27 October 2015 BUY More misses than hits AXSB s Q2 PAT grew 19% YoY to Rs 19.2bn on lower provisions and wellmanaged operating costs (+7% YoY). NIMs too improved 4bps QoQ to 3.85% on lower cost of funds and loan mix changes. But asset quality was a miss as stressed asset formation, including ARC sale (Rs 18.2bn) and 5:25 refinancing (Rs 15bn), jumped to Rs 44bn from Rs 24bn in Q1. However, the bank s loan growth remained strong (+23% YoY) with the momentum expected to continue ahead. Maintain BUY with a Sep 16 TP of Rs 750. Asset quality devil lies in the details: Though headline NPA was flat QoQ, two assets both power sector companies belonging to a single promoter group worth Rs 18.2bn were sold to ARC (specific/floating provisions of Rs 3.3bn/Rs 8.5bn, cash/security receipts received from ARC Rs 1bn/Rs 5.5bn). Two accounts worth Rs 15bn were also refinanced under the 5:25 scheme (Q1: Rs 5bn). Thus, stressed asset formation, including ARC sale and 5:25 accounts, stood at Rs 44bn vs. Rs 24bn in Q1FY16. Higher ARC sale and 5:25 restructuring is negative for the stock. Residual contingent provision on books is ~Rs 4bn. Management maintained its guidance of 90bps for credit costs and stressed assets formation of less than Rs 57bn for FY16. Loan growth remains strong; NIM improves QoQ: AXSB s reported a healthy 23% YoY growth in its loan book during Q2FY16, well above industry growth of ~9-10%, driven by 27%/25% YoY growth in the retail/corporate books. NIM increased by 4bps QoQ to 3.85% on account of 13bps sequential drop in the cost of funds and loan mix changes. AXSB is confident of maintaining NIMs well above its mediumterm guidance of 3.5%. CASA ratio improved by 150bps QoQ to 44%. Maintain BUY: AXSB s loan growth is likely to remain above the industry and its earnings profile strong over FY16-FY17. Maintain BUY with a Sep 16 TP of 750. REPORT AUTHORS Parag Jariwala +91 22 6766 3442 parag.jariwala@religare.com Vikesh Mehta +91 22 6766 3474 vikesh.mehta@religare.com PRICE CLOSE (27 Oct 15) INR 521.80 MARKET CAP INR 1,240.8 bln USD 19.1 bln SHARES O/S 2,377.9 mln FREE FLOAT 68.0% 3M AVG DAILY VOLUME/VALUE 8.7 mln / USD 68.6 mln 52 WK HIGH INR 655.35 52 WK LOW INR 420.25 Financial Highlights Y/E 31 Mar FY14A FY15A FY16E FY17E FY18E Net interest income (INR mln) 1,19,516 1,42,241 1,67,721 2,00,720 2,45,162 Net revenues (INR mln) 1,93,569 2,25,892 2,63,362 3,11,707 3,75,046 Pre-provision profits (INR mln) 1,14,561 1,33,854 1,57,196 1,85,895 2,26,659 Adj. PAT (INR mln) 62,177 73,578 86,956 1,05,485 1,28,807 Adj. EPS (INR) 26.5 31.2 36.7 44.5 54.3 ROE (%) 17.4 17.8 18.0 18.6 19.3 ROA (%) 1.7 1.7 1.7 1.7 1.7 Gross NPA (%) 1.3 1.4 1.3 1.2 1.1 Tier I ratio (%) 12.6 12.1 11.8 11.5 11.4 P/BV (x) 3.2 2.8 2.4 2.0 1.7 P/E (x) 19.7 16.7 14.2 11.7 9.6 Source: Company, Bloomberg, RCML Research (INR) Stock Price Index Price 640 29,410 540 440 24,410 340 19,410 240 140 14,410 This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-us affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Fig 1 - Q2FY16: results snapshot (Rs mn) Q2FY15 Q1FY16 Q2FY16 % YoY % QoQ Net interest income 35,249 40,562 40,621 15.2 0.1 Non-interest income 19,476 22,983 20,414 4.8 (11.2) Net total income 54,725 63,545 61,035 11.5 (4.0) Staff expenses 7,860 8,093 8,293 5.5 2.5 Other operating expenses 15,242 14,532 16,462 8.0 13.3 Total operating expenses 23,102 22,624 24,755 7.2 9.4 Pre-provisioning profit 31,623 