Sunday, April 26, 2009

>Banks (CLSA)

Seven deadly sins of banking

We are initiating on US banks with an Underweight sector rating given the ongoing consequences of increased risk taking by banks in seven different areas. A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression. While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class. New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.

Greedy loan growth – once-in-a-generation excess
This decade, the pace of loan growth versus its natural rate (nominal GDP) was the widest in a generation. This type of excess seems to occur about once every 40 years, or enough time for those who made the prior mistakes to retire. The issue was less the reported pace of loan growth, which matched the average of the prior decade (8%), than the failure of bankers to realize that the natural rate declined given a decline in nominal GDP from an average of 8% during the prior three decades to 5% this decade. Loans overshot this decade and now will likely undershoot versus nominal GDP.

Gluttony of real estate – historic asset concentration
The fastest loan growth this decade has been in home equity and construction (20% annual), along with mortgages and other commercial real estate. Phase one of the problems reflected borrowers that probably should have never gotten the loans, especially at it relates to subprime mortgages. Phase two reflects the more credit-worthy borrowers that face issues given unemployment concerns. In addition to loans, banks increased their concentration in securities. The percentage of mortgage-backed securities (now $1 trillion) increased from 15% in 1982 to 40% in 1992 to 65% today, whereas Treasury holdings declined from over one-third to only 2%. Now, these securities will likely refinance at lower rates at a time when banks have limited to no capacity to add new MBS.

Lust for high yields – worse loan losses than the Depression
Banks’ greater risk-taking reflected not only faster loan growth and greater concentration but also a higher risk mix of loans. This improved loan yields, only to back-end loan losses. The result is that we expect loan losses to increase from 2% of loans to a peak of 3.5% by late 2010. If so, this would be higher than the peak of the Depression of 3.4% (1934). In particular, during the Depression, banks did not have home equity or credit card loans, and never
before had the record high percentage of construction loans. Relative to the Depression, these three areas alone add an estimated 100 basis points to our loss estimate.

Sloth-like risk management – highest consumer debt in history
Banks en masse lent to over-levered consumers. Consumer debt (to GDP) is the highest in history at 100% vs. 70% at the start of the decade, 50% in 1985, and only 37% in 1929. This leveraging reflected the US more generally, given an increase in US debt to 3.5 times GDP, higher than the Depression of 3.0. Going forward, this implies lower fees related to consumer borrowing (cards, mortgages, etc.) and fewer new loans given ongoing deleveraging, mitigated by better pricing on new loans and potential re-intermediation opportunities as business comes from nonbanks and capital markets.

Pride of low capital – highest leverage in 25 years
The industry increasingly and falsely felt comfortable with higher levels of leverage. The level of banks’ tangible common equity and reserves (to total assets) declined to the lowest level in 25 years as of a couple years ago and now is in the process of getting rebuilt. The brokerage industry, too, increased leverage from 20 in 1980 to 30 in 2000 to a peak of 50 late this decade and similarly faces deleveraging. The result partly stemmed from their acting like leveraged bond funds with more wholesale borrowings. Banks increased the percentage of wholesale funding from one-third to one-half since the early 1990s, reflecting the higher funding risk that helped to facilitate risk related to leverage.

Envy of exotic fees – exotic turns toxic
US financials will soon approach about $400 billion of capital market write-downs since 2007. While these write-downs seem in the later stages, there still is the chance for ongoing write-downs in areas such as leveraged loans, private equity, and other areas. All fee revenues are not created equally, given annuity-like service charges and low capital-intensive revenue related to insurance; however, these other fee areas are more volatile or lumpy, and these more volatile fees have come to represent a significant portion of fee revenues at banks, increasing from 20% of the total in 1980 to 30% in 1990 to 40% today. This is the first time that this level of fees has been subjected to a major downturn, creating uncertain fallout.

