Axis Bank. Strong core performance. Source: Company Data; PL Research

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1 Strong core performance January 17, 2011 Abhijit Majumder Umang Shah Rating BUY Price Rs1,230 Target Price Rs1,600 Implied Upside 30.1% Sensex 18,882 (Prices as on January 17, 2011) Trading data Market Cap. (Rs bn) Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 37.35% Foreign 36.56% Domestic Inst. 5.32% Public & Other 20.77% Stock Performance (%) 1M 6M 12M Absolute (6.1) (9.4) 14.1 Relative (1.1) (14.5) 6.6 Price Performance (RIC: AXBK.BO, BB: AXSB IN) Healthy core operating performance, margins improve sequentially: Axis Bank reported Q3FY11 PAT of Rs8.9bn, up by 35.9% YoY and 21.3% QoQ, ahead of our as well as street estimates of ~Rs8.3bn. Net Interest Income (NII) for the quarter grew by 28.5% YoY and 7.3% QoQ, attributable to 13bps QoQ improvement in reported NIM to 3.81%, coupled with strong 45.7% YoY and 11.7% QoQ advances growth. Recent PLR and base rate hikes, coupled with impressive over 9.0% QoQ increase in the average daily CASA balances (despite rising term deposit rates), led to sequential improvement in margins. However, margins are likely to contract as the fuller impact of deposit rate hike will be felt in the coming quarters. Advances growth was mainly driven by strong growth in the large and mid corporate segment (69.5% YoY and 10.7% QoQ). Among retail loans, personal loans increased by 140% QoQ on account of certain one off loans to the tune of Rs25.0bn pertaining to specific housing loan scheme applications. These loans are short term and are likely to get re paid by Q1FY12. Healthy CASA accretion continues, core fee income growth steady: Deposits grew strongly by 36.9% YoY, but declined marginally by 0.7% QoQ, while CASA deposits grew by 27.0% YoY and 1.1% QoQ, resulting into ~70bps QoQ improvement in CASA ratio to 42.3%. Importantly on an average daily basis, total deposits grew by 3.2% QoQ, while the CASA deposits grew impressively by over 9%. Overall non interest income grew by 21% YoY and 14% QoQ despite sharp decline in income from capital markets, while the core fee income grew by healthy 20% YoY. Asset quality stable; slippages decline: Notably, slippages during the quarter reduced to Rs3.3bn (1.6% annualized) v/s Rs4.5bn (2.2% annualized) in Q2FY11. Gross NPAs, in absolute terms, increased by 8.8% QoQ as the bank did not make aggressive write offs during the quarter. Provision coverage improved to 74% Key financials revise our ( Y/e FY13 March) NII and PAT estimates 2010 upwards by 2011E 2.9% and 3.8% 2012E respectively. 2013E Net interest We maintain income our (Rs m) BUY rating and the 50,045 target price on 66,239 the stock. 82, ,684 Growth (%) Operating profit (Rs m) 52,405 63,090 76, ,245 PAT (Rs m) 25,145 32,902 41,115 55,901 EPS (Rs) Growth (%) Net DPS (Rs) Q3FY11 Result Update (Rs) 1,800 1,600 1,400 1,200 1, Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Source: Company Data; PL Research Profitability & Valuation E 2012E 2013E NIM (%) RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Source: Bloomberg Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 from 70% in Q2FY11, while provision cover, including technical write offs, stood comfortable at 82.7%. The bank restructured Rs1.6bn worth loans during the quarter, of which Rs1.1bn pertains to a CDR account. Cumulative restructured assets now stand at Rs21.2bn, 1.7% of net advances. Valuation & Outlook: Axis Bank has delivered healthy core operating performance. Margin pressures are likely to persist, which is in line with the industry trend. However, we believe that improving asset quality trends should result in lower credit costs and the healthy growth momentum is likely to be maintained. We have revised our earnings estimates upwards by 1.6% to factor in lower credit costs. We are also factoring in 10% equity dilution in FY13 as we believe the bank would require capital to fund its future growth. We thereby revise our FY13 NII and PAT estimates upwards by 2.9% and 3.8% respectively. We maintain our BUY rating and the target price on the stock. January 17,

