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AXIS BANK
Game of divergence and convergence
India Equity Research| Banking and Financial Services
Dismal asset quality (multi-fold rise in slippages) took the sheen off of an
COMPANYNAME
otherwise operationally stable Q2FY18 - >16% loan growth and sustained
EDELWEISS 4D RATINGS
Dil. EPS (INR) 1.8 1.3 35.3 5.4 (66.9) 15.4 18.8 36.5 Malav Simaria
Adj. BV (INR) 207.6 215.2 244.0 +91 22 6623 3357
malav.simaria@edelweissfin.com
Price/ Adj book (x) 2.5 2.4 2.1
Price/ Earnings (x) 33.4 27.3 14.1 October 17, 2017
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Banking and Financial Services
Within large corporate, BB and below rated pool stands at INR158bn (SMA II will also be
at similar levels). Of this, BB and below rated corporates, top 5 sectors contribute ~66%.
The top-5 sectors are: a) power (~33%); b) infra construction (~11%); c) iron & steel
(~11%); d) roads (~8%); and e) mining (~5%). Non-fund based outstanding of this pool is
closer to INR40bn.
Chart 1: Watchlist (WL) comes down to INR60.5bn Chart 2: Sectoral composition of watch list
250.0 80.0
226.3
64
203.0 64.0
210.0
48.0
(%)
170.0
(INR bn)
32.0
137.9
130.0 16.0 11 7 6
110.9 5 4 2 1
94.4 0.0
90.0 79.4
Engineering
Telecommunicati
Iron & Steel
Infra. Cons.
on Services
Infra.
50.0
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Chart 3: WL + Restructuring dispensations at 2.5% Chart 4: Low rated corporate portfolio (BB and below)
300.0 325.0
268.0
274.1
250.0 275.0
195.4 219.3
200.0 225.0 207.9
(INR bn)
(INR bn)
196.9 194.6
161.9
145.0
150.0 130.3 175.0 158.2
100.9
100.0 125.0
50.0 75.0
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Source: Company
Steel 1 11.3
Power 3 16.9
IT/ITES 1 11.4
Others 4 9.1
Total 9 48.7
Source: Company
Table 10: Retail growth driven by personal, credit cards and auto loans
(INR mn) Q2FY18 Q2FY17 Growth YoY
Non-schematic loans & others 2,02,682 1,49,284 35.8
Loan against Property 1,47,405 1,34,356 9.7
Personal Loans & Credit Cards 2,39,533 1,79,141 33.7
Auto Loans 1,84,256 1,34,356 37.1
Retail agricultural 2,76,384 2,23,926 23.4
Housing loan 7,92,301 6,71,778 17.9
Total retail 18,42,560 14,92,840 23.4
Source: Company
Ratios
NII/GII (%) 40.4 40.5 41.8 41.1 41.9 44.4
Cost/income (%) 47.0 41.9 43.7 45.3 44.3 42.4
Provisions / PPOP 83.1 88.4 54.6 67.9 62.2 38.9
Tax rate (%) 32.1 33.2 33.0 32.8 32.0 32.0
Bal. sheet data (INRbn)
Advances 4,102 3,532 16.1 3,855 6.4 4,102 4,328 5,150
Deposits 4,164 3,802 9.5 3,937 5.8 4,164 4,765 5,712
Investments 1,442 1,246 15.7 1,418 1.6 1,442 1,467 1,634
Asset quality
Gross NPA 274,023 163,787 67.3 220,309 24.4 274,023 289,025 327,095
Gross NPA (%) 5.9 4.2 5.0 5.9 6.1 5.8
Net NPA 145,023 77,612 86.9 97,660 48.5 145,023 101,975 98,026
Net NPA (%) 3.1 2.0 2.3 3.1 2.4 1.9
Provision coverage (%) 47.1 52.6 55.7 47.1 64.7 70.0
B/V per share (INR) 245.0 272.7
Adj book value / share 215.2 244.0
Price/ Adj. book (x) 2.4 2.1
Price/ Earnings 27.3 14.1
Change in Estimates
FY18E FY19E
New Old % change New Old % change Comments
NII 192,028 194,374 (1.2) 224,126 228,568 (1.9)
PPOP 174,723 185,108 (5.6) 210,455 216,739 (2.9)
Provisions 108,599 89,059 21.9 81,942 67,290 21.8 Factoring in higher than anticipated
credit cost, largely arriving from
deviation in RBIs annual inspection
PAT 44,963 65,312 (31.2) 87,388 101,625 (14.0)
NIMs 3.3 3.3 3.3 3.4
Of these 9 accounts 8 are consortium account and axis is lead in 1 account (power
segment). The bank was sole banker in IT/ ITES account, bank stated that a significant
part of this account is expected to get repaid soon, post a business sale transaction, for
which a binding agreement is already in place.
