>AXIS BANK: Consistency commands premium (EDELWEISS)

Robust loan growth, coupled with superior performance of saving balances and stable asset quality, were the key highlights of Axis Bank’s Q1FY11 results. PAT was at INR 7.4 bn (up 32% Y-o-Y), in line with our higher than consensus estimates, aided by strong NII growth (up 45% Y-o-Y) and higher other income; this compensated for the relatively higher credit costs. Axis Bank is moving towards a consistent earnings growth trajectory of 30-32% every quarter, which, we believe, could lead to a further re-rating of the stock.

■ Growth momentum sustained; on course to achieve higher than industry growth. Led by strong momentum in the large corporate segment, the bank achieved 4% Q-o-Q growth, beating the historical trend of decline in Q1. The growth delivered seems remarkable against the backdrop of a significant jump witnessed in Q4FY10. We believe the bank is well on track to achieve above industry growth; we have built in loan growth CAGR of 25% over FY10-12.

■ Margin decline as expected; superior SA performance
Reported margins declined 38bps, to 3.71%, after peaking at 4.09%, due to impact of higher cost on saving bank balances, coupled with CRR impact and drag due to low yielding agri assets. CASA franchise of the bank has once again come to the fore with saving balances growing 2.5% Q-o-Q, unlike the historical trend. With re-pricing benefit largely over, margins are likely to draw support from the CASA franchise. We estimate NIMs of 3.3% over FY11-12 - a higher
margin trajectory from 2.85% registered in FY07-09.

■ Outlook and valuations: Re-rating underway; maintain ‘BUY’
Under the new management, the bank is focused on achieving a more rational target (4-5% above industry) rather than beating the industry (grew 2x the industry earlier). This strategy will allow it to build a more formidable retail franchise and achieve consistently higher ROA. We believe the bank can sustain higher ROA of 1.6-1.7% against 1.0-1.2% a few years back, enabling ROE to move closer to 20% in a capital efficient manner. As the bank closes on the gap between ROA of HDFC Bank and delivers consistent earnings, the current discount of ~30% could narrow down to 15-20%. This would effectively translate into a trading range of 3.0-3.2x and price target closer to INR 1,600, an upside of 20% over the next 12-15 months. The stock is attractive at 2.5x FY12E adjusted book and 13x FY12E earnings. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’ on relative returns. Axis Bank continues to be one of our top picks in the space.

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