Anger of regulators
While regulators seemed to have insufficient authority over some of the worst nonbank offenders (mortgage brokers, insurers, etc.), in our opinion they nevertheless appeared to get too close to the industry that they regulated. Bank lobbying may have been too successful. Most banks paid zero deposit insurance premiums from 1996-2006 and now, as these rates increase we estimate they will cost a permanent 3% to EPS. The SEC’s decision in 1998 related to SunTrust made it more difficult for banks to reserve for problem loans, leading to uniquely low reserves going into this recession. Moreover, the budgets of all regulators were reduced at the wrong time, in our opinion. For instance, during the peak, Goldman Sachs generated the equivalent of the SEC’s annual budget every two weeks. The FDIC’s headcount got slashed by a whopping three-fourths since the early 1990s. An increase in regulatory oversight is a permanent change that can increase expenses, cause the largest banks to become more akin to public utilities, and create investing uncertainty until all the regulatory rules are known.

To see full report: BANKS


Structural problems should not be overlooked

Before the markets become too euphoric because of a few green shoots in the environment, it has to be pointed out that there are (at least) five structural problems that have not been solved:

− deleveraging by the private sector,
− the cost of medium-term loans,
− the deterioration in the financial situation of companies and in the labour market,
− restoring fiscal solvency,
− the shortfall in the supply of commodities if growth picks up.

These problems will not be solved in 2010, and the scenario of a robust recovery in growth in 2010 in our opinion is therefore unconvincing, and far less likely than that of a W-shaped recovery.

To see full report: SPECIAL REPORT

>Wipro Technologies (EMKAY)

Delivers in line but red flags still up

Delivers in line on revenues, margin resilience driven by lower SG&A expenses

Volume decline sharpest amongst peers at ~6.3% QoQ as weakness in financial services and telecom clients catches up with the co. See more pressure ahead on this count.

Reported Pricing holds firm V/s peers because of higher fixed proportion of business (up~900 bps YoY) but reflects in lower volumes/lower realizations

Do not share similar optimism as co management which is in stark contrast to peers as we believe that the lagged effects of weakness for financial services, manufacturing will start reflecting going forward

Upgrade FY10/FY11E EPS by ~3%/2% on exchange rate resets to Rs 23.8 and Rs 24.4 respectively.

Maintain Reduce with a revised target price of Rs 240 (V/s Rs 220 earlier)

Q4FY09 Results; Delivers in line
Wipro reported revenues in line with estimates at US$ 1046 mn (down ~5% QoQ, +1.4% YoY). EBIT margins at 17.7% expanded by an impressive 190 bps sequentially helped by tighter cost controls however driven majority by cuts in SG&A expenses (down by ~140 bps QoQ). Net profits at Rs 9073 mn (+1% QoQ, +3.3% YoY) beat estimates marginally. However we are surprised by the steep decline in volumes at ~12% QoQ onsite and ~4% QoQ offshore which in our view is driven by sharp ramp downs at major financial services and telecom clients.

Reported pricing holds up, isn’t the cut reflecting in lower vols/utilization??
Wipro’s reported pricing ( offshore price realizations down 0.1% QoQ while onsite price realizations up ~0.8% YoY) held up well as compared to much steeper declines for other peers like Infy and TCS (Infy blended pricing down by ~3% QoQ and ~2% QoQ dip for TCS). However we note that actual realization pricing cut may continue to be not reflected in the reported realization metric but show up in lower volumes and lower utilization as a T& M engagement gets converted into a fixed price engagement. Thus in our view some of the pricing pressures being witnessed by Indian IT companies will rather show up in the form of lower volumes for Indian IT companies.

Management appears optimistic but admits to macro weakness as well
Wipro management appear confident of business prospects saying that the ‘worst might be behind us’ however admitted that they were facing pressures in the financial services space (with unpredictable project cancellations/ramp downs etc). Revenues from the Telecom and the financial services business declined by ~13%/5% QoQ respectively. We believe that the co would continue to face more macro headwinds from these spaces going forward (a view confirmed by TPI findings released yesterday).

Up FY10/FY11E EPS by ~3%/2%; Maintain REDUCE with TP of Rs 240.
We have cut our FY10/FY11 US$ revenue estimates marginally and reset our avg estimates at US$/INR of Rs 48.25/Rs 46.25 for FY10/FY11respectively which leads to an upward revision in FY10/FY11E EPS by ~3%/2% respectively to Rs 23.8 and Rs 24.4 respectively ( V/s Rs 23.1 and Rs 23.8 earlier). We maintain REDUCE with a revised target price of Rs 240, based on 10x 1 year rolling forward multiple.