With respect to RBIs referred list under IBC : The Bank has total loan outstanding of
INR70.4bn against the IBC accounts mentioned in the two lists referred by RBI.
Incremental provisions of INR5.05bn on these select accounts have been made in
Q2FY18 taking the total provisioning to INR38.86bn with an improved provision
coverage ratio at 55%. For the full pool perspective the bank roughly estimates the
haircut of 60%, and the credit cost assumption factions in this haircut.
The credit cost for H1FY18 has been 256bps that includes 73 bps on account of RBS
impact and 14bps on account of additional provisioning done for IBC accounts. The
divergence related credit cost is expected to consume ~40 bps for FY18. Incorporating
this, and after evaluation of the underlying credit trends of the rest of the book, the
credit cost guidance for FY18 is revised upwards to 220-260 bps (from 175-225 bps).
PCR is expected to be maintained in the 60 to 65% range, the bank has also baked in
some recovery in these accounts (having said that lot depends on how the classification
pans out in other banks)
Within the large corporate the BB and below rated pool stands at INR158bn (SMA II
will also will be at similar levels). Of this BB and below rates , top 5 sectors contribute
As on Q2FY18, the power NPLs stood at INR33bn and the provisions held against these
stood at 45%.
Divergence post RBIs AQR exercise has been coming down, just to state for Axis bank
divergence was INR100bn earlier which was INR50bn for this review.
Entire contingency provisions (INR2.6bn) has been utilized this quarter
The Restructuring (including all dispensations of Restructured Accounts, SDR, S4A and
5:25, etc) stands at 1.6% of book (INR73.9bn).
SRs outstanding : INR30bn
GNPLs compositions: INR50bn ( retail + SME, with 50% split each) and INR220bn
corporate GNPLs.
Loan growth momentum is back largely broad based in nature. Corporate growth
(10% YoY) was higher driven by working capital (36% YoY growth) demand . SME
growth has also shown signs of picking up (15% YoY). Retail growth continues to
maintain momentum (up > 23% YoY, now form 45% of the loans).
The growth in the retail book is more diversified now with growth picking up in
Personal loans/credit cards/ Small business banking segment. Thus contribution of
home loans has come down to 43% ( from 54% in FY13). The growth in the new
business drivers viz. Education loans of > 115%, Small business banking grew > 79%. The
growth in the retail portfolio is driven by both deepening of relationship and expansion
of branches.
85% of the incremental corporate credit is towards A and better rated companies. On
outstanding basis 70% of corporate exposure are A rated and above
NIMs impact due to higher slippages (including RBIs divergence) is 6bps (of this 4bps
was on account of RBI divergence accounts). NIMs during the quarter at 3.45% with
domestic NIMs of 3.71% (versus 3.85% in previous quarters). The management
maintained that they expect NIMs for full year FY18 to be lower than FY17 by 20bps.
Management sees some transient impact due to implementation of GST. But believes
that GST will benefit the SME sector in longer terms as it will improve transparency
significantly which will further help in better risk evaluation and loan pricing.
Other highlights
Deposit another excellent quarter , CASA grew > 24% YoY and the CASA ratio came in
at 50%, CASA on daily average basis was 46%.