3 Q3FY11 Result Overview (Rs m) Y/e March Q3FY11 Q3FY10 YoY gr. (%) Q2FY11 9MFY11 9MFY10 YoY gr. (%) Interest Income 38,383 28, , ,882 86, Interest Expense 21,052 15, ,092 59,262 51, Net Interest Income 17,331 13, ,151 48,620 35, Non Interest Income 11,477 9, ,332 31,817 30, Treasury Income 1,347 1,696 (20.6) 1,080 4,385 7,197 (39.1) CEB 9,677 7, ,490 25,597 21, Net total Income 28,808 23, ,483 65,300 52, Operating Expenses 12,224 9, ,620 34,488 26, Employee 3,962 3, ,053 12,179 9, Other operating expenses 8,262 6, ,567 22,310 17, Operating profit 16,585 13, ,864 45,949 38, Provisions 3,139 3,731 (15.9) 3,788 10,256 11,873 (13.6) Profit before tax 13,446 10, ,076 20,555 13, Tax 4,532 3, ,725 12,009 9, Net Profit after tax 8,914 6, ,351 23,684 17, Asset Quality Gross NPA's 14,829 11, ,624 14,829 11, % Gross NPA's Net NPA's 3,855 4,296 (10.2) 4,094 3,855 4,296 (10.2) % Net NPA's Provision Coverage Capital Adequacy (%) CAR Tier Yield Measurement ratios (%) NIM reported NIM calculated Balance Sheet Items Deposits 1,558,106 1,138, ,568,871 1,558,106 1,138, CASA 659, , , , , CASA (%) Advances 1,235, , ,105,928 1,235, , Investments 596, , , , , Total Assets 2,067,058 1,504, ,998,331 2,067,058 1,504, January 17,

4 Trend in margin and cost of funds 4.5 Reported NIM (%) (LHS) Cost of funds (%) (RHS) Reported NIM for the quarter improved by 13bps QoQ to 3.81%. This could be partially attributed to the increase in PLR/base rate effected by the bank during the quarter which resulted in increase in the overall yields due to asset re pricing (as 85% of the asset book is floating in nature) Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Trend in deposit mobilisation On the liability front, despite a sharp increase in the term deposit rates, CASA deposits grew by 27.0% YoY and 1.1% QoQ. Notably, the average daily CASA deposits grew impressively by over 9% QoQ, thereby, restricting the adverse impact of rising cost of funds. (Rs bn) 1,800 1,600 1,400 1,200 1, Term deposits CASA deposit growth % (RHS) CASA deposits Term deposit growth % (RHS) Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY % 40.0% 30.0% 20.0% 10.0% 0.0% 10.0% Strong traction in asset growth continued, as advances grew by 45.7% YoY and 11.7% QoQ, driven by robust growth in corporate advances (up 53.1% YoY and 8.8% QoQ). Besides corporate loans, retail and agri loans, too, grew at a healthy pace by 33.0% and 24.0% YoY, respectively. Retail loans include one time retail home loans to the tune of Rs25bn pertaining to certain application for home loan schemes. These loans are expected to run off the book in the short term. Trend in advances strong traction in corporate and agri loans (Rs bn) 1,400 1,200 1, Agricultural advances Retail Advances Corporate Advances % (RHS) Corporate Advances Retail Advances % (RHS) Agricultural advances % (RHS) Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY % 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% January 17,

5 Trend in asset quality Asset quality remained healthy, with Increase in GNPA Increase in NNPA slippages trending downwards. Fresh slippages during the quarter stood at Rs3.3bn v/s Rs4.5bn in Q2FY11. However, due to lower write offs, gross NPAs increased by 8.8% QoQ. Cumulative restructured assets stood reduced Rs21.2bn (1.7% of net outstanding loans). (Rs bn) GNPA % (RHS) NNPA % (RHS) Provision cover improved to 74% v/s 70% in Q2FY11, while including technical writtenoff accounts, it stood high 82.7%. 0.5 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY Core Fee Income details (Rs m) Particulars Q3FY11 Q3FY10 YoY gr. (%) Q2FY11 QoQ gr. (%) Corporate Banking + Agri & SME Banking 4,100 3, , Business Banking 950 1,000 (5.0) Capital Markets (6.3) 160 (6.3) Retail Banking 2,850 2, , Total core fee income 8,050 6, , January 17,