To see full report:WIPRO TECHNOLOGIES

>Fund Manager Survey Global (MERRILL LYNCH)

Less fear, no greed

Global growth expectations surge. . . and broaden
The April FMS prints the most optimistic reading on global growth since 2004. A net +24% of investors believe the global economy will strengthen over the next 12 months. China remains the principal catalyst but growth optimism has now broadened out to all regions, including previous laggards Europe and Japan.

Risk appetite rallies as bank fears ease
Our risk appetite indicator climbed to a 12-month high. Asset allocators are less pessimistic on equities, sharply cutting their underweight to 17% from 41% in March. Overweights in bonds were trimmed. Cash overweights fell to net 24%, the lowest since late-2007, lowering average cash balances to 4.9% from 5.2%. Even hedge funds raised net equity exposure to an 8-month high of 25%.

Emerging markets the preferred vehicle to play catch up
Playing catch-up with the rally in equity markets, global investors massively raised GEM exposure (to +26% from +4%) to augment a longstanding US overweight (+14%). The Eurozone (-29%) and Japan (-36%) continue to be shunned.

Bank sentiment & China optimism force cyclical rotation
The sharp rally in banking stocks in recent weeks has been met by a dramatic reduction in U/W positions on global banks to 26% from the record 48% in March. Better sentiment on banks and growth optimism has unlocked a classic sector rotation out of staples, telcos, pharma and utilities into industrials, consumer discretionary and industrials. Technology is now the most preferred global sector.

Survey sound bites

The fieldwork for April survey took place between Thursday 2nd, and Wednesday 8th April 2009.

Growth expectations
The sharp thaw in global growth expectations continues unabated with our global growth composite back above 50 for the first time since March 2005. The profound turnaround in sentiment on the Chinese economy continues, recovering from a reading of -86% in November to +26% this month (the highest since 2003). With China and the US having been the only growth stories up to this point, it wasnoteworthy to see a sharp pick up in growth expectations in the previous laggards of Japan and Eurozone.

Economic growth optimism extends into corporate profit expectations. While still negative, the degree of pessimism at -12% continued the sharp improvement from the low of -75% seen in October 2008.

Fears on inflation outlook continue to gather pace: a net 18% still expect lower inflation in 12 months time, but this is sharply up from 82% in December. This has fed a sharp change in views on short (and long) term interest rates with a net 16% now expecting higher rates 12 months out versus -17% last month.

Risk appetite
After considerable volatility in recent months, our Risk & Liquidity composite rose sharply to 35 from 28 last month. It still remains below the average of 40 seen since the start of this data series in late-2001. Better risk appetite is also reflected in the proportion of asset allocators overweight cash which fell to +24%, the lowest since late-2007.

Apocalypse averted: reluctant, not euphoric, bulls
Apocalyptic bearishness in the March FMS aided & abetted a major equity rally. The April FMS shows investors believe the worst is over and extreme defensive positions have been cut. But there is no bull market euphoria: PMs remain underweight risk, equities & cyclicals and cash levels remain high – as such the survey supports a "grind higher" view. Bulls now require support from April/May G7 economic data. The bears are reliant on China and banks disappointing.

Valuation & Asset Allocation
While a net 17% remain underweight, the survey showed a big jump in equity allocations from the all-time low of 41% recorded in March. The rally in equity markets led to a fall in those viewing equities as undervalued to 30% from 42% in March. After a sharp rise in March, bonds fell back to 9% overweight in April, slightly above February’s level but sharply down on 26% last month.

Emerging Markets are now the most popular region on a 12-month view with a net 26% of respondents overweight, up from only 4% last month. The US is the only other region allocators say they are overweight at +14%. While Eurozone
equities saw some pick up, a net 29% remain underweight, slightly better than Japan at 36%.

Commodities continued to see investment with the net overweight of 4% being the highest reading in 10 months. Gold is still seen as overvalued (7%) but oil is still seen as undervalued by a net 38% of respondents despite a 30% increase in WTI over the last 2 months.

No major change in currency views this month with GEM and sterling seen as undervalued and Euro and Yen firmly overvalued. A dissenting voice on currencies has emerged from regional equity PMs who now see $ and € as fairly valued, a marked shift from previous $ bullishness.