Have adequate capital to grow for the opportunity available. At the basic the bank will
try to maintain CET atleast 150bps over the regulatory requirement (currently CET
requirement stands at 8.8%).
Retail fee grew 23% and now form 48% of fees. Card fee continues to growth stronger
(up 36% YoY)
Expect opex growth to continue to be lower in H2FY18.
Expect that by end of FY18, only 10% of book would be base rate linked.
Telecom is not part of top 10 industry segment, the exposure is 1% (fund based
exposure is INR25bn) and there is nothing material in stressed pool from this segment.
Non-fund based exposure is INR80bn ( fairly short term and to the top 3 names in the
segment).
Another 100 branches were opened during the quarter, but the shape and form has
changed. The branch model will continue to be a essential for distribution thus
investment on these will continue.
RWA : INR4.96tn
Subidiary performance:
o Axis Finance: Loan book grew 65% YoY at INR53bn (IPO finance, LAS has
contributed to the growth). The products which are difficult to operate from banks
platform will be rolled out from this subsidiary.
o Axis Securities: Cumulative client base rose to 1.59mn, PAT grew 44%
o Axis AMC: 46% YoY growth in AAUM, PAR growth > 52% H1FY18
Gross slippages during the quarter was INR35.11bn, with GNPLs of 5.03%. Corporate
slippages during the quarter was INR23.17bn. Of the corporate slippages outside of
watch-list large part is driven by 4 sectors viz. I&S, Infra, construction , power. Net
retail slippages at 7.58bn and Net SME slippages at INR2.28bn.
The non-corporate slippages were also higher during the quarter, largely driven by
retail segment following slippages in the agri segments (seasonal plus effect of farm
loan waiver)
Credit cost during the quarter was 1.95% (well within the guidance of 1.75-2.25% for
the full year FY18). Management continued to maintain the guidance expect credit cost
to revert to longer term averages by FY19.
No impact in GNPLs and provisions pertaining to accounts that was refereed to NCLTs.
Bank expects that some provisions will be made towards these accounts from Q2FY18
(amortised over 3 quarters), having said that these are already captured into the
estimates for full year credit cost guidance.
The Bank has made enhanced standard asset provisioning at 1% on four sectors - power,
infrastructure construction, iron and steel, and telecommunication services. Against
these sectors, an additional provision of INR1.84bn has been made during the quarter.
Little bit of stress seen in power portfolio outside of the watchlist. Overall power
portfolio at INR200bn of which INR55bn is in watchlist. Having said that the
management stated that these outside stress has already been factored in the credit
cost guidance.
Power accounts in watchlist are lumpy, so when they slip there will be some lumpyness
and will not be evenly spread, The cases are at different stages of resolution (1 account
is SDR) and will evolve over later part of year (so some .
Contingent provisions INR2.60bn (havent used anything this quarter, large part of
this largely towards power sector)
All the divergence pertaining to FY16 was already addressed in FY17, thus there was no
impact because of divergence.
Loan growth during the quarter was >11% largely driven by retail segment ( up > 22%
YoY), SME growth of > 10% and corporate advance growth of > 3% YoY (but working
capital loans grew > 23%, thus suggesting de-growth in the term loans). Management
expect corporate loan growth to trace back to double digit growths over the course of
the year.
The growth in the retail book is more diversified now with growth picking up in
Personal loans/credit cards/ Small business banking segment. Thus contribution of
home loans has come down to 44% ( from 44% in FY13). The growth in the new
business drivers viz. MFI grew 16%, Education loans of > 140%, Small business banking
grew > 80%. The growth in the retail portfolio is driven by both deepening of
relationship and expansion of branches.
Management sees some transient impact due to implementation of GST. But believes
that GST will benefit the SME sector in longer terms as it will improve transparency
significantly which will further help in better risk evaluation and loan pricing.
Other highlights
The guidelines of higher risk weights on unrated exposure , has not been implemented
(for the industry as a whole)
NIMs during the quarter at 3.63% with domestic NIMs of 3.85% (versus 4.11% in
previous quarters). The management maintained that they expect NIMs for full year
FY18 to be lower than FY17 by 20bps.