40,921 36,280 14.7 (11.3) Total provisions 7,250 11,218 7,072 (2.5) (37.0) Profit before tax 24,373 29,703 29,208 19.8 (1.7) Tax 8,266 9,919 10,051 21.6 1.3 Profit after tax 16,107 19,784 19,156 18.9 (3.2) Key balance sheet items Loans 24,21,981 28,46,491 29,80,656 23.1 4.7 Retail Loans 9,02,770 11,52,040 11,94,480 32.3 3.7 Retail as a % of Total Advances 37.3 40.5 40.1 280 bps (40 bps) Deposits 28,37,276 30,77,839 32,41,011 14.2 5.3 CASA ratio (%) 44.5 42.8 44.2 (29 bps) 149 bps Loan to deposit ratio (%) 85.4 92.5 92.0 660 bps (52 bps) Margin Components (%) Cost of funds 6.2 6.1 6.0 (20 bps) (13 bps) Net interest margin 4.0 3.8 3.9 (12 bps) 4 bps Key Ratios (%) Cost/Income 42.2 35.6 40.6 (165 bps) 496 bps Tax rate 33.9 33.4 34.4 50 bps 102 bps Fees to Avg Assets 1.8 1.6 1.7 (7 bps) 14 bps Capital Adequacy Ratios (%) Tier I ratio 12.6 12.2 11.2 (141 bps) (99 bps) Tier II ratio 3.3 2.4 3.2 (12 bps) 86 bps Total CAR ratio 15.9 14.5 14.4 (153 bps) (13 bps) Asset Quality Ratios Gross NPLs 36,131 42,512 44,511 23.2 4.7 Net NPLs 11,798 14,613 15,436 30.8 5.6 Gross NPL ratio (%) 1.34 1.38 1.38 4 bps 0 bps Net NPL ratio (%) 0.44 0.48 0.48 4 bps 0 bps Reserve coverage ratio (%) 67.3 65.6 65.3 (203 bps) (31 bps) Source: Company, RCML Research 27 October 2015 Page 2 of 10
Asset quality misses the mark AXSB sold two accounts (belonging to the same promoter group) worth Rs 18.2bn to ARCs for a consideration of Rs 6.5bn, including Rs 5.5bn of security receipts. Contingent provisions to the tune of Rs 8.5bn were utilised during the quarter and the bank has outstanding contingent provisions of ~Rs 4bn. Fresh restructuring of Rs 4.6bn was done in Q2, primarily due to a change in the date of commencement of business. However, the outstanding restructured book declined marginally to Rs 84.3bn as accounts were upgraded on satisfactory performance post the moratorium period of two years. The bank, as a part of the consortium, also refinanced two thermal power sector accounts worth Rs 15bn under the RBI s 5:25 scheme. Slippages from the restructured book stood at Rs 0.9bn in Q2FY16. Headline NPAs remained stable QoQ as GNPA and NNPA remained flat at 1.38% and 0.48% respectively in Q2FY16. Management maintained its guidance of 90bps for credit costs and stressed assets formation of <Rs 57bn for FY16. AXSB s exposure to the iron & steel sector stood at 3.8% of loans, of which 65% of the exposure was to companies rated A and above. Stressed asset formation (incl. ARC sale and 5:25 restructuring) increased to Rs 44bn from Rs 24bn in Q1FY16 Fig 2 - Sharp increase in slippages QoQ (Rs bn) Slippages New Restructuring 5/25 restructuring Sale to ARC 50 45 40 35 30 25 20 15 15.4 6.9 10.3 5.7 10 3.2 3.7 7.9 6.7 11.2 4.8 1.3 5 6.3 5.4 4.0 6.8 6.2 5.9 6.3 9.1 7.1 6.1 0 3.0 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Source: Company, RCML Research 5.0 7.4 11.9 Q1FY16 18.2 15.0 4.6 5.8 Q2FY16 Other key highlights Management expects the bank s tier 1 ratio to improve by 20bps due to a change in the risk weights on housing loans. Loan growth was strong at 23% YoY largely driven by 27%/25% YoY growth in retail/ corporate loans. 27 October 2015 Page 3 of 10
