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Axis Bank reported a moderate set of numbers for 2QFY2016 with 8.9% yoy
growth in profit to Rs. 1,915.6cr, which is in line with our expectations. However,
the asset quality took a severe hit with stressed assets increasing to Rs. 2,866cr
(slippages + sale to ARCs + restructuring). However, the bank had pre-emptively
made provisions for the same, thereby cushioning the impact on profitability

Advances growth remains strong; NIM improves qoq
During 2QFY2016, the bank reported an advance growth of 23.1% yoy, while
deposits grew by 14.2% yoy. The bank’s loan book growth outpaced industry
loan growth, primarily due to strong traction witnessed in the retail and
corporate book. The retail book grew by 26.6% yoy and accounted for 40% of
the advances. The corporate loan book, which comprises 47% of the total
advance book, increased by 25.8% yoy, mainly on account of refinancing and nonrupee
financing.
The CASA ratio came in at 44.2%, declining by 29bp yoy, while it improved by
149bp on a qoq basis. The NIM improved qoq and stood at 3.85%, as the cost of
funds fell by 13bp qoq to 5.99%. The impact of base rate cut in October will likely
have an effect in the upcoming quarter’s NIM since 82% of the domestic loans of
the bank are linked to the base rate.
Asset quality deteriorated following the sale to ARC (Rs. 1,820cr). The sale was at
~65% haircut, with a Rs. 336cr hit on the P&L and Rs. 850cr accounted from
contingent provisions. Outstanding contingent provisions now stand at Rs. 450cr.
Including this sale to ARC and restructuring, slippages stood at Rs. 2,866cr (4.1%
annualized) vs the reported 0.8% annualized (without considering the sale to
ARC and restructured loans). However, the company had pre-emptively made the provisions, thereby
cushioning the impact on profitability. The bank restructured Rs. 463cr worth of
loans during the quarter. However, the Management has reiterated its credit cost
guidance of 90bp, while it has guided for lower stressed asset formation in
FY2016 (excluding the sale to ARC).
Outlook and valuation: Healthy pace of branch expansion and a strong
distribution network continue to be the driving force for the bank’s retail
business. Going forward, the bank will continue to focus on the retail business.
While the near term asset quality environment remains challenging, the company
will be able to absorb the credit costs given the adequate profitability. The bank
is positioned strongly to benefit once the macros revive. We are of the view that
the stock is over discounting the near-term concerns. The stock currently trades at
2.0x P/ABV FY2017E. We maintain our Buy rating on the stock with a revised target
price of Rs. 630.

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