Axis Bank INR 521. Target Price (INR): 600. Staunch operating metrics; but blemish asset quality. Potential Upside: 15.16%

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1 India Equity Institutional Research BANKS RESULT UPDATE Axis Bank INR 521 Staunch operating metrics; but blemish asset quality ACCUMULATE With strong operating performance, Axis Bank reported net profit at Rs 19.2 bn up by 18.9% Y-o-Y (down 3.2% Q-o-Q) aided by strong loan book growth at 23.1% Y-o-Y and lower provisions. Sequentially, PAT growth stood restricted due to 11.2% dip in other income during the quarter. Key highlights are: 1) NII went up 15.2% Y-o-Y, flat Q-o-Q fuelled by consistent traction in retail and corporate loans (both grew 25% Y- o-y) and margins uptick 2) While margins at 3.85% were seen up 4bps Y-o-Y, sequentially they looked down by 12 bps primarily on account of impact of base rate cut of 30 bps during Q1FY16. 3) Non-interest income posted a somber growth of 4.8% Y-o-Y and declined 11.2% sequentially. While fee income growth at 14% y/y still stood healthy; the treasury gains dipped 38% y/y to Rs 1.7 bn curbing the other income traction. 4) Opex remained under control reporting 7.2% spike y/y and 9.4% q/q; 154 branches added in Q2. Cost-income ratio stood at 40.6% v/s 42.2% a year ago. 5) Provisions for the quarter declined 2.5% y/y, 37.0% q/q with stable reported NPAs and lower slippages at Rs 5.8 bn. However, the bank utilized Rs 8.5 bn contingent provisions for sale of two large power accounts worth Rs 18.2 bn to ARCs for Rs 6.5 bn. What was intriguing is that these assets (pertaining to same promoter group) were recognized under standard category in Q1FY16 and were not part of Rs 55 bn stressed asset guidance then. Moreover, given the incremental slippages standing higher at Rs bn, the overall slippage ratio turns out to be 4% and which is on the higher side. 6) Loan book grew 23.1% Y-o-Y driven by demand in corporate lending and healthy retail loan growth both reporting 25% growth y/y. Deposits grew by 14.2% Y-o-Y and 5.3% Q-o-Q, of which CASA deposits stood at healthy 44.2%. Target Price (INR): 600 Potential Upside: 15.16% Previous TP (INR): 600 Market Data Eq. sh. O/S (Mn) 2378 MCAP (INR Mn) Wk H/L (INR) 655 /422 Avg Vol (3m 000) 8756 Face Value (INR) 2 Bloomberg Code AXSB IN Market Info: SENSEX NIFTY 8233 Price Performance Healthy NII driven by definite loan book growth and range-bound margins: NII increased by 15.2% Y-o-Y, flat Q-o-Q owing to a strong loan book growth and margins remaining in the range of 3.9%-4.0%. Easing cost of funds rightly offset the lower loan yields leading to uptick in sequential margins. Domestic NIM stood at 3.85% while overseas NIM stood at 1.6%. We expect NII to growth at 19-20%+ between FY16-17E. Somber non-interest income; stable fee-income: Core fee income depicted a rather healthy growth (14.0% y/y) due to robust traction in transaction banking (+17.4% y/y) and corporate banking. In our opinion, fee income trajectory will continue to look strong over FY16- FY17E driven by healthy growth in retail and corporate fees and traction in transaction banking. Asset quality worries come to the fore: While the Gross NPAs and Net NPAs for the quarter stood stable at 1.5% and 0.5% respectively, however fresh impairments and increased restructured assets reported this quarter rings a warning bell. The bank utilized Rs 8.5 bn contingent provisions for sale of two large power accounts worth Rs 18.2 bn to ARCs for Rs 6.5 bn. What was intriguing is that the quantum of these assets (pertaining to same promoter group) and recognized under standard category in Q1FY16 stood higher than the Rs 55 bn stressed asset guidance for FY16. Moreover, given the incremental slippages standing higher at Rs bn, the overall