Growth expectations
The improvement in growth expectations seen since December continues with our economic & profit expectations composite surging to 54 from 43 in March. At +26%, fund managers’ optimism on the global economy now stands at a 5-year high. The surge in optimism on Chinese growth prospects once again led the way in boosting optimism.

Inflation and interest rates
Inflation expectations remain negative, at a net -14%, but continue the sharp reversal seen since the turn of the year. This measure continues to map well to the ISM prices paid component and is also confirmed in investor views on the direction of short term interest rates looking 12 months out.

To see full report: FUND MANAGER SURVEY

>Reliance Industries (JP MORGAN)

4QFY09: Better than expected

4Q FY09 better than expected: RIL reported pre-exceptional 4Q FY09 net profit of Rs39B (flat y/y), higher than our and consensus estimates (Rs36.5B). Better-than-expected petchem margin and forex gains were key drivers for the higher earnings. Refining margins were marginally higher than expected at US$9.9/bbl.

Projects up and running, ramp-up to drive earnings over FY10-11: RPL commenced commercial production in Mar-09 and >90% utilization is expected by Sep-09. KGD6 gas production commenced in Apr-09 with current production of ~10mmsmcd, to ramp up to
40mmsmcd by Sep-08, and 80mmsmcd by Mar-10. Refining volumes and gas revenues should drive a 30% earnings CAGR over FY09-11E.

Petchem surprises; RIL expects pain to come in FY11: Restocking, demand, and supply discipline led to a rebound in petrochem margins in 4Q. RIL believes a petrochem downturn could be pushed to FY11 as 1) stock levels are still 30-40% below normal (further restocking possible), and 2) the full impact of new capacity will be felt only in 2010.

Refining – waiting for supply discipline: RIL assesses around 10mbpd of private refining capacity were at loss/break-even levels. It believes that a significant number of these refineries will shut down, which would help balance the global refining industry. Low opex (c. US$2/bbl v/s US$5/bbl for peers) will help RIL weather the downturn, in the
company’s view.

Prudent strategy: Slowing on capex: RIL plans capex of US$4-4.5B on E&P development, exploration, and RPL completion. Capex on new projects will be deferred and RIL will hold cash through the downturn. Management likened this to a year of consolidation for RIL.

To see full report: RELIANCE INDUSTRIES


Disappointing performance

Overall performance - Disappointing: Rolta India (Rolta) reported weak numbers for Q3FY09. The revenues declined by 8.3% sequentially to Rs3.3bn and EBITDA declined sequentially by 15.5% to Rs1.0bn (without amortization of MTM losses, EBITDA would have declined by 11.4%). Reported net profit stands at Rs1,332m as against Rs490m in Q2FY09, primarily due to a write-back of MTM losses of Rs840m on outstanding FCCBs.

Weak performance across all segments: Performance across all the segments was weak. GIS grew by a meagre 0.9%, whereas Engineering and EICT segments declined sequentially by 17.7% and 11.2%, respectively. Even EBIT margin declined in all the three segments (GIS (-) 230bps, Engineering (-) 440bps and EICT (-) 360bps). The weak performance was also visible in the company’s orderbook which declined sequentially by 2.5% to Rs15.5bn. A downfall in the orderbook was led by the Engineering segment which saw a sequential decline of 10.1% and the EICT segment which declined by 5.4%. However, orderbook in GIS still managed to grow by 4.4% sequentially.

Reversal of MTM losses on outstanding FCCBs as per revised AS11: Rolta has opted to write-back MTM forex losses (of Rs840m) provided earlier in the first nine months of the current financial year. From the current quarter, the company has started amortizing the whole MTM liability spread over the next 12 quarters. Per quarter amortization amount would be close to Rs120m.

Outlook and Rating: We expect Rolta’s revenue to grow at a CAGR of just 5.3%, whereas its earnings are expected to show a 5.5% de-growth over FY09-11. Our numbers factor in interest (net of tax) on its FCCB bonds. We believe that the recent acquisitions done by the company (outside India), while good in the long run, has diluted its attractiveness as domestic (India) growth story. We downgrade the stock to ‘Reduce’ at the target price of Rs82.

To see full report: ROLTA INDIA

>India Strategy (EDELWEISS)

Voting for India!

