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Axis Bank – Higher NIM, trading income

July 14, 2009

Axis reported 70% growth in net profits in 1Q09 to Rs5.6bn, which came ahead of Reuters consensus. NIM and trading income surprised positively. But higher-than-anticipated loan restructuring in 1Q was a negative surprise – Axis restructured Rs10bn of loans in 1Q09 (vs. Rs6.6bn in 4Q08). The key issue in our view is whether the loan restructuring cycle is likely to end soon.

Existing investors can hold to the stock while Fresh exposure can be taken on corrections. Key investment arguments include: 1) continued growth momentum, resilient profitability/balance sheet profile; 2) an underappreciated deposit franchise and diversified revenue streams. Valuation that is below mid-cycle levels (2010E P/B of 1.9X vs. 5-year median P/B of 2.2X). The market may be concerned about the higher number of restructured loans in 1Q09.

EPS expectations are Rs 63, 77 and 96 for FY10, FY11 and FY12 respectively.

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