Axis Bank | Value Research After the recent correction the bank's valuation has become reasonable

Axis Bank

After the recent correction the bank's valuation has become reasonable

Axis Bank is India’s third-largest private sector bank. It is reputed to be a well-managed bank.

Large branch network: It has a large network of 1,027 branches.
Fast-growing loan book: The bank has a track record of expanding its loan book faster than the industry. In Q2FY11 its loans grew at the rate of 36.5 per cent, propelled by loans to large-and mid-sized corporates.
Strong margins: The bank enjoys high net interest margin (NIM). In Q2FY11 it stood at 3.68 per cent, which was up 16 basis points (bps) y-o-y but down 3 bps q-o-q. The bank’s high NIM is the result of a strong CASA (current account savings account) ratio, which stood at 41.5 per cent in Q2FY11. This gives the bank the advantage of low cost of funds.
Fast growth in net interest income: In Q2FY11 its net interest income grew at 40.5 per cent y-o-y.
Stable fee income: In Q2FY11 the bank’s core fee income grew 18 per cent y-o-y, led by high growth in corporate banking and capital markets. With corporate loan growth reviving and the capital markets going strong, analysts at Angel Broking expect the bank’s fee income to grow at a compounded annual rate of 30 per cent per annum between FY10 and FY12.
Strong capital adequacy ratio: It has a healthy CAR of 13.7 per cent and tier-I capital of 9.8 per cent.
Purchase of Enam: The bank’s recent acquisition of the sell-side businesses (institutional and retail broking, distribution and advisory businesses) for Rs 2,067 crore in an all-stock deal has been seen as a positive for the bank due to the right strategic fit. It gives it an entry into equity capital market related businesses. The valuation of Enam’s business, according to analysts at Prabhudas Liladher, was slightly higher compared to peers, though they concede that such acquisitions usually happen at a premium of 10-20 per cent. The share-swap deal will result in a 3.3 per cent dilution of Axis’s equity base.

Lower trading gains: In Q2FY11, the bank’s trading gains stood at Rs 108.4 crore, which was down (-)51.6 per cent y-o-y.
Rising operating expenditure: In Q2FY11 its operating expenses were up 27.8 per cent y-o-y, chiefly on account of costs arising out of expansion of branch and ATM network and higher wages.
High provision expenses: At Rs 321 crore, the bank’s NPA provisions remained high sequentially. It was up 5.6 per cent q-o-q (though 24.1 per cent lower y-o-y). However, analysts do not see this as a cause for much concern. As the loan book grows, they say, the amount of provisioning is bound to increase.

Slippage ratio in Q2FY11 was 1.7 per cent, marginally higher than the 1.6 per cent in Q1FY11. However, the slippage rate has been declining — it stood at 2.2 per cent at the end of FY10.

Growth drivers
High loan growth: Analysts expect the bank to clock a loan growth rate of 25 per cent in FY11 as a whole.
Network expansion: The bank aims to add 200 branches in FY11. This is expected to lower its cost of funds and help it maintain its net interest margin (NIM).

Axis Bank is currently trading at a trailing P/B ratio of 3.3. This is exactly at par with its five-year median trailing PB ratio of 3.3. Investors should gradually accumulate this fundamentally sound stock whenever its price dips.

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