RESULT UPDATE

AXIS BANK
Game of divergence and convergence
India Equity Research| Banking and Financial Services

Dismal asset quality (multi-fold rise in slippages) took the sheen off of an
COMPANYNAME
otherwise operationally stable Q2FY18 - >16% loan growth and sustained
EDELWEISS 4D RATINGS

Absolute Rating HOLD

momentum in retail franchise. Critically, slippage was not from up-fronting
Rating Relative to Sector Performer
of stress from the watch-list, but due to divergence (pertaining to RBIs Risk Rating Relative to Sector Medium
annual inspection) and higher non watch-list slippages. Continued Sector Relative to Market Overweight
COMPANYNAME
disappointment from outside watch-list slippages has rattled investors
confidence, as sanctity of watch-list claims stands challenged. Not only was
stress creation been much higher than anticipated, but the road to recovery MARKET DATA (R: AXBK.BO, B: AXSB IN)
is also expected to be arduous given: a) 4.3% of the book in un-recognised CMP : INR 513
stress (watch-list + RBIs restructuring dispensation + below-investment Target Price : INR 545
52-week range (INR) : 548 / 424
grade corporate rating); b) Slower resolutions; and c) Pressure on NIMs,
Share in issue (mn) : 2,397.6
which will keep earnings recovery modest in near term. We cut our
M cap (INR bn/USD mn) : 1,230 / 18,919
FY18/FY19 earnings by 30%/14% and book value by 3%/4%. Consequently,
Avg. Daily Vol.BSE/NSE(000) : 8,379.5
we downgrade the stock to HOLD from BUY with TP of INR545 (INR638
earlier). We also exclude the stock from our BRAVEHEART SERIES as asset SHARE HOLDING PATTERN (%)
quality shocks are over-riding a strengthening retail franchise.
Current Q1FY18 Q4FY17
Promoters * 28.6 28.7 28.8
Asset quality takes a knock, outlook cautious
MF's, FI's & BKs 9.1 8.7 8.4
Slippages rose to INR89.4bn (9.3% vs. run-rate of 5-6% in past 6 quarters). Major rise was
FII's 46.3 47.8 48.2
in corporate slippages (INR81bn, >90% of slippages) with ~INR49bn (across 9 accounts
Others 16.0 14.8 14.6
largely in power, iron & steel, IT/ITES segments) being due to RBIs divergence (pertaining * Promoters pledged shares : NIL
to RBIs risk-based supervision inspection). Having said that, corporate slippages outside (% of share in issue)
of these & watch-list (27% of slippages) remain high, a key disappointment. Moreover,
incremental disclosure by bank on BB & below rated corporates (INR73.6bn, 1.8% of PRICE PERFORMANCE (%)
loans) along with watch-list (INR60bn, 1.5% of loans) and restructuring dispensations EW Banks and
(INR40.35bn, 1% loans) suggests that incremental stress would remain elevated. Stock Nifty Financial
Services Index
Consequently, bank revised credit cost guidance to 220-260bps from 175-225bps (taking
40bps impact of divergence). Ergo, factoring higher credit cost of ~290/187bps for 1 month (0.6) 1.5 (1.1)
3 months 0.5 3.2 1.7
FY18/19 (earlier 236/153bps), we revise our FY18/19E EPS by >30%/14%.
12 months (1.1) 20.1 26.8

Outlook and valuations: Limited visibility; downgrade to 'HOLD'

Even though retail segment continues to strengthen, visibility in corporate earnings is
weak. RBIs stress reporting divergence again raises a question on recognition of
corporate stress, which may be a near term overhang (for corporate focused banks). We
expect valuations to be capped at 2x FY19E P/BV for RoE of sub-15% (resulting in TP of
Kunal Shah
INR545) and are therefore, downgrading the stock to HOLD/SP from BUY/SO. +91 22 4040 7579
Financials (INR mn) kunal.shah@edelweissfin.com
Year to March Q2FY18 Q2FY17 Growth % Q1FY18 Growth % FY17 FY18E FY19E
Prakhar Agarwal
Net revenue 71,252 70,535 1.0 76,160 (6.4) 2,97,844 3,13,774 3,65,639 +91 22 6620 3076
Net profit 4,324 3,191 35.5 13,056 (66.9) 36,793 44,963 87,388 prakhar.agarwal@edelweissfin.com

Dil. EPS (INR) 1.8 1.3 35.3 5.4 (66.9) 15.4 18.8 36.5 Malav Simaria
Adj. BV (INR) 207.6 215.2 244.0 +91 22 6623 3357
malav.simaria@edelweissfin.com
Price/ Adj book (x) 2.5 2.4 2.1
Price/ Earnings (x) 33.4 27.3 14.1 October 17, 2017
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Banking and Financial Services

NIMs under pressure, earnings recovery to be modest in near term

NIMs stood lower at 3.45% (down 18bps QoQ) largely due to pressure on lending yields. The
yield pressure primarily percolated from lower interest rate scenario and conversion to
MCLR regime. Additionally, NIMs were also partially impacted by higher slippages (impact of
6bps of which 4bps was due to RBI divergence). Given that loan conversion (from base rate
to MCLR) is still on course, which along with limited funding cost benefit entails that NIMs
will likely continue to be under pressure. Management maintained they expect FY18 NIMs to
be lower than FY17 by 20bps. We have factored in NIMs of 3.3-3.4% for FY18-19E.

Improving loan growth; retail key driver

Axis Banks advance growth continued its upward trajectory, with growth crossing the 15%
mark for the first time in 4 quarters (albeit, on relatively lower base) to INR4.1tn - advances
grew by ~16% YoY/6% QoQ. Loan growth was largely broad based in nature while
corporate book was pegged ~10% YoY/7% QoQ growth (driven by working capital demand),
overall traction was driven by sustained momentum in retail advances (up ~23% YoY/5%
QoQ) and SME portfolio (up ~15% YoY/10% QoQ). Within retail, growth was driven by auto
loans (up ~37% YoY/5% QoQ), personal loans & credit cards (up ~34% YoY/5% QoQ) and
small business banking & other loans (up ~36% YoY/16% QoQ). Given increasingly diversified
growth in the banks retail book, proportion of housing loans in the retail portfolio is now
down to 43% (versus ~45% a year ago). While growth towards better-rated corporates is
expected to continue going ahead (85% of sanctions in H1FY18 were rated A- & above),
retail business will continue to be the key growth engine going forward.
Further, Axis Banks retail deposit franchise continued to strengthen, with CASA deposits
jumping >23% YoY/8.5% QoQ to INR2.1tn. Consequently, CASA ratio inched up to ~50%
(versus 47% as on FY16). The strengthened liability franchise is also reflected in proportion
of savings plus retail TD structurally moving up to ~64% versus 45% in FY12.

Other key pointers of asset quality

With respect to RBIs referred list under IBC: The bank has total loan outstanding of
INR70.4bn as against the IBC accounts mentioned in the 2 lists referred by RBI.
Incremental provision of INR5.05bn was made for select accounts in Q2FY18 taking the
total provisioning to INR38.86bn with an improved provision coverage ratio of 55%. For
the full pool, the bank roughly estimates haircut of 60% and credit cost assