Axis ups the ante on retail loans, Casa

Plans to diversify loan book, focus on efficiency will help the bank maintain high profitable growth.

Axis Bank, India’s third-largest private sector bank by assets, last week announced plans to increase lending to the retail segment, indicating a shift of focus from corporate lending. Notably, this move will improve the bank’s operating metrics over the next two-three years. Higher retail exposure will also boost return ratios (on equity and assets) of the bank in the longer term.

While Axis has managed to grow profitably over the last five years, it has been delivering healthy financial performance even in the weakening macro-economic situation. Analysts at Sharekhan estimate the bank’s earnings to grow at a compounded annual rate of 19 per cent over FY11-13.

STABLE FINANCIALS Loan growth moderating, but higher than overall credit growth
In Rs  crore	FY11	FY12E
Net interest income	6,563	7,968
Y-o-Y change (%)	31.1	21.4
Total Income	11,195	13,475
Y-o-Y change (%)	24.94	20.4
Net interest margin (%)	3.3	3.2
Y-o-Y change (bps)	-	-10
Net profit	3,389	4,079
Y-o-Y change (%)	34.9	20.4
P/BV (x)	2.3	1.9
ROE (%)	19.3	19.7
ROA (%)	1.6	1.5
E: Estimated                                       Source: Analysts reports

With market sentiments subdued, stock valuations have also fallen.

HOW THE TOP PRIVATE BANKS COMPARE
Loan portfolio (%)	Axis Bank	ICICI Bank	HDFC Bank
Retail	20.9	35.0	49.3
Corporate	56.7	24.2	50.7
SME	14.8	4.7	-
Rural /Agriculture	7.6	7.5	-
International	-	28.6	-
Source: Companies; All figures as on September 30, 2011

The stock is trading well below its historical average price/book value ratio of 2.4 times, while its discount versus its larger peer, HDFC Bank, has widened significantly to 48 per cent currently, based on FY12 estimates. Given the business growth outlook and valuations, analysts are bullish on the stock.

Going forward, Axis Bank’s net interest margins (or NIMs) are expected to range 3.25-3.45 per cent. While the current Tier-I capital ratio is comfortable at 9.33 per cent, the bank plans to raise capital in the first half of FY13, which will help support future growth.

Boost to returns
Axis has so far focused on corporate loans for growth. It now plans to diversify the loan book and increase retail penetration. The bank aims to raise the share of retail in its loan book to 30 per cent over the next three years from 21 per cent. Higher retail exposure will boost the return ratios and should also ease asset quality pressure. This is because the bank is focussing to grow housing as well as vehicle loans, which typically carry low default risk.

The bank is also looking to raise its current account and savings account (Casa) ratio from the current 42 per cent. Casa is low cost deposit, which should help margins.

The move will also bring it at par with its larger private sector peers such as HDFC Bank and ICICI Bank, which have higher exposure to retail banking.

The success of this strategy will be contingent on how the rate cycle pans out, as demand from individual borrowers is sensitive to interest rates.

Experts believe the rates will remain at these elevated levels for at least three to four months and cuts could come in only around April 2011. Thus, demand from retail segment is likely to remain subdued in the near-term.

Concerns priced in
Despite the tough macro environment, the bank has maintained asset quality. However, the management is hawkish on this front, given the challenging economic environment.

While analysts believe the power sector, as well as small and medium enterprises (SME) and mid-corporate segments, could exert some pressure on asset quality in the near term, these concerns are priced adequately in stock valuations.

Vaibhav Agarwal, analyst at Angel Broking, says, “We believe asset quality concerns for Axis Bank are overdone. Current valuations adequately capture asset quality risks. Axis Bank is one of our top picks in this sector and we expect around 30 per cent upsides from current levels in the stock price.”

While FY12 loan growth is likely to tone down for Axis Bank to 22-24 per cent, it is still expected to be five-six percentage points higher than the systemic loan growth, believe analysts at Antique Stock Broking. Stronger loan growth is also likely to offset some of the pressure on account of higher provisioning, if any.

Among key sectors contributing to this growth will be retail, agriculture, infrastructure and SME. On the other hand, the bank is going slow at increasing its branch network in a bid to increase operational efficiency.

It will be adding up to 250 branches in FY12 as against 400 in FY11, while leveraging on its existing branch network to fuel growth.