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Braving the tide

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While a sound track record provides comfort, Axis Bank’s exposure to vulnerable segments may weigh in on its stock valuations.

The appointment of a new leader at puts to rest speculations about the successor of P J Nayak, who has been responsible for the bank’s makeover from the erstwhile UTI Bank to being amongst top three private banks in the country. However, concerns pertaining to the bank’s near-to-medium term prospects haven’t eased significantly as yet. This has been among the reasons for the stock underperforming the since around October 2008.

From an average 50 per cent growth in profits in the last 5 years, the bank’s profit growth is seen slowing down to around 20 per cent levels. This is on the back of a perception that there will be deterioration in its asset quality, which is also reflecting in its FY09 performance. While net NPAs are stable at 0.35 per cent in Q4 FY09, there has been a significant rise in the quantum of restructured assets. Although the management is taking measures to keep a tab on the portfolio quality and profitability, until the economic climate improves for the better, these concerns may weigh in on the stock.

Advances slowing
The advances grew by 36.7 per cent y-o-y in Q4, slower than the average 50 per cent growth seen in the last five years, thanks to the slowdown in the economic activity and cautious approach of lending to certain sectors. The retail segment (around 20 per cent of loan portfolio), which was susceptible to asset deterioration, has seen the advances grow by 18 per cent y-o-y. However, further concerns in the retail segment would be comforted from the fact that 80 per cent of the bank’s retail advances are backed by assets (cars, homes)—the concern pertains to the non-collateral loans like credit card and personal loans.

On the other hand, the bank has been aggressive towards building its agriculture and infrastructure portfolio (about 10-11 per cent each of loan portfolio). While the rural economy is relatively unperturbed, infrastructure is perceived to be counter cyclical and relatively safer in a slowing economy. As advances to the two sectors grew by about 50 per cent each y-o-y in Q4, their share in total advances was up between 100-150 basis points. This partly emphasises the management’s strategy to manage growth and risks in these difficult times. However, with a slowing economy, expect the growth in overall advances to reduce to 25-30 per cent in FY 10, which though would still be ahead of industry growth.

Asset quality: Restructuring support
The rapid credit growth in the last five years has helped the bank grow its net interest income (5 year CAGR of 50 per cent) and fee-income at a fast pace. However, with the downturn in the economy there are concerns on non-performing assets (NPA). For now, the bank has been able to maintain gross NPA’s below 1 per cent. The bank believes that adherence to its internal rating methodology for loan approvals and prudent lending practices have helped it keeping a tab on asset quality. For instance, in loan approvals, 81 per cent of corporate advances have rating of at least ‘A’ and 77 per cent of SME advances have rating of at least ‘SME3’ as of March 2009. An ‘SME3’ is similar to a ‘A’ rating in SME.

Additional measures undertaken in the recent past include the cautious stance towards export-oriented sectors like textiles, gems and jewellery, which are bearing the brunt of the global meltdown. For example, the bank has been securing 100 per cent cash collateral from customers in gems and jewellery. Such measures, it believes, will stand it in good stead.

Axis Bank has also been following an aggressive policy in terms of writing-off bad loans. Lately, it increased the provision coverage to 63.6 per cent (from 56.6 per cent earlier), though it is still lower than desired levels of 75-80 per cent.
 

ON A GROWTH TRAJECTORY
in Rs crore FY08 FY09 FY10E FY11E
Net interest income 2,585 3,686 4,689 5,909
Non-interest income 1,796 2,897 3,284 3,967
Operating profit 2,226 3,725 4,431 5,465
Net profit 1,071 1,815 2,116 2,551
EPS (Rs) 29.8 50.4 58.8 70.8
P/E (x) 16.6 9.8 8.4 7.0
P/BV (x) 2.0 1.7 1.5 1.3
E: Analyst estimates

For Axis Bank, it has seen a jump in restructured (rescheduling) loans of 158 per cent y-o-y (up 69 per cent q-o-q) to Rs 1,626 crore. Out of restructured loans of Rs 996.2 crore during the year, around 86 per cent was from corporate and SMEs put together. Further break-up throws up stress from sectors like textiles and auto ancillaries. Overall, the restructured assets in Q4 FY08 rose from 1.1 per cent of advances to 2 per cent in Q4 FY09. However, for now, since banks don’t have to classify the restructured loans as NPAs, the declared NPA levels still look comforatable.

Other levers
The bank has been able to maintain net interest margins above 3 per cent in the last six quarters. However, margins trended down from Q3 FY08 and have seen the lowest of 3.1 per cent in Q3 FY09, recently. These have improved to 3.4 per cent in Q4 FY09 on the back of a reduction in the cost of funds from 6.9 per cent to 6.6 per cent sequentially. A drop in term rates from around 11 per cent in Q3 to about 8 per cent in Q4 has helped margins. Further cushion to margins was provided by an increase in the ratio of lower-cost CASA deposits to 43 per cent in Q4 (compared to 38 per cent in Q3). Plans to add 200 branches during FY10, on top of 165 branches opened this year, would augment better proportion of lower cost deposits in the future. Thus, expect margins to be around 3-3.2 per cent, going ahead. Additionally, the recent drop in bulk rates will also provide support to margins.

Outlook
The permission to restructure loans and hence, not classifying them as NPAs will mean that net NPA’s might be lower in the near future. However, if the economic situation remains weak, these could be up by end-FY10 itself. Not surprisingly, analysts have already accounted for an increase of 50 per cent in provisions for FY10 and about 25 per cent for FY11. Thus, earnings growth is expected to hover between 16 and 21 per cent for FY10 and FY11, respectively. Notably, most of the concerns are largely reflecting in the stock’s valuation, which at Rs 502 is quoting at a price-to-book value of 1.5 times based on estimated FY10 numbers. For those with some appetite for risk, this stock can deliver 20 per cent over the next 12 months.

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