slippage ratio turns out to be as high as 4%. Therefore, more than expected stressed asset formation and the bank s significant exposure to troubled sectors of the economy such as infra, metals and power (in that pecking order) indicates the vulnerability of Axis to tough macros. Share Holding pattern (%) Particulars Sep15 Jun15 Mar15 Promoters FIIs DIIs Outlook and Recommendation: The bank has been able to deliver consistent core operating earnings with superior retail loan book accretion and consistent healthy fee-income performance. While Axis Bank boasts of well capitalized balance sheet and rich liability franchise supported by its huge presence in retail and corporate lending, the credit quality concerns now have come to the fore. Against this backdrop, we maintain ACCUMULATE rating on the stock with a target price of Rs 600 valuing the bank at 2.4x P/BV FY17E. However, given the asset quality pressures, we believe the valuation gap between the two rich retail franchises viz; Axis bank and HDFC bank will remain. Key Financials Rs in mn Net Interest Income 96, , , , ,110 Pre-provision profits 93, , , , ,602 Net Profit 51,794 62,177 73,578 84, ,594 EPS BVPS ABVPS P/E (x) P/ABV (x) Others Total Source: BSE Analyst Shweta Mane-Daptardar Ext KRChoksey Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Fact set and Capital IQ October 28, 2015

2 Healthy NII growth supported by strong loan growth and stable margins Net interest income at Rs 4,056 crs, was up by 22.5% Y-o-Y and 6.8% Q-o-Q mainly attributable to strong loan growth and stable margins. Impact of base rate cut was offset by lower cost of funds and elevated CD ratio, resulting in steady state margins in the range of 3.9%- 4.0%. Management's focus on high yield retail loan book growth in coupled with CASA deposit growth will continue to support strong margins traction going forward. The share of high cost wholesale deposits stood at 21% of total deposits, down from 23% in Q1FY15. We estimate 3.5% NIMs for the bank over FY16-17E. Exhibit 1: Loan and NII growth Trend Exhibit 2: NIM and Cost of Fund Trend Substantial trading gains boost non-interest income Core fee income depicted a rather healthy growth (14.0% y/y) due to robust traction in transaction banking (+17.4% y/y) and corporate banking fees (27% q/q, 2% y/y). However, subdued treasury gains at Rs 1.7 bn, down 38% y/y and poor forex income at Rs 612 mn, down 40% y/y curbed the other income growth during the quarter. In our opinion, fee income trajectory will continue to look strong over FY16-FY17E driven by healthy growth in retail and corporate fees and traction in transaction banking. Exhibit 3: Segment wise fee income trend Rs in mn Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Corporate Banking 3,445 4,614 4,215 5,947 3,722 4,714 Treasury and DCM 3,307 3,023 3,541 4,248 2,171 1,813 Agri & SME Banking ,012 1, Business Banking 1,378 1,273 1,517 1,487 2,946 3,445 Capital markets Retail Banking 5,099 6,046 6,575 8,284 6,048 7,252 Total 13,780 15,910 16,860 21,240 15,508 18,130 Steady deposit growth, CASA stable at 40% Despite an ongoing tough environment for generating CASA deposits, Axis Bank holds a healthy CASA ratio at 44.2% in Q2FY16. Savings deposits (+12.3% Y-o-Y) registered a healthy growth aided by current account deposits (+15.5% Y-o-Y). CASA and retail term deposits now constitute 80% of the total deposits. The bank has reduced its reliance on wholesale deposits and increased retail deposits mix which in turn reduces margin volatility and better pricing capabilities in medium to long term. Moreover, the CD ratio at 92% stood elevated supporting margins enhancement. We believe steady branch expansion, leveraging corporate relationship, superior customer service and deepening branch relationship for term deposits will continue to drive CASA growth and retail deposits for the bank. The borrowings for the quarter grew 51.4% Y-o-Y; whereas the total deposits registered 14.2% Y-o-Y growth during the quarter. Going forward, we maintain the 20%+ growth estimate for deposit base of the bank. 2 KRChoksey - Institutional Research