Fig 3 - Loan book grows at a healthy pace of 23% (%) 25 23.2 22.2 23.5 23.1 Loan growth was strong at 23% YoY driven by retail and corporate loans 20.3 20 16.9 17.8 16.8 16.3 15 10 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Source: Company, RCML Research Despite a cut in the base rate, NIMs increased by 4bps QoQ to 3.85%, which is encouraging. As per management, cost of funds declined by 13bps QoQ due to a moderation in term deposits. Domestic NIMs stood at 4.11% and international NIMs at 1.6%. Management expects overall NIMs to remain well above its medium-term guidance of 3.5%. The bank s retail franchise continues to perform well. The share of CASA and retail term deposits has improved to 80% of deposits from 79% in Q1FY16. Fig 4 - NIMs remain strong (%) 4.0 4.0 NIMs increased by 4bps QoQ to 3.85% 3.9 3.9 3.9 3.9 3.9 3.8 3.8 3.8 3.8 3.7 3.7 3.6 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Source: Company, RCML Research 27 October 2015 Page 4 of 10
Valuations Since we expect AXSB s loan growth to remain much higher than the system for the next few years, we use the two-stage Gordon growth model to set our target price, as it captures valuations in a high-growth stage. We maintain BUY with a Sep 16 TP of Rs 750. Fig 5 - Valuation snapshot Components of the two-stage GGM model Assumptions RoE 19.6% G 15.7% R 12.8% Gn 3.9% N 10 P/BV 2.8x Sept'16 ABV 274 Restructuring hit on book value (25%) 8 Book value adjusted for restructuring 266 Target Price 750 Source: Company, RCML Research Fig 6 - AXSB - One-year forward PBV chart (X) PBV +1 Sd Mean -1 Sd 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Source: Company, RCML Research, Bloomberg 27 October 2015 Page 5 of 10
Per Share Data Y/E 31 Mar (INR) FY14A FY15A FY16E FY17E FY18E Reported EPS 26.5 31.2 36.7 44.5 54.3 Adjusted EPS 26.5 31.2 36.7 44.5 54.3 DPS 4.7 5.5 5.7 6.2 6.2 Book value 162.7 188.5 219.4 257.8 305.9 Adjusted book value 159.7 184.5 214.8 252.4 300.2 Valuation Ratios Y/E 31 Mar (x) FY14A FY15A FY16E FY17E FY18E P/E 19.7 16.7 14.2 11.7 9.6 P/BV 3.2 2.8 2.4 2.0 1.7 P/ABV 3.3 2.8 2.4 2.1 1.7 Financial Ratios Y/E 31 Mar (%) FY14A FY15A FY16E FY17E FY18E Spread Analysis Yield on advances 10.3 10.1 9.8 9.6 9.6 Yield on investments 7.3 7.4 7.1 7.0 6.9 Cost of funds 6.0 5.8 5.5 5.5 5.5 NIMs 3.4 3.5 3.4 3.4 3.4 Operating Ratios Operating cost to income 40.8 40.7 40.3 40.4 39.6 Operating expenses / Avg assets 2.2 2.2 2.1 2.1 2.0 Proportion of CASA deposits 45.0 44.8 44.5 44.5 44.5 Non-int inc / Total income 38.3 37.0 36.3 35.6 34.6 Credit / Deposit ratio 81.9 87.2 86.2 86.1 86.2 Investment / Deposit 40.4 41.0 40.1 40.0 40.0 Asset Quality and Capital Gross NPA 1.3 1.4 1.3 1.2 1.1 Net NPA 0.5 0.5 0.5 0.5 0.4 Coverage ratio 65.4 64.8 62.1 61.4 64.3 CAR 16.1 15.1 14.6 14.1 13.6 Tier I ratio 12.6 12.1 11.8 11.5 11.4 Growth Ratios Net interest income 23.6 19.0 17.9 19.7 22.1 Non-interest income 7.3 13.5 20.0 20.0 20.0 Non-interest income (ex-treasury) 118.7 104.1 118.2 118.2 118.3 Pre-provisioning profit 23.1 16.8 17.4 18.3 21.9 Net profit 20.0 18.3 18.2 21.3 22.1 Assets 12.5 20.5 20.4 20.3 20.3 Advances 16.9 22.2 21.8 22.2 22.1 Deposits 11.2 14.8 23.3 22.5 22.0 Book value per share 15.0 15.8 16.4 17.5 18.7 EPS 12.8 17.6 17.7 21.3 22.1 DuPont Analysis Y/E 31 Mar (%) FY14A FY15A FY16E FY17E FY18E Net interest income / Assets 3.3 3.4 3.3 3.3 3.3 Non-interest income / Assets 2.0 2.0 1.9 1.8 1.8 Operating expenses / Assets 2.2 2.2 2.1 2.1 2.0 Provisions / Assets 0.6 0.6 0.5 0.5 0.5 Taxes / Assets 0.9 0.9 0.8 0.8 0.9 ROA 1.7 1.7 1.7 1.7 1.7 Equity / Assets 10.1 10.2 10.5 10.8 11.0 ROAE 17.4 17.8 18.0 18.6 19.3 27 October 2015 Page 6 of 10
