Axis Bank

Axis Bank's performance in 2Q09 has laid to rest concerns about whether the bank can pursue growth without sacrificing NIMs, asset quality and profitability. The disclosure of SME loan rating and growth in fee income is particularly pleasing, in our view. Buy, with a new target price of Rs769.10. 

NIMs and profitability improve; asset quality holds up 

Axis Bank’s 2Q09 net interest margins increased both yoy and qoq. We believe asset quality remains good, with GNPLs at 0.9% and NNPLs at 0.4%. Loans grew 54% yoy. About 84% of corporate loans have a rating of 'A' and above. Further, about 78% of SME loans have a rating of 'SME3' (equivalent to an 'A' rating) and above. In addition, profitability in terms of return on average assets improved to 1.34% in 2Q09, from 1.10% in 2Q08. 

Fee income growth continues to surprise positively 

Fee income jumped 91% yoy in 2Q09. Fees from retail banking, corporate and SME loans, capital markets and treasury grew strongly. Cash management throughput increased 350% yoy and placements and syndications grew 52% yoy. Fees from the cards business and from the distribution of third-party products showed robust traction. 

We raise FY09 and FY10 estimates and introduce FY11 numbers 

The bank’s reported NIMs were largely in line with our estimates, and the momentum on fee income should be sustained. We now expect non-interest income to grow about 53% in FY09 (+76% yoy in 1H09), compared to our earlier estimate of 20%. However, we increase provision charges for loan losses, offsetting the impact of higher non-interest income growth. We raise our net profit estimates by 11.7% for FY09 and 7.8% for FY10. We expect profits to moderate in FY11 and grow 16.5% yoy. 

We reiterate Buy with a new EVA-based target price of Rs769.10 

We reiterate Buy, as we believe Axis Bank will be able to maintain profitability and sustain aboveindustry average growth. Our assumptions for cost of equity and terminal spread remain unchanged. However, we have reduced our terminal growth assumption to 3%, from 5%. Accordingly, we cut our target price to Rs769.10 (from Rs791.90). At our target, the stock would trade at 2.5x FY10F BVPS, adjusted for 100% of pre-tax net NPLs.