3 Strong loan growth driven by pickup in corporate loans and healthy retail franchise Loan book grew 23.1% Y-o-Y (exceeding industry levels) driven by demand in corporate lending and healthy retail loan growth both reporting 25% growth y/y. Corporate loans grew by 27.2% Y-o-Y with increased share in overall mix to 47% (v/s 45.5% a year ago) as the bank increases its focus on working capital lending and transaction baking businesses. It is worth mentioning that almost 60% of the corporate book forms part of high rated AAA category. Retail loans grew by 26.4% Y-o-Y driven by personal loans and credit cards. The share of retail loans remained steady at 40% of total loans in Q2FY16. The SME book however grew moderately and form 13% of the total loans. The management has guided for loan book to grow premium to industry growth rate in FY16. We expect loan book to grow ~22% y/y over FY16-FY17E. Exhibit 4: Segment wise loan book growth & CD Ratio Trend Rs in mn Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Corporate advance 1,018,410 1,101,760 1,215,430 1,261,840 1,295,660 1,400,908 Y-o-Y 2.0% 13.1% 24.8% 23.4% 27.2% 27.2% Q-o-Q -0.4% 8.2% 10.3% 3.8% 2.7% 8.1% SME advance 374, , , , , ,485 Y-o-Y 33.7% 24.0% 26.0% 8.0% 6.4% 2.8% Q-o-Q -5.9% 0.6% 5.6% 7.9% -7.2% -2.8% Retail advances 912, , ,190 1,119,320 1,152,040 1,192,262 Y-o-Y 60.9% 55.0% 43.5% 27.2% 26.3% 26.4% Q-o-Q 3.6% 3.4% 5.2% 12.8% 2.9% 3.5% Advances 2,305,352 2,421,981 2,605,673 2,810,830 2,846,491 2,980,656 Y-o-Y 16.3% 20.3% 23.2% 22.2% 23.5% 23.1% Q-o-Q 0.2% 5.1% 7.6% 7.9% 1.3% 4.7% Asset quality pressures come to the fore; exercise caution The Gross NPAs and Net NPAs for the quarter stood stable at 1.5% and 0.5% respectively and the provisions declined 2.5% y/y, 37.0% q/q with slippages at Rs 5.8 bn. However, fresh impairments, increased restructured assets and sale to ARCs disappointed this quarter and ring a warning bell. The bank utilized Rs 8.5 bn contingent provisions for sale of two large power accounts worth Rs 18.2 bn to ARCs for Rs 6.5 bn. What was intriguing is that the quantum of these assets (pertaining to same promoter group) and recognized under standard category in Q1FY16 stood higher than the Rs 55 bn stressed asset guidance for FY16. Moreover, given the incremental slippages standing higher at Rs bn, the overall slippage ratio turns out to be as high as 4.3% of loan assets. The fresh restructured assets stood at Rs 44 bn as against Rs 24 bn a quarter ago; couple of accounts weighing ~ Rs 15 bn were moved to the 5:25 scheme as against one account worth Rs 5 bn previous quarter. Therefore, more than expected stressed asset formation and the bank s significant exposure to troubled sectors of the economy such as infra (7.2%), metals (6.2%) and power (5.9%) (in that pecking order) indicates the vulnerability of Axis to tough macros. Opex under control Opex remained under control reporting 7.2% spike y/y and 9.4% q/q; 154 branches added in Q2. Cost-income ratio stood at 40.6% v/s 42.2% a year ago indicating stable operating metrics for Axis bank. Exhibit 5: Cost to income ratio Exhibit 6: Branch expansion 3 KRChoksey - Institutional Research