6 Income Statement (Rs m) Int. Earned from Adv. 79, , , ,647 Int. Earned from Invt. 34,283 44,458 56,980 72,878 Others 2,231 3,722 6,469 7,496 Total Interest Income 116, , , ,022 Interest expense 66,335 91, , ,338 NII 50,045 66,239 82, ,684 Growth (%) Treasury Income 7,140 5,500 5,500 5,000 NTNII 32,317 37,697 46,756 57,348 Non Interest Income 39,458 43,197 52,256 62,348 Total Income 155, , , ,370 Growth (%) Operating Expense 37,097 46,345 57,798 72,787 Operating Profit 52,405 63,090 76, ,245 Growth (%) NPA Provisions 13,570 12,770 12,954 15,096 Investment Provisions (222) (653) Total Provisions 13,892 13,983 15,101 16,811 PBT 38,514 49,107 61,366 83,434 Tax Provisions 13,368 16,205 20,251 27,533 Effective Tax Rate (%) PAT 25,145 32,902 41,115 55,901 Growth (%) Balance Sheet (Rs m) Par Value No. of equity shares Equity 4,052 4,052 4,052 4,452 Networth 160, , , ,750 Adj. Networth 156, , , ,918 Deposits 1,413,002 1,808,643 2,260,804 2,826,004 Growth (%) Low Cost deposits 660, , ,321 1,158,662 % of total deposits Total Liabilities 1,806,477 2,270,726 2,801,727 3,550,859 Net Advances 1,043,431 1,328,591 1,640,186 2,103,291 Growth (%) Investments 559, , ,497 1,045,622 Total Assets 1,806,479 2,270,726 2,801,727 3,550,859. Axis Bank Quarterly Financials (Rs m) Y/e March Q4FY10 Q1FY11 Q2FY11 Q3FY11 Interest Income 29,885 33,256 36,243 38,383 Interest Expense 15,284 18,118 20,092 21,052 Net Interest Income 14,601 15,138 16,151 17,331 Non Interest Income 9,335 10,008 10,332 11,477 CEB 7,796 7,431 8,490 9,677 Treasury 1,027 1,957 1,080 1,347 Net Total Income 23,936 25,146 26,483 28,808 Operating Expenses 10,098 10,645 11,620 12,224 Employee Expenses 3,338 4,164 4,053 3,962 Other Expenses 6,761 6,481 7,567 8,262 Operating Profit 13,838 14,501 14,864 16,585 Core Operating Profit 12,811 12,543 13,784 15,238 Provisions 2,019 3,330 3,788 3,139 Loan loss provisions 1,760 3,040 3,210 2,330 Investment Depreciation 200 (146) Profit before tax 11,819 11,171 11,076 13,446 Tax 4,171 3,752 3,725 4,532 PAT before EO 7,649 7,419 7,351 8,914 Extraordinary item PAT 7,649 7,419 7,351 8,914 Key Ratios CMP (Rs) 1,230 1,230 1,230 1,230 Equity Shrs. Os. (m) Market Cap (Rs m) 498, , , ,559 M/Cap to AUM (%) EPS (Rs) Book Value (Rs) Adj. BV (75%) (Rs) P/E (x) P/BV (x) P/ABV (x) DPS (Rs) Dividend Yield (%) Profitability (%) NIM RoAA RoAE Efficiency Cost Income Ratio (%) C D Ratio (%) Business per Emp. (Rs m) Profit per Emp. (Rs m) Business per Branch (Rs m) 2,373 2,490 2,627 2,883 Profit per Branch (Rs m) Asset Quality Gross NPAs (Rs m) 13,180 15,403 20,683 23,329 Net NPAs (Rs m) 4,190 4,621 6,205 5,832 Gr. NPAs to Gross Adv. (%) Net NPAs to Net Adv. (%) NPA Coverage (%) January 17,

7 Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 55.3% 28.8% 13.6% 2.3% Buy Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. For Clients / Recipients in United States of America: All materials are furnished courtesy of Direct Access Partners LLC ("DAP") and produced by Prabhudas Lilladher Pvt. Ltd. ("PLI"). This material is for informational purposes only and provided to Qualified and Accredited Investors. You are under no obligation to DAP or PLI for the information provided herein unless agreed to by all of the parties. Additionally, you are prohibited from using the information for any reason or purpose outside its intended use. Any questions should be directed to Gerard Visci at DAP at January 17,