Stock Market Update on Axis Bank for 1QFY2012

Stock Market Update on Axis Bank for 1QFY2012 with a Buy recommendation and a Target Price of `1648 (12 months)

For 1QFY2012, Axis Bank  reported strong performance with healthy 27.0% yoy growth in its net profit at `942cr, in line with our estimates of `943cr (which were ~5% higher than street’s expectations). Healthy fee income growth and further improvement in slippage ratio were the key highlights of the results. We maintain our Buy recommendation on the stock.

Moderating business momentum arrests fall in NIM; healthy asset quality: Business growth momentum for the bank slowed during the usually lean quarter, with advances declining by 7.4% qoq (up 21.4% yoy) and deposits coming off by 3.0% qoq (up 24.5% yoy). With the widening interest rate differential in savings account and term deposit, the bank’s CASA deposits growth moderated to 25.6% yoy (down 4.3% qoq) – leading to a decline in CASA ratio to 40.5% from 41.1% in 4QFY2011. Reported NIM compressed by 16bp qoq to 3.3% compared to a 37bp qoq decline in 4QFY2011. The slower build-up in CASA deposits, higher savings rate and drop in CD ratio added to the downward pressures on NIM. Asset quality remained healthy with annualised slippage ratio declining further to 0.8% from 1.0% in 4QFY2011 and 1.6% in 1QFY2011. Gross and net NPA ratios were also stable sequentially and the provision coverage ratio including technical write-offs was at comfortable 80.0%. The bank added 21 branches during the quarter. Tier-I CAR including 1QFY2012 profit improved to 9.8%.

Outlook and valuation: The bank’s substantial branch expansion over the past 2–3 years (407 in FY2011 itself, a 41.4% yoy increase) is expected to yield meaningful results over FY2012–13, leading to more CASA market share gains. We remain positive on the bank, owing to its attractive CASA franchise, rapid branch expansion, multiple sources of sustainable fee income, strong growth outlook and A-list management. The stock is currently trading at 2.1x FY2013E ABV. We maintain our Buy view on the stock with a target price of `1,648.