4 Other Highlights The bank has opened 154 branches in Q2FY16, taking the total branch network to 2,743 branches. CAR stood at 14.4% vs 15.1% in the previous quarter; bank stands adequately capitalized to pursue future growth. Q2FY16: Result Analysis Rs in mn Q2FY16 Q1FY16 Q2FY15 Y-o-Y Q-o-Q Income Statement Interest income 99,596 99,361 86, % 15.8% Interest expense 58,975 58,799 50, % 16.1% Net interest income 40,621 40,562 35, % 15.2% Non interest income 20,414 22,983 19, % 4.8% Total Net Income 61,035 63,545 54, % 11.5% - Employee Expenses 8,293 8,093 7, % 5.5% - Other operating expenses 16,462 14,532 15, % 8.0% Operating expenses 24,755 22,624 23, % 7.2% Pre-prov profits 36,280 40,921 31, % 14.7% Provisions % -2.5% Profit before tax 29,208 29,703 24, % 19.8% Tax expense 10,051 9,919 8, % 21.6% Net profit 19,156 19,784 16, % 18.9% Balance Sheet Summary Net worth 488, , , % 17.1% Deposits 3,241,011 3,077,839 2,837, % 14.2% Borrowings 843, , , % 51.4% Other Liabilities & Provisions 153, , , % 11.7% Total Liabilities 4,727,246 4,524,919 3,949, % 19.7% Investments 1,136,810 1,078,631 1,142, % -0.5% Advances 2,980,656 2,846,491 2,421, % 23.1% Fixed and other assets 609, , , % 58.4% Total Assets 4,727,246 4,524,919 3,949, % 19.7% Key Ratios Spread Analysis Yield on avg advances 10.9% 11.0% 11.3% Yield on avg investments 7.7% 9.7% 7.6% Yield on avg int. bearing assets 9.7% 10.2% 9.5% Cost of funds 6.3% 6.6% 6.3% Net interest margin 3.9% 4.2% 3.9% Net interest margin - reported 3.9% 3.8% 4.0% Key Balance ratios CD ratio 92.0% 92.5% 85.4% CASA ratio 44.2% 42.8% 44.5% Asset Quality GNPA ratio 1.5% 1.5% 1.5% NNPA ratio 0.5% 0.5% 0.4% Provision coverage 65.3% 65.6% 67.3% Other Key ratios Cost to income ratio 40.6% 35.6% 42.2% Capital Adequacy ratio CAR 15.4% 15.1% 15.9% Tier I 12.2% 12.2% 12.6% KRChoksey - Institutional Research

5 Financials Rs in mn Income Statement Interest income 271, , , , ,960 Interest expense 175, , , , ,850 Net Interest Income 96, , , , ,110 Non interest income 65,511 74,052 83,650 97, ,533 Operating income 162, , , , ,642 Operating expenses 69,142 79,008 92, , ,040 -Employee cost 23,770 26,013 31,150 35,850 42,543 Pre-provision profits 93, , , , ,602 Provisions 17,504 21,075 23,277 31,508 34,581 PBT 75,527 93, , , ,021 Provision for taxes 23,733 31,310 36,999 44,699 55,427 Net profit 51,794 62,177 73,578 84, ,594 Balance Sheet Rs in mn Equity share capital 4,680 4,698 4,741 4,751 4,751 Reserve and Surplus 326, , , , ,660 Net worth 331, , , , ,411 Deposits 2,526,136 2,809,446 3,224,419 3,905,883 4,806,087 Borrowings 439, , ,583 1,001,154 1,235,443 Other liabilities and provisions 108, , , , ,761 Total 3,405,607 3,832,449 4,619,324 5,585,816 6,838,701 Cash in hand and Bal. with RBI 204, , , , ,115 Investments 1,137,375 1,135,484 1,323,428 1,602,344 1,940,549 Advances 1,969,660 2,300,668 2,810,830 3,452,216 4,282,413 Fixed assets 23,556 24,102 25,143 26,934 28,930 Other assets 70,666 89,808 98, , ,695 Total 3,405,607 3,832,449 4,619,324 5,585,816 6,838,702 DuPont analysis As % avg assets NII 3.1% 3.3% 3.4% 3.3% 3.4% Fee Income 1.9% 2.0% 1.7% 1.8% 1.8% Treasury Income 0.2% 0.1% 0.2% 0.1% 0.1% Operating Cost 2.2% 2.2% 2.2% 2.1% 2.1% Provisions 0.6% 0.6% 0.6% 0.6% 0.6% Tax 0.8% 0.9% 0.9% 0.9% 0.9% ROAA 1.7% 1.7% 1.7% 1.6% 1.7% ROAE 18.5% 17.4% 17.8% 17.5% 19.2% Business Profile Advances 1,969,660 2,300,668 2,810,830 3,452,216 4,282,413 Credit Deposits ratio 78.0% 81.9% 87.2% 88.4% 89.1% Deposits 2,526,136 2,809,446 3,224,419 3,905,883 4,806,087 CASA Deposits 1,120,998 1,264,623 1,444,003 1,715,971 2,101,546 CASA Ratio 44.4% 45.0% 44.8% 43.9% 43.7% 5 KRChoksey - Institutional Research

