Axis Bank Ltd. share price target

We believe that the de-risked loan portfolio, a competent and young CEO (one of the youngest amongst large banks) with a very credible track record at HDFC Life, along with reversal in provisioning cycle will drive sharp expansion in valuation multiples for AXSB over the next few years. A decade ago, Corporate/SME segments accounted for ~70% of total loans. Currently, the share of these two segments has steadily declined to ~50%, as the bank is focused on retail assets and has added significant granularity to its loan book. The growth in retail assets was driven by smaller ticket sized loans such as vehicle loans, personal loans and credit cards, even as AXSB consciously slowed growing its housing portfolio owing to lower profitability in the segment. AXSB has been focusing on the cross-selling strategy with ~96%/93% of credit cards/personal loans being extended to existing customers.

Retail slippages remains a pain point; unfavorable risk reward: We note that we had a cautious outlook on the stock as we had built in risk of consolidation on growth post the transition given that we assess non-corporate slippages (retail/SME) to be elevated.

Axis Bank reported a stellar set of numbers Asset quality improved with slippages at | 3746 crore vs. | 2777 in Q2FY19 & | 4428 crore in Q2FY19. Corporate slippages were at | 1,887 crore, of which ~98% came from BB & below account. The bank's BB & below rated book is continuously declining to | 7645 crore; 1.4% of gross customer assets vs. 7.3% peak in June 2016 Exposure to IL&FS; stays lower at | 825 crore (| 238 fund based). Divergence from RBI AQR for March 2018 was | 225 crore pertaining...

Maintain BUY with a revised TP of Rs 743 (2.5x Dec-20E ABV of Rs 297). Axis remains our top pick among larger banks. AXSBs 3Q vindicates our belief in its sustainable recovery, driven by a transformational leader. The evidence is broadbased: (1) Uptick in domestic loan growth: 18% vs. 15% in 2Q, (2) NIM expansion 11bps QoQ, (3) Fee growth of 10% QoQ led by retail, (4) Stable asset quality, with slippages mostly confined to the rapidly falling BB and below portfolio, and (5) Rising coverage, now at 75%.

Stressed assets (BB & below + SR + restructuring) book has declined by another 30bps during the quarter to 2.4% of loan book. Slippages are tad higher at 3.2% as against 2.4% last quarter, attributable to higher slippage in watch list. Loan growth moderates at 13%, driven by retail and SME segment. NII growth of 18% is 5% ahead of our estimates. On the back of recovery from written off accounts of Rs10bn, PAT is 35% ahead of our estimate. We have retained our ACCUMULATE rating marginally...

Axis Bank's net interest income (NII) grew at a healthy pace of 15% YoY (in line with our expectation) mainly due to 11 bps YoY increase in net interest margin (NIM) to 3.5%. With better pricing power and lower interest income reversals, we expect NIM to improve further by 10-15 bps to 3.6% over FY18-FY20E. Other income grew by 4% YoY as the bank reported lower trading income (64% YoY). Fee income growth was modest at 9% YoY wherein retail fee grew at a strong pace of 23% YoY, but corporate fee declined by 37% YoY. Though provisions declined by 7% YoY, we expect it to remain elevated in H2FY19 as the bank continues to provide further for its stressed pool in FY19. Net profit jumped by 83% YoY mainly on the back of the low base of Q2FY18. Going...

Relative valuation premium amidst transition & higher non-corporate slippages: The quarter is marked by much lower slippages in the corporate segment; however we sense Retail/SME slippages continuing to remain high.

Axis Bank registered an 18% rise in Interest income to Rs 13280.99 crore in the quarter ended September 2018. A 20% rise in interest expenses to Rs 8048.88 crore saw net interest income (NII) rise 15% to Rs 5232.11 crore....

Significant improvement is seen on asset quality. Slippages have eased to 2.4% as against 3.9% last quarter. Similarly GNPA as well as provision coverage has improved sequentially. Loan growth is moderate at 11%, driven by retail and SME segment. NII growth of 15% is in line with our expectations; whereas PAT growth of 83% is 4% ahead of our estimates. We have cut our slippage estimate by 100bps to 3% for FY19. We have raised our ABV estimates by 3%/1% for FY19/FY20. Given the recent price correction, we upgrade our rating to ACCUMULATE marginally increasing our TP to Rs665 (Rs655...