Axis Bank

Axis Bank has outperformed the Bankex year to date, but underperformed the Nifty, due probably to the increased risk perception for the financial sector. We largely maintain our earnings estimates. We cut our target price to Rs791.90, on the back of our new assumptions for terminal growth and cost of equity. Buy maintained.

Net interest income largely in line; fee income surprises positively
Axis Bank's net interest margins (NIM) declined qoq in 1Q09, but net interest income was largely in line with our estimate. Fee income surprised on the upside, which was impressive as it came in the midst of a downturn in the financial market. The buoyancy in fee income and lower-than-expected operating expenses partly offset the significant increase in provision charges. As a result, profits exceeded our forecast.

Marginal stress on asset quality
Overall asset quality came under pressure, with both gross and net NPLs rising qoq. The bank attributes the decline in asset quality primarily to increased delinquency in the credit-cards business. Axis Bank aims to contain gross NPLs at 1% and net NPLs at 0.5% in FY09. We estimate net NPLs at 0.4% of total loans by FY09 (vs 0.4% in FY08). We believe the bank will meet its target, hence our provision estimates remain unchanged.

Business growth should exceed peers
We expect Axis Bank's business growth to exceed that of its peers, given the bank's smaller size. We also believe the bank will be able to maintain its low-cost deposit base at 43-45%, allowing it to maintain margins even amidst aggressive asset growth. We estimate NIMs at 3.04% for FY09 and at 3.10% for FY10, largely unchanged from our previous numbers.

Buy, with a new target price of Rs791.90
We raise our cost of equity assumption for Axis Bank to 14% (from 13%), given the challenging operating environment for the banking sector. This reduces our terminal spread assumption to 4% (from 5%). Our new assumptions for terminal growth (from 7% to 5%) and cost of equity lead the change in our EVA™-based target price to Rs791.90 (from Rs1,187.80). Our forecasts are largely unchanged for FY09 and FY10. At our target, the stock would trade at 3x FY09F adjusted book value (writing off pre-tax net NPLs fully). We maintain our Buy rating.