We recently met with Hemant Kaul, ED - Retail Banking, Axis Bank to get an update on the bank’s strategy and future outlook in an uncertain macro environment.
We returned positive to recognize its strategic response to recent macro economic developments.
The management has reaffirmed that its loan growth would slowdown inline with the systemic growth.
However, it is likely to grow 4-5% faster than the system leading to some gain in its market share. Therefore, we have revised our loan growth estimates downward for FY09E as well as FY10E.
The NIM declined to 3.12% in Q3FY09 from 3.51% in the Q2FY09 and from 3.93% in Q3FY08 on back of rising cost of funds on account of rising interest rates on deposits during October and November and also some pressure felt in the growth of low cost deposits (CASA).
Although there is some pressure from falling asset yields, both from competitive pricing in the system and its conscious decision to focus more on less risky assets, the recent cut in policy rates is likely to partly offset these factors.
In our view, its margins are likely to stabilize around 3.0%, going forward. Another positive development in recent times is the sharp decline in bulk deposit rates which is likely to help the whole banking system.
Outlook and valuation
We have slightly tweaked our earning estimates for FY09E and FY10E and now expect earnings to grow at 34.3% and balance sheet size at 21.2% CAGR over FY08-10.
We expect RoA to remain high at 1.25%-1.40% and RoE in the range of 17-18% during FY08-10E. At the current market price of Rs.374, the stock is trading at 6.9x its FY10E earnings and 1.2x its FY10E ABV.
We now expect net profit for FY09E and FY10E to be Rs16.81 billion and Rs19.31 billion, respectively and an EPS of Rs.46.8 and Rs.53.8 for FY09E and FY10E, respectively. The adjusted book value for FY09E and FY10E are forecast at Rs266.4 and Rs301.1, respectively.
We maintain a BUY rating on the stock with a target price of Rs590 (earlier Rs645) based on P/ABV of 2.0x its FY10E adjusted book value and P/E of 11.0x its FY10E earnings. In the short term the stock may move in line with international trends.