Axis Bank: Strong operating performance in Q2

Valuation discount versus HDFC Bank could come down

Axis Bank reported healthy results on all key parameters for the September quarter. The 23 per cent growth in loans was in line with recent trends at the bank and fuelled by continued traction in retail and corporate loans, which grew 25 per cent each. This helped net interest income rise 15 per cent year-on-year (y-o-y) to Rs 4,062 crore. Though fee-income grew 14 per cent to Rs 1,813 crore versus 16-20 per cent in the past four quarters, it is still healthy.

Asset quality was stable with gross non-performing asset (NPA) and net NPA unchanged sequentially at 1.38 per cent and 0.48 per cent, respectively; y-o-y, these were up four basis points (bps) each. The cumulative value of net restructured advances fell a per cent to Rs 8,426 crore. Axis has managed to keep asset quality under check with gross NPA ratio of 1.3-1.4 per cent over the past few quarters.

As a result, provisions fell both y-o-y and sequentially. All these aided net profit, which grew 19 per cent y-o-y to Rs 1,916 crore. Although the profit figure was a tad short of Bloomberg consensus estimate of Rs 1,944 crore, it was partly due to a 47 per cent fall in treasury profits to Rs 376 crore.

Easing cost of funds led to a 4 bps uptick in net interest margin (NIM) sequentially to 3.85 per cent. On a y-o-y basis, NIM contracted 12 bps as this quarter saw the full impact of the 30 bps base rate cut implemented in June 2015 quarter. Analysts expect FY16 NIM to be at similar levels as FY15.

The stock ended unchanged on Tuesday. At current levels of Rs 518, it trades near its historical average one-year forward price/adjusted book value of 2.1 times, which is at a steep 40 per cent discount to HDFC Bank.

Vaibhav Agrawal, vice-president - research, banking at Angel Broking, said, “Axis Bank has similar growth profile to HDFC Bank and is witnessing a pick-up in retail growth as well... The Axis scrip should run up to reduce its discount versus HDFC Bank to a reasonable 25 per cent.” He has a target price of Rs 673 on the scrip.

Given its well capitalised balance sheet, healthy return ratios and strong execution, most analysts are positive on the scrip. Their average target price of Rs 654 indicates upside potential of 26 per cent.