Published on 18/12/2019 4:09:11 PM | Source: Motilal Oswal Services Ltd

High Conviction Idea - Axis Bank Ltd By Motilal Oswal

Posted in Broking Firm Views - Short Term Report| #Axis Bank Ltd #Banking Sector #Stock Market #Motilal Oswal #Trading Report

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Focused execution to drive RoE improvement

Axis Bank (AXSB) is one of the largest private sector banks in Indiawith 4,284 branches and 12,191 ATMs spread across the country. It has a loan book of ~INR5.2t, grew at a CAGR of 15% over FY15-2QFY20.


Loan book to grow at 17% CAGR over FY19-21E: AXSB has been delivering steady loan growth led by healthy trends in retail book, which now comprises 52.4% of loans v/s 32.4% in FY14. Within retail, the proportion of high yielding book comprising personal loans, credit cards, etc. has increased from 10% in FY14 to 17% currently. Management has further guided for optimizing the business mix, a step that is likely to support margins.


Fee income getting granular: Retail and transaction banking fees now forms 82% of the bank’s fees, signifying the granularity in the fee income. This is driven by cards/third party distribution, which together contributes 36% of total fees. We thus expect the fee income to average assets to contribute significantly to the ROA.


Asset quality continues to improve: The BB & below pool has reduced to 1.2% of the total loan book vs 2.0% in FY18. Thus, total Net stressed loans declined to 4.7% of the total advances from 6.4% in FY18. In the current quarter, ~97% of the corporate slippages came from BB & below rated book. Overall coverage ratio (incl TWO) has improved to ~79% vs ~65% in FY18. Further, in addition AXSBalso holds additional provisions of INR26b towards various contingencies. Overall, the bank has guided for its credit cost to match its long-term average (~110bp) over the next three years as it aspires to deliver 18% RoE by FY22.


Subsidiaries gaining scale; to make healthy contribution to overall profitability: During 1HFY20, Axis AMC reported PAT growth of 103% YoY to INR300m with an average AUM of INR1.1t (+20% YoY). Axis Finance PAT grew at 41% YoY to INR1.4b with a loan book of INR73.6b (+0.4% YoY). Axis Capital PAT grew at 94% YoY to INR620m while Axis Securities revenue declined 23% YoY to INR770m.


Valuation & view: AXSB registering a healthy decline in its net stressed loans, we believe it to be in the last leg of NPL cycle and expect slippages to subside from FY21 onwards resulting in an improvement in return ratios. We thus estimate itto report ROA/ROE of 1.3%/14.0% for FY21E onwards. The stock is currently trading at 2.3x FY21E ABV. Maintain Buy with a target price of INR825 (2.4x FY21E ABV).


Risks: Deterioration in credit environment and asset quality given that economic slowdown may impact credit cost and hence valuations.


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