India: Resilience amidst global turmoil

The Indian market is up over 30% in the past one month, outperforming most EMs. On a YTD basis, however, India is still underperforming several EMs With the Sensex now over 11,000, the market seems to be pricing in two key events:

1. An acceptable election outcome (UPA- or NDA-led government); and
2. Likely recovery in the global economy by CY09 end

* We believe there is a fair chance of a stable government coming to power. Lead 2 indicators, however, do not yet suggest an early recovery for the global economy.

* However, we expect Indian economic growth to remain resilient, with a worst-case GDP growth estimate of over 4% in FY10. Our worst-case fair value for the Sensex is 8,000 (FY10 end) at 10x FY11E worst-case EPS.

* Our recommended strategy is to be overweight domestic-focused sectors: telecom, industrials, consumer discretionary, and BFSI

* Our top large cap picks are Bharti, BHEL, Crompton, Hero Honda, HDFC Bank, SBI, Sun TV and Suzlon.

To see full report: INDIA STRATEGY



HDFC Bank promoted by HDFC Ltd is amongst the first private sector banks that were permitted by the RBI, during the 'Reform Era' of early 1990's, to undertake banking
activities. The bank commenced operations in 1995. Currently it operates 1412 branches and
3295 ATMs in 528 cities and has an asset size of Rs 1833 bn at the end of March 31, 08 with
retail assets constituting 61% of the gross advances. HDFC bank completed the acquisition of Centurion Bank of Punjab (CBoP) in May 2008 by offering one share of its own for every 29 shares of CBoP. At the time of merger CBoP had a balance sheet size of Rs 254 bn, representing 20% of HDFC Bank.

Key Highlights of HDFC Bank Q4FY09 Conference Call:

· HDFC Bank Ltd's net profit for FY09 grew by 41.2% y-o-y to Rs 22.4bn mainly driven by the merger of Centurion Bank of Punjab which was effective from May 23, 2008, and a robust 42% y-o-y and 44% y-o-y growth in net interest income and non interest income to Rs 74.2bn and Rs 32.9bn respectively.

· In Q4FY09 the bank registered a 33.9% increase in its net profits to Rs 6.3 bn mainly due to higher non interest income which grew by 102% y-o-y to Rs 11.1bn due to robust growth in its fee based income and profit on sale of investments during the quarter.

· Operating profit grew by 37.5% y-o-y to Rs 51.8bn in FY 09 and by 44.3% y-o-y to Rs 15.7bn in Q4FY09.

· Net interest income expanded by 42% in FY 09 to Rs 74.2 bn mainly on account of a robust growth in advances by 48.3% to Rs 1002.3bn. Retail loans at Rs 611.5 bn were up by 55.5% over March 08 and now form 61% of gross advances. Net interest income in Q4FY09 declined by 6.4% q-oq to Rs 18.5bn despite a decrease in the cost of funds to 5.9% in Q4FY09
from 6.5% in Q3FY09. This was mainly on account of the cautious lending approach adopted by the bank in this scenario. The NIMs for FY 09 stood at 4.2% and going forward the management expects to maintain it at around 4%.

· Total deposits increased by 41.7% y-o-y to Rs 1428 bn at the end of March 08. The CASA deposits of the bank saw a revival in Q4FY09 and total CASA as % of total deposits stood at 44% at the end of March 09 as against 40% at the end of Dec 08.

· Non Interest Income registered a 102.9% y-o-y gain in Q4FY09 to Rs 11.1 bn due to a 45.8% increase in fee based income to Rs 7.1 bn, 153% growth in forex/derivative income to Rs 1.5bn and 2037% growth in profit on sale of investments to Rs 2.4 bn. Non interest income in FY 09 increased by 44.1% y-o-y to Rs 32.9bn.

· With the worsening economic environment starting to hurt the bank's SME and retail assets and slightly lower asset quality of CBoP, HDFC Bank has reported a 64 bps y-o-y and 8 bps q-o-q increase in gross NPA levels to 1.98% and 10 bps y-o-y increase in net NPA levels to 0.6%. With the bank's provisioning policies for Q4FY09 for specific loan loss provisions remaining higher than regulatory requirements its provision coverage stood at 68%.

