis Bank reported a healthy net profit growth of 31% yoy to Rs. 6.6 bn for the quarter ended December 2010. This was primarily on account of higher fee income and lower cost of funds (led by repricing of higher cost term deposits and positive impact of capital infusion in Q1’10). We expect RBI’s recent increase of CRR by 75 bps will reduce the liquidity in the system andin order to control inflation, we anticipate further tightening of the monetary policy in the coming quarters. Hence, we believe that Axis with its high CASA ratio will be a beneficiary in terms of margins. Our DECF valuation suggests a fair value of Rs.1,166, indicating a potential upside of 11% over the current stock price. Thus, we reiterate our Hold rating.

■ NIM to improve owing to rising CASA and recent capital infusion: The Bank reported a Net Interest Margin (NIM) of 4.0% for the Q3’10 (a rise of 48 basis points) over the previous quarter primarily on account of rising
CASA ratio along with the capital infusion in the first quarter. In the coming quarters, we expect NIM to remain in the range of 4.0% to 4.1% as we believe the Bank will be able to maintain its high CASA ratio, which will help the Bank in the wake of tightening monetary policy.

■ Muted advances growth; however, we expect it to pick-up: The advances for the Bank grew by 12.5% yoy to Rs 847.7 bn at the end of third quarter. The growth in the loan book was slower than the previous quarters; however, it was in line with the industry growth. We expect the loan book to expand in the coming quarters as the economy is recovering and the Bank has enough headroom in terms of capital adequacy ratio, which now stands at 16.8%.

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