>AXIS BANK LIMITED (ASIT C MEHTA)

Axis Bank is the third largest private bank with a network of 1,027 branches across India. Axis Bank has established a track record of expanding its loan book at a faster pace than the industry. We expect Axis Bank to maintain its growth momentum and expand its loan book in FY 2010-FY 2012 at a CAGR of 25%. We expect the net profit to grow at a CAGR of 27.6% over the same period. We have estimated RoA of 1.5% and 1.6% and RoE of 17.5% and 20.7% in FY11 and FY12 respectively, driven by loan growth and higher Net Interest Margins (NIM). Given the robust loan growth and relatively superior return ratios, we assign a multiple of 13.5x to FY12 EPS of INR100.1 to arrive at a target price of INR1,350. We thus initiate coverage with a “BUY AT DECLINES” rating on the stock. At CMP of INR1,228 the stock trades at 2.4x FY12E ABVPS and 12.3x FY12E EPS.

Recommendation Rationale
■ Strengthening Liability Franchise
As on FY 2010, the bank had a network of 1,027 branches. Axis Bank plans to add another 200 branches in FY 2011, which would help the bank to increase its CASA base and support CASA ratio. This we believe will help lower cost of funds and, support Net Interest Margin (NIM). As on FY 2010, the bank’s NIM stood at 3.75%. We expect NIM to grow in long term as rising interest rates will improve yields on advances and higher CASA ratio will lower the cost of funds.

■ Loan growth momentum to continue
Axis Bank has established a track record of expanding its loan book at a faster pace than the industry. Its loan book has grown at a CAGR of 46.2% over FY 2005-FY 2010 compared to industry growth of 24.7% over the same period. The bank has a
Capital Adequacy Ratio (CAR) of 15.8% and tier 1 capital of 11.2%, which provides enough headroom to grow its loans & advances. We expect higher CAR, strengthening branch network, acquisition of new customers along with improving macro-economic conditions will support loan growth going forward.

■ Core fee income to support revenues
Axis Bank derives its fee income from Corporate segment, Retail segment, Treasury, Agri & SME Banking, Business Banking and Capital Markets segment. Core fee income as a percent of non-interest income has been around at an average of 75% from FY 2006 - FY 2010, reflecting the stability of non-interest income. We expect core fee income to grow at a CAGR of 29% over FY 2010-FY 2012.

■ Adequately capitalized
Axis Bank has been raising sufficient capital at regular intervals to ensure growth in its balance sheet. In Q2 FY10, the bank had undertaken a Qualified Institutional Placement (QIP) and preferential allotment to raise capital amounting to INR37.6 bn. Consequently as on FY 2010, the bank has a Capital Adequacy Ratio (CAR) of 15.8% with tier 1 capital at 11.2%. Also infusion of tier 1 capital would provide enough room to raise tier 2 capital in future, which will further reinforce CAR and give enough headroom for the bank to grow its loan book and capitalize on emerging growth opportunities.

To read the full report: AXIS BANK