To see full report: HDFC BANK

>Oil & Gas & Petrochemicals (ICICI Securities)

Take some money off the table

Strong outperformance in the O&G space despite continued weak fundamentals – end-product demand remains weak and significant dip in refining margins in March ’09 – has necessitated revisiting our estimates and recommendations for companies under I-Sec O&G coverage. Though the market continues to be buoyant, we believe there is little upside to O&G stocks – most stocks under I-Sec coverage that rose 17-41% over the past three months are trading at a premium to fair value. We believe long-term investors should book profits at current valuations. We downgrade Oil & Natural Gas Corporation (ONGC), GAIL and Reliance Industries (RIL) to HOLD from Buy. We maintain BUY on Cairn India (Cairn), which is our top pick in the sector. Also maintain HOLD on Hindustan Petroleum Corporation (HPCL) and reinitiate Bharat Petroleum Corporation (BPCL) with HOLD recommendation.

BPCL, HPCL – Attractive defensive BUYs in overpriced market. Though oil marketing companies (OMCs) are at risk from possible diesel price cuts and reintroduction of customs duty post elections, they would be attractive defensive bets in a falling market. OMC stocks may outperform if market sentiment turns negative.

Cairn – Maintain as top pick in sector. Earlier-than-expected commencement of production from Rajasthan’s southern fields would enable Cairn to quickly resolve issues with the Government regarding the benchmark for crude sales and applicable cess. This would be a key trigger for the stock. Cairn’s bear-case valuation of Rs167/share would offer an excellent entry point for long-term investors.

GAIL – Gas abounds, but risks aplenty; downgrade to HOLD. Though management is confident of maintaining tariffs for the HVJ pipeline, we remain uncertain on the PNGRB allowing current tariffs to continue for the pipeline as we believe that the policy is prospective and may ignore any retrospective returns that GAIL might have made historically. Given that LPG/SKO would comprise most of the under-recoveries in the next two years, historical evidence suggests GAIL’s share of upstream burden at ~7.5% versus I-Sec & market estimates at 5.5%. This is a concern for GAIL’s FY10 and FY11 earnings.

ONGC – Our call vindicated, but what next? Downgrade to HOLD. We had upgraded ONGC to our top pick in the O&G PSU space on February 12, ’09. Since then, the stock has been the top performer in the space, rising 21% overall and outperforming the O&G PSU space 17.5% over the past two months. However, the stock now trades at a marginal 2.5% discount to our fair value and, we believe, investors should book profits at current prices.

RIL – Valuations, the only blemish; downgrade to HOLD. RIL’s fundamentals look strong despite weakness in the extant refining and petchem businesses due to significant cashflow generation from the Reliance Petroleum (RPL) refinery and KG D6 projects. Exploration at the company’s E&P blocks would result in further reserve accretion and improved valuations. However, our valuations already include significant reserve accretion from the company’s attractive E&P portfolio. RIL is likely to see improvement in debt-to-equity on positive free cashflow generation and register earnings CAGR of 34% over FY09E-11E. We value the stock at Rs1,536/share and downgrade it to HOLD despite strong fundamentals due to stretched valuations. While bear-case valuations stand at Rs1,122/share, bull-case valuations are at Rs1,981/share.

To see full report: OIL & GAS & PETROCHEMICALS

>Axis Bank (ICICI Direct)

Asset quality at risk amid strong performance…
Axis Bank (AXB) declared a robust set of results beating our estimates. AXB reported 60% YoY PAT growth to Rs 581 crore (I-direct estimate of Rs 435 crore). The buoyancy in the PAT can be attributed to huge treasury gains of Rs 166 crore coupled with better operating efficiency that lead to a 2% QoQ decline in operating expenses. The growth of the total business moderated to 35% in Q4FY09 as compared to 50%+ growth rates registered by AXB in previous quarters. The core fee income also grew robustly at 42% YoY. The large & mid-corporate segment, agri & SME banking and treasury segment mainly contributed to this. On the asset quality front, the GNPA and NNPA stood at 0.96% and 0.35%, respectively.

Highlight of the quarter

Advances and deposits growth moderated to 37% and 34%, respectively, with NII growing 25% YoY. NIMs in Q4FY09 stood at 3.37%, an up tick of 25 bps YoY. The heartening factor for Q4FY09 was the increase in the CASA ratio to 43%, which provided a cushion to margins in a falling interest rate environment. On the asset quality front, AXB cumulatively restructured loans worth Rs 996.1 crore, which constitutes 1.74% of gross customer assets.