Raised INR35bn of T-I and INR50bn of Tier II bonds during the quarter. Because of this
the need for deposit was lower and thus whole sale deposits has come down
( wholesale TD has dipped 7% YoY)
< 15% of the power book is renewable ( all of this is standard)
Opex growth during the quarter was 19% (3 percentage points are one-off , bonus
entitlement towards some set of contracted employees were increased) ,
management expect these to normalise over course of the year and maintains opex
growth guidance for the full year at low to mid teens growth.
Impact on the capital because of IND-AS could be to the tune of 50bps.
RWA- INR4.84tn
Company Description
Axis Bank is the third-largest private sector bank in India in terms of asset size, with a
balance sheet of >INR6.3tn. It has a network of over 3,485 branches and extension counters
across the country. The bank earns substantial fee income from transaction and merchant
banking activities.
Investment Theme
Continued disappointment from outside watch-list slippages has shaken investors
confidence, as sanctity of watch-list claims stands challenged. Not only was stress creation
been much higher than anticipated, but the road to recovery is also expected to be arduous
given: a) 4.2% of the book in un-recognised stress (watch-list + RBIs restructuring
dispensation + below-investment grade corporate rating); b) Slower resolutions; and c)
Pressure on NIMs, which will keep earnings recovery modest in near term. Consequently,
we downgrade the stock to HOLD from BUY.
Key Risks
Deterioration of macro environment can result in even higher slippages and slow down
business growth.
The retail segment of the bank has been strengthening, any blip in that may lead to further
weakening of the earning profile.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E
Macro Interest income 409,880 445,422 458,160 504,943
GDP(Y-o-Y %) 7.9 6.6 6.8 7.4 Interest expended 241,551 264,490 266,132 280,818
Inflation (Avg) 4.9 4.5 4.0 4.5 Net interest income 168,330 180,931 192,028 224,126
Repo rate (exit rate) 6.8 6.3 5.8 5.8 Non interest income 93,715 116,913 121,746 141,513
USD/INR (Avg) 65.5 67.1 65.0 66.0 - Fee & forex income 79,826 78,804 89,969 104,364
Sector - Misc. income 3,640 4,108 6,778 9,150
Credit growth 9.3 9.0 12.0 14.0 - Investment profits 10,249 34,002 25,000 28,000
Deposit growth 8.6 14.0 12.0 13.0 Net revenue 262,044 297,844 313,774 365,639
CRR 4.0 4.0 4.0 4.0 Operating expense 101,008 121,999 139,051 155,184
SLR 20.8 20.0 20.0 20.0 - Employee exp 33,760 38,919 46,319 51,026
G-sec yield 7.5 6.5 6.5 6.5 - Other opex 67,248 83,081 92,732 104,158
Company Preprovision profit 161,036 175,845 174,723 210,455
Op. metric assump. (%) Provisions 37,099 121,170 108,599 81,942
Yield on advances 9.7 9.3 8.6 8.2 Loan loss provisions 38,005 107,192 107,599 80,942
Yield on investments 7.4 7.7 7.1 6.5 Investment depreciation 840 2,390 - -
Yield on asset 8.7 8.5 7.8 7.5 Other provisions (1,746) 11,588 1,000 1,000
Cost of funds 5.4 5.2 4.6 4.2 Profit Before Tax 123,938 54,676 66,124 128,513
Net interest margins 3.6 3.5 3.3 3.3 Less: Provision for Tax 41,701 17,883 21,160 41,125
Cost of deposits 5.4 5.0 4.4 4.0 Profit After Tax 82,237 36,793 44,963 87,388
