>AXIS BANK: Low cost of funds propels bottomline (ICICI DIRECT)

Axis Bank declared its Q4FY10 earnings, which were above our expectations. The PAT grew 32% YoY to Rs 765 crore (we estimated Rs 716 crore). A drop in the cost of funds, primarily driven by repricing of bulk deposits, growth in demand deposits and QIP proceeds, helped the
bank to inch up its NIM to 4.1% (3.4% in Q4FY09).

Strong business growth leads to NIM improvement YoY, QoQ
The bank witnessed 23% YoY and 24% YoY growth in advances and deposits to Rs 1,04,343 crore and Rs 1,41,300 crore, respectively. This resulted in 23% YoY growth in total business of the bank. The key highlight for Q4FY10 was sequential 39 bps improvement in cost of funds, which helped the NIM to be at 4.1% levels. On the other hand, CASA was stable at 46%. We expect NIM to stabilise around 3.5% by FY12E.

Non-interest income
The non-interest income of the bank grew moderately by 10% YoY in Q4FY10 to Rs 934 crore. This was lower than our estimate of Rs 1,010 crore. Going forward, we expect 37% CAGR in non-interest income over FY09-12E to Rs 5,403 crore.

Asset quality showing early signs of stress
GNPA inched up QoQ by Rs 144 crore whereas NNPA improved by Rs 11 crore to Rs 419 crore. The GNPA slipped from 0.9% in FY09 to 1.1% in FY10, while NNPA stayed stable at 0.36%. The silver lining for asset quality remains the fact that provision coverage has improved sequentially from 69% in Q3FY10 to over 72% in Q4FY10. We have built in higher provisioning for the bank till FY12E to absorb any shock on asset quality.

Valuation
We expect the bank to generate a business CAGR of 22% over FY09- FY12E with NIM hovering around 3.5% levels. We expect the bank to deliver healthy return ratios with improvement in credit offtake. We expect RoA of 1.7% and RoE of 19% for FY12E. We are rolling over our target price on FY12E estimated ABV of Rs 544 and valuing the bank at Rs 1302 (2.4x ABV).

To read the full report: AXIS BANK