April , 2019
Third largest private sector bank
15:34 pm

Rajesh Agarwal

Company Background

Axis Bank Ltd. (Axis) is the third largest private sector bank in India and one of the first new generation banks to have begun operation in 1994. Axis Bank Ltd. has been promoted by the largest and the best Financial Institution of the country, UTI. The Bank offers the entire spectrum of financial services which includes Treasury, Retail Banking, Corporate/Wholesale Banking and Other Banking Business services to customer segments covering Large and Mid-Corporates, MSME, Agriculture and Retail Businesses. Its Treasury operations include investments in sovereign and corporate debt, equity and mutual funds, trading operations, derivative trading and foreign exchange operations on the proprietary account and for customers.

Investment Rationale

l The Bank has a large footprint of 3,964 domestic branches (including extension counters) with 12,705 ATMs & 3,548 cash recyclers spread across the country as on December 31, 2018.

l  The overseas operations of the Bank are spread over ten international offices with branches at Singapore, Hong Kong, Dubai (at the DIFC), Colombo and Shanghai. The international offices focus on corporate lending, trade finance, syndication, investment banking and liability businesses.

l  Axis has filled up strategic product gaps and developed key subsidiary businesses to become a full service bank and offer the customers all products under one Axis umbrella. It has eleven unlisted subsidiary companies and one step down subsidiary. It is the only bank with two Fintech companies as subsidiaries, one in the payments space and the other in the digital invoice discounting space.

l For Q3FY19 Axis’s Net Profit increased robustly by 131% YOY to Rs. 1,681 crore and Operating profit grew by 43% YOY. For 9MFY19 Net profit & Operating Profit both grew by 29% & 17% respectively.

l  A 22% rise in interest expenses saw net interest income (NII) rise 18% to Rs. 5,604 crore. Other income grew by 54% to Rs. 4,001 crore mainly driven by recoveries in written-off accounts, fees income and gains on sale of strategic investments. NIM for Q3FY19 was 3.47%, up from 3.36% in Q2FY19.

l Overall deposit growth for the Bank during Q3 stood at 26% YoY. On quarterly average balance (QAB) basis, CASA and Retail Term Deposits put together recorded a growth of 17% YoY and constituted 80% of total deposits.

l Under Basel III, the Capital Adequacy Ratio (CAR) and Tier I CAR as on 31st December 2018 was 16.40% and 13.07% respectively and thus the Bank remains well capitalized to pursue growth opportunities.

l Axis’s Gross NPA and Net NPA levels were 5.75% and 2.36% respectively in Q3FY19, as against 5.96% and 2.54% respectively as on Q2FY19.

l Gross slippages for the quarter stood at Rs. 3,746 crore where 98% of corporate slippages came from the BB & Below pool (accounts that are under any stress).

l Axis Bank’s top management provided deep insights into the bank’s strategy to achieve aspired RoE of 18% over the next

3 years along with capital infusion with a clear strategy based on the pillars of Growth-Profitability-Sustainability.

Recommendation – In order to deliver continued excellence

Axis is strengthening its core which is around Technology, Analytics, Operations or Process, investment in risk management architecture and finally reorienting the organizational structure. Axis Bank as a franchise is well capitalized, digital ready and uniquely positioned to leverage the competitive and market share dynamics of the industry. With a strong management team the Bank is poised to report strong growth in coming quarters. Thus, we recommend a BUY on the stock with a Target Price of RS. 875, appreciation of ~14% from the current level with the medium to long term investment horizon.

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