6 Asset quality Gross NPA 23,934 31,464 41,102 56,378 67,531 Net NPA 7,041 10,601 13,167 16,913 20,259 Gross NPA as % of Advances 1.2% 1.4% 1.4% 1.6% 1.6% Net NPA as % of Advances 0.4% 0.5% 0.5% 0.5% 0.5% Credit Costs 0.8% 0.8% 0.8% 1.0% 0.8% Spread analysis Avg Yield On Advances 10.5% 10.3% 10.2% 9.9% 9.7% Avg Yield On Investments 7.5% 7.3% 7.4% 7.2% 7.1% Avg Yield On Int Earning Assets 9.0% 8.7% 8.7% 8.4% 8.3% Avg Cost Of Deposits 6.4% 5.8% 5.7% 5.6% 5.4% Avg Cost of Funds 6.4% 6.0% 5.8% 5.6% 5.4% Spread 2.6% 2.8% 2.9% 2.9% 3.0% NIM 3.2% 3.4% 3.5% 3.4% 3.5% Growth ratios Net interest income 20.6% 23.6% 19.0% 19.3% 23.3% Fee income 15.7% 7.3% 13.5% 17.0% 20.0% Pre-provision Profits 25.2% 23.1% 16.8% 19.8% 23.3% Net Profits 22.1% 20.0% 18.3% 14.3% 27.9% Advances 16.0% 16.8% 22.2% 22.8% 24.0% Deposits 14.8% 11.2% 14.8% 21.1% 23.0% Total Assets 19.2% 12.5% 20.5% 20.9% 22.4% Per Share Data (Rs) EPS DPS BVPS ABVPS P/E P/ABV Dividend Yield 0.7% 0.8% 0.9% 1.0% 1.2% 6 KRChoksey - Institutional Research

7 Axis Bank Date Recom CMP Target 28-Oct-2015 Accumulate Our Rating Rating Legend Upside 8-July-15 HOLD April-15 ACCUMULATE Apr-15 HOLD Jan-15 ACCUMULATE Jan-15 ACCUMULATE Nov-14 ACCUMULATE Oct-14 ACCUMULATE Jul-14 BUY BUY More than 15% ACCUMULATE 5% - 15% HOLD 0 5% REDUCE -5% 0 SELL Less than -5% ANALYST CERTIFICATION: I Shweta Mane-Daptardar (MBA), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. KRCSSPL is in the process of making an application with SEBI for registering as a Research Entity in terms of SEBI (Research Analyst) Regulations, We submit that no material disciplinary action has been taken on KRCSSPL and its associates by any Regulatory Authority impacting Equity Research Analysis activities. KRCSSPL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analyst covers. The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable basis, KRCSSPL is not under any obligation to update the information. Also, there may be regulatory, compliance or other reasons that may prevent KRCSSPL from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or KRCSSPL policies, in circumstances where KRCSSPL might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KRCSSPL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. KRCSSPL accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Our employees in sales and marketing team, dealers and other professionals may provide oral or written market commentary or trading strategies that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. KRCSSPL or its associates might have received any commission/compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of brokerage services or specific transaction or for products and services other than brokerage services. KRCSSPL encourages the practice of giving independent opinion in research report preparation by the analyst and thus strives to minimize the conflict in preparation of research report. KRCSSPL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither KRCSSPL nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Shweta Mane-Daptardar (MBA) research associate of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific brokerage service transactions. KRCSSPL or its associates collectively or its research analyst do not hold any financial interest/beneficial ownership of more than 1% (at the end of the month immediately preceding the date of publication of the research report) in the company covered by Analyst, and has not been engaged in market making activity of the company covered by research analyst. Since associates of KRCSSPL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Shweta Mane-Daptardar (MBA) research associate do not serve as an officer, director or employee of the companies mentioned in the report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject KRCSSPL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Please send your feedback to Visit us at Kisan Ratilal Choksey Shares and Securities Pvt. Ltd Registered Office: 1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai Phone: ; Fax: Corporate Office: ABHISHEK, 5th Floor, Link Road, Andheri (W), Mumbai Phone: ; Fax: KRChoksey - Institutional Research

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