Axis Bank - BUY

Investors with a more than a one-year horizon can consider adding the Axis Bank stock to their portfolio.

The bank’s stock has been beaten down amidst concerns about asset quality and a slowdown in advances growth, but we believe these concerns are overdone.

We reiterate a ‘buy’ on the stock considering the bank’s high proportion of investment grade advances, apart from superior net interest margins and potential for growth in core fee income.

At the current market price of Rs 406, the Axis Bank stock is trading at 10.3 times its trailing 12-month earnings and 1.5 times its September 30 book value. This is well below the bank’s peak valuation of 43 times earnings and 5 times book value.
Top performer

Historically, Axis Bank has been among the top performers in the banking space. The net profit has grown at 40 per cent compounded annually in last 4 years.

The first half saw net profit growth of 82 per cent, helped primarily by net interest income growth of 71 per cent. Fee income for Axis Bank now covers more than 90 per cent of the operating expenses.

Net interest margin at 3.43 per cent has slightly moderated, but remains high relative to peers and is helped by a high proportion of low cost deposits.
Points of concern

The bank’s exposure to commercial real estate (9 per cent), textiles (6.5 per cent) and gems and jewellery (2.5 per cent) could be the key points of concern on asset quality. However, with 84 per cent of the corporate advances and 78 per cent of SME advances being investment rated, the advances book appears fairly protected.

The NPAs of the bank are currently among the lowest in the industry, with net NPA/advances at 0.43 per cent; this may remain superior to that of other banks even in the event of slippages. The capital adequacy ratio is at comfortable 12.2 per cent.
Outlook

The key risks to earnings arise from a possible slowdown in SME and retail advances in coming quarters, even as the bank makes a conscious attempt to go slow on such advances. There is also the possibility of slippages in credit card, personal loan and other retail segments, in line with peers. But this may be addressed by the bank lowering lending rates in the coming months.

A write-back of provisions on the bond portfolio may help improve profitability over the next quarter. Though the bank has to provide for the future slippages, the lowering of standard asset provisioning by the Reserve Bank of India will help it in limiting the NPA provisioning.