Profit and Loss Statement Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Interest income 3,06,412 3,54,786 4,12,666 4,95,444 6,00,150 Interest expense (1,86,895) (2,12,545) (2,44,945) (2,94,724) (3,54,988) Net interest income 1,19,516 1,42,241 1,67,721 2,00,720 2,45,162 Non-interest income 74,052 83,650 95,641 1,10,987 1,29,885 Non-interest income (ex-treasury) 70,776 73,701 87,141 1,02,987 1,21,885 Net revenue 1,93,569 2,25,892 2,63,362 3,11,707 3,75,046 Operating expenses (79,008) (92,037) (1,06,166) (1,25,812) (1,48,387) Pre-provision profits 1,14,561 1,33,854 1,57,196 1,85,895 2,26,659 Provisions & contingencies (21,070) (23,277) (27,412) (28,455) (34,410) PBT 93,490 1,10,578 1,29,785 1,57,440 1,92,249 Extraordinaries 0 0 0 0 0 Income tax (31,314) (36,999) (42,829) (51,955) (63,442) Reported PAT 62,177 73,578 86,956 1,05,485 1,28,807 Adj. net profit 62,177 73,578 86,956 1,05,485 1,28,807 Balance Sheet Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Cash in hand & bal with RBI 1,70,413 1,98,188 2,18,007 2,39,808 2,63,789 Bal with banks, money at call 1,11,974 1,62,802 84,271 89,460 95,167 Investments 11,35,484 13,23,428 15,96,127 19,47,275 23,75,675 Advances 23,00,668 28,10,830 34,28,693 41,93,446 51,22,812 Fixed assets (net) 24,102 25,143 27,379 30,140 33,551 Other assets 89,808 98,932 2,09,268 1,94,726 1,63,337 Total Assets 38,32,449 46,19,324 55,63,745 66,94,854 80,54,331 Equity capital 4,698 4,741 4,741 4,741 4,741 Reserves & surplus 0 0 0 0 0 Net worth (ex-pref capital) 3,82,205 4,46,765 5,20,161 6,11,044 7,25,248 Preference capital 0 0 0 0 0 Deposits 28,09,446 32,24,419 39,76,598 48,72,911 59,42,916 - CASA deposits 12,64,623 14,44,003 17,69,722 21,68,971 26,42,838 - Term deposits 15,44,822 17,80,416 22,06,876 27,03,940 33,00,078 Borrowings (+sub-ord bonds) 5,00,769 7,95,443 8,68,480 9,52,842 10,50,693 Other liabilities & provisions 1,40,029 1,52,697 1,98,506 2,58,057 3,35,475 Total Equity & Liabilities 38,32,449 46,19,324 55,63,745 66,94,854 80,54,331 27 October 2015 Page 7 of 10
RESEARCH TEAM ANALYST SECTOR EMAIL TELEPHONE Mihir Jhaveri Auto, Auto Ancillaries, Cement, Logistics mihir.jhaveri@religare.com +91 22 6766 3459 Siddharth Vora Auto, Auto Ancillaries, Cement, Logistics siddharth.vora@religare.com +91 22 6766 3435 Misal Singh Capital Goods, Infrastructure, Utilities misal.singh@religare.com +91 22 6766 3466 Prashant Tiwari Capital Goods, Infrastructure prashant.tiwari@religare.com +91 22 6766 3485 Gaurang Kakkad Consumer gaurang.kakkad@religare.com +91 22 6766 3470 Premal Kamdar Consumer premal.kamdar@religare.com +91 22 6766 3469 Parag Jariwala Financials parag.jariwala@religare.com +91 22 6766 3442 Vikesh Mehta Financials vikesh.mehta@religare.com +91 22 6766 3474 Rumit Dugar IT, Telecom, Media rumit.dugar@religare.com +91 22 6766 3444 Saumya Shrivastava IT, Telecom, Media saumya.shrivastava@religare.com +91 22 6766 3445 Pritesh Jani Metals pritesh.jani@religare.com +91 22 6766 3467 Arun Baid Mid-caps arun.baid@religare.com +91 22 6766 3446 Praful Bohra Pharmaceuticals praful.bohra@religare.com +91 22 6766 3463 Aarti Rao Pharmaceuticals aarti.rao@religare.com +91 22 6766 3436 Arun Aggarwal Real Estate arun.aggarwal@religare.com +91 22 6766 3440 Pawan Parakh, CFA Utilities pawan.parakh@religare.com +91 22 6766 3438 Jay Shankar Economics & Strategy shankar.jay@religare.com +91 11 3912 5109 27 October 2015 Page 8 of 10
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