Cost of borrowings 7.3 7.0 6.6 6.2 Shares o /s (mn) 2,383 2,395 2,395 2,395
Spread 3.3 3.3 3.2 3.3 Adj. Diluted EPS (INR) 34.5 15.4 18.8 36.5
Tax rate (%) 33.6 32.7 32.0 32.0 Dividend per share (DPS) 5.0 5.0 6.0 8.0
Balance sheet assumption (%) Dividend Payout Ratio(%) - 35.9 35.2 24.2
Credit growth 18.1 10.5 15.9 18.1
Deposit growth 11.0 15.8 15.0 19.9 Growth ratios (%)
SLR ratio 19.0 17.9 18.0 17.5 Year to March FY16 FY17 FY18E FY19E
Low-cost deposits 47.3 51.4 52.7 53.4 NII growth 18.3 7.5 6.1 16.7
Gross NPA ratio 1.7 5.3 6.1 5.8 Fees growth 12.3 (1.3) 14.2 16.0
Net NPA ratio 0.7 2.3 2.4 1.9 Opex growth 9.7 20.8 14.0 11.6
Net NPA / Equity 4.7 15.5 17.4 15.0 PPOP growth 21.7 (5.9) 5.6 21.9
Capital adequacy 15.3 14.9 14.6 14.2 PPP growth 20.3 9.2 (0.6) 20.5
Incremental slippage 2.4 6.0 5.2 2.8 Provisions growth 59.3 226.6 (10.4) (24.5)
Provision coverage 58.6 59.5 64.7 70.0 Adjusted Profit 11.8 (55.3) 22.2 94.4
Operating ratios
Year to March FY16 FY17 FY18E FY19E
Yield on advances 9.7 9.3 8.6 8.2
Yield on investments 7.4 7.7 7.1 6.5
Yield on assets 8.7 8.5 7.8 7.5
Cost of funds 5.4 5.2 4.6 4.2
Net interest margins 3.6 3.5 3.3 3.3
Cost of deposits 5.4 5.0 4.4 4.0
Cost of borrowings 7.3 7.0 6.6 6.2
Spread 3.3 3.3 3.2 3.3
Cost-income 38.5 41.0 44.3 42.4
Tax rate 33.6 32.7 32.0 32.0
Additional Data
Directors Data
Sanjiv Misra Director & Non Executive Chairman Shikha Sharma Managing Director & CEO
V. Srinivasan Deputy Managing Director Rajiv Anand Executive Director
Rajesh Dahiya Executive Director Prasad Menon Director
Samir K. Barua Director Som Mittal Director
Rohit Bhagat Director Usha Sangwan Director
S. Vishvanathan Director Rakesh Makhija Director
Ketaki Bhagwati Director B. Babu Rao Director
Holding - Top 10
Perc. Holding Perc. Holding
BNY Mellon 5.82 Cinnamon Capital 4.32
BlackRock 2.57 Vanguard Group 2.45
Genesis Indian Investment 1.99 ICICI Prudential Asset Management 1.79
GIC 1.68 Abu Dhabi Investment Authority 1.63
Lazard 1.62 Templeton Asset Management 1.44
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
15 May 2017 National Insurance Company Limited Sell 1183488.00
02 May 2017 United India Insurance Company Limited Sell 15000.00
18 Apr 2017 General Insurance Corporation of India Buy 200000.00
18 Apr 2017 General Insurance Corporation of India Sell 335000.00
17 Apr 2017 United India Insurance Company Limited Sell 15000.00
*in last one year
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Sector return is market cap weighted average return for the coverage universe
within the sector
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES
Aditya Narain LIMITED, ou=HEAD RESEARCH,
cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27
990f20bf0213f69235fc3f1bcd0fa1c300927
Head of Research
NARAIN
92c20, postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a
8e0c89e548e5001b4f8141cf423fd58c07b
aditya.narain@edelweissfin.com 02, st=Maharashtra
Date: 2017.10.18 01:29:30 +05'30'
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594
575
297
540
149 505
(INR)
- 470
Apr-14
Sep-14
Feb-14
Mar-14
Jun-14
Dec-14
Jul-14
Aug-14
Oct-14
Nov-14
May-14
Jan-14
435
400
Apr-17
Feb-17
Sep-17
Mar-17
Jun-17
Dec-16
Jul-17
Aug-17
Oct-16
Oct-17
Nov-16
May-17
Jan-17
Axis Bank
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