Multi Baggers

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. 

Shareholding pattern:

Valuation summary:

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.

Confidentiality & Disclaimer: This message contains confidential information and is intended only for the individual named. If you are not the named addressee you should not disseminate, distribute or copy this e-mail. Please notify the sender immediately by e-mail if you have received this e-mail by mistake and delete this e-mail from your system. E-mails are not encrypted and cannot be guaranteed to be secured or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender, which includes India Infoline Limited and its group companies, will not be liable for any errors or omissions in the contents of this message which arise as a result of e-mail transmission. If verification is required please request a hard-copy version. This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments.