Despite slow down in the industry, Axis Bank continues to deliver strong business
growth: Axis Bank has been able to outpace the industry growth delivering 19%
CAGR in loan book over FY12-16. The key driving force has been the retail
business (39% CAGR), whose share has gone up to 41% from 21% during the
same period. The management has been reiterating its stand on pick up in retail
loans, which is visible from the 24.3% growth during Q1FY17. Corporate loans
also witnessed strong growth during Q1FY17 by 21%. Hence, we believe the
bank has potential to deliver 20% CAGR in loan for next 2-3 years & sharp
moderation in growth is unlikely.
Asset quality woes restricted to the watch list: Axis bank came out with a watch
list of Rs22,628cr worth of loans at the end of Q4FY16, estimating 60% of that
could fall into NPA over the next 2 years with a bias towards higher slippages in
FY17. Accordingly, the bank saw slippages of Rs3,638cr in Q1FY17, reducing the
watch list amount by 10.3%. Almost 74% of the slippages (`2,680cr) came from
the watch list, while slippages from non watch list corporate book accounted for
6% of the gross slippages.
Balance 20% slippages came from Non Corporate book. As expected, large part
of the slippages came from the corporate loans within the watch list. While, it is a
known fact that in absolute terms there would be a rise in NPA and their ratio
will go up. However, there is low probability of negative surprise from the non
watch list accounts turning into large scale NPAs.
We expect RoE to bounce back in FY18: Axis Bank has maintained RoE of 16-
17% over the last 3 years. Their ability to contain credit cost and higher traction
in fee income were the driving forces behind the strong RoE. However, the
management has already come out with a watch list and has given a higher
credit cost guidance of 125-150 bps for FY17 vs 92 bps/ 83 bps/110 bps in
FY14/FY15/16, respectively. This indicates that bottom-line will be under
pressure. While, FY17 will see RoE falling to 13.6% vs 16.8% in FY16, we expect
the same to bounce back to 16.5% by FY18. Ability to grow retail loans would be
one of the keys for maintaining strong RoE & we believe the bank will be able to
sustain RoE of 16-17% in the medium term.
Outlook and valuation: Declaring the watch list gave the much required clarity
on the book for the Bank. While credit cost will remain high and in turn RoE will
be under pressure for FY17; once the cleaning up process is over, we can expect
RoE rebounding and Axis Bank can be a re-rating candidate. At the current
levels, the stock trades at 2x its FY18E Adj BV of Rs268. Thus, we believe the
current corrections in the stock gives long term investors an opportunity to enter
the stock. We upgrade the stock to a BUY with a target price of Rs630.
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