PowerYourTrade: Multibagger – Axis Bank

Loan growth to remain ahead of peers and the system: The recent deceleration in Axis Bank’s loan growth has been driven by its increasing risk averseness and qualitative realignment of lending portfolio. However, the loan book growth at annualized 35% in 9m FY09 continues to be well above other private sector banks and the system. Even the quality of loan growth has been superior, as Axis preferred to keep lending rates competitive despite an increase in the cost of funds and therefore attracted prime borrowers. Recent trend in the loan book mix reveals a clear de-emphasis on the risky Retail segment. We expect Axis to clock higher-than-system loan growth of 26% in FY10 and 22% in FY11.

Recent decline in NIM is a fall-out of prudent lending strategy: As mentioned above, Axis Bank has adopted a different but prudent and conservative lending approach since Q4 FY08. To maintain the high
quality of its loan book, the bank chose to sacrifice on the NIM front by keeping lending rates lower. NIM dipped to 3.1% in Q3 FY09 from 3.9% in Q4 FY08. Other private sector banks appear to have followed a reverse and a more aggressive lending strategy as manifested in their stable NIMs. Axis’s NIM is likely to improve by 20-30 bps in Q4 FY09 on lower term deposit rates and improvement in CASA. We expect NIM in the range of 3.2-3.4% in FY10 and FY11.

Concerns with respect to bank’s asset quality exaggerated: We believe that on account of its prudent lending practice and high quality loan book, Axis would report a lower pace of Gross NPL formation as compared to other banks in FY10E and FY11E. The bank’s stable Gross NPL % over the past four quarters against rapid increase for the industry reaffirms our belief. We expect Gross NPLs to increase from 1% in FY09 to 1.7% in FY10 and 2.3% in FY11.

As on 08 December 2009 %

Promoters

42.4

Institutions

36

Non promoter corp hold

6.7

Public & others

14.9

Valuations at 5-yr low, discount to HDFC Bank at 4.5-yr high: Over the past six months, Axis has underperformed other private sector banks and Bankex despite its relatively resilient financial performance. Current valuations at 0.9x 1-year rolling P/BV are at a 5-year low. More importantly, valuation discount to HDFC Bank is at a 4.5-year high of 51%. We believe that Axis with lower cost of funds, superior lending strategy and high quality loan book would emerge as one of the sturdiest banks over the next 2-3 years. The undue pessimism in the stock provides a great opportunity to BUY. We assign a P/BV multiple of 1.9x to FY10E adj. BV and arrive at 1-year price target of Rs 579.

Y/e 31 Mar (Rs m) FY08 FY09E FY10E FY11E

Total operating income

43,808

64,184

81,310

99,548

yoy growth %

76.8

46.5

26.7

22.4

Op profit (pre-provisions)

22,259

35,200

44,210

53,545

Net profit

10,710

16,931

20,393

23,740

yoy growth %

62.5

58.1

20.4

16.4

EPS (Rs)

29.9

47.2

56.8

66.1

BVPS (Rs)

245.2

281

324.9

375.9

P/BV (x)

1.2

1

0.9

0.8

ROE %

17.6

18

18.8

18.9

ROA %

1.2

1.4

1.3

1.3

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