At the CMP of Rs 495, the stock is trading at 1.5x and 1.3x its FY10E and FY11E ABV, respectively. Going forward, the bank will moderate its business growth target in the wake of economic uncertainty and rising threat to the asset quality as a whole. We believe AXB will be able to grow its advances and deposits at a CAGR of 26% and 25%, respectively, over FY09-FY11E. The key monitorable for the bank would be the asset quality as it has grown its advances book aggressively in the past few years and the current restructured assets that are 2x the current GNPA of the bank. We believe that after building in higher slippages and credit cost, AXB will be able to deliver RoEs in the range of 18-19% over FY09-FY11E with comfortable CAR of 13 %( FY09).

Business momentum continues even in difficult times
On the core business front, Axis Bank has been delivering consistently in the past few quarters and beating all expectations on the higher side. This quarter was no exception. The total business mix for AXB in Q4FY09 grew 35% YoY to Rs 198931 crore from Rs 147288 crore in Q4FY08. The impetus to the business mix was provided by 34% growth in deposits to Rs 117364 crore and 35% rise in advances to Rs 81557 crore. On the advances front, the growth was lead by the agri segment and SME segment, which grew 39% YoY and 49% YoY, respectively. The growth in retail advances has come down to 18% in Q4FY09 as this is the most risky segment during economic downturns. Going forward, we believe exposure to corporates and the agri segment will be key focus areas. The major highlight of the quarter was the YoY uptick of 25 bps in NIMs. This was mainly due to the increase in the CASA ratio, which as of FY09 stood at 43%. Also, shedding of wholesale deposits has helped the bank to arrest the fall in margins vis-à-vis the recent cut in PLRs.

Other income growth exhibits robust YoY growth

The core fee income of the bank grew 42% YoY to Rs 664 crore whereas for FY09 the fee income grew 64% to Rs 2447 crore. Also, the significant jump in PAT for Q4FY09 can be attributed to a 272% jump in trading profits, which stood at Rs 166 crore in Q4FY09 vs. Rs 45 crore in Q4FY08. Within the fee income segment the main drivers for the robust performance were the large & mid corporate segment, agri segment and treasury segment, which grew 48%, 72% and 56% YoY, respectively. Going forward, we estimate the core fee income growing at a CAGR of 18% over FY09-FY11E on the back of a slowdown in loan growth and moderation in growth of retail assets.

Asset quality: The driver for valuation multiple

For Q4FY09, the GNPA and NNPA stood at 0.96% and 0.35%, respectively. On an absolute basis, the GNPA has increased QoQ and stood at Rs 898 crore as against Rs 788 crore in Q3FY09. Provisions have increased during this quarter and the provision coverage ratio stood at 64% in Q4FY09 vs. 50% in Q4FY08 and 56% in Q3FY09. Going forward, we have built in higher slippages and provisions for the bank. We expect the GNPA to be at 1.35% in FY10E and 1.4% in FY11E. Also, in FY09, the bank has restructured loans worth Rs 996 crore, which constitutes 1.74% of the gross customer assets. So, any further deterioration of these restructured assets in FY10E, due to non payment of principal or interest, may pose a threat to the asset quality and will cap the investment multiple of the stock.


At the CMP of Rs 496, the stock is trading at 1.5x and 1.3x its FY10E and FY11E ABV, respectively. Going forward, we believe the bank will moderate its business growth target in the wake of economic uncertainty and rising threat to the asset quality as a whole. We believe the bank will be able to grow its advances and deposits at a CAGR of 26% and 25%, respectively, over FY09- FY11E. Also, we have trimmed down the expectations on the core fee income front and expect it to grow at a CAGR of 18%. The key data the bank would monitor would be the asset quality as it has grown its advances book aggressively in the past few years. The current restructured assets are 2x the current GNPA of the bank. This, we believe, will cap the investment multiple of the stock until there is some clarity on the economic environment. We believe that after building in higher slippages and credit cost the company will be able to deliver RoEs in the range of 18-19% over FY09-FY11E with comfortable CAR of 13% (FY09). We, therefore, value the stock at 1.8x its FY10E ABV to arrive at a price target of Rs 575 and rate the stock as PERFORMER.

To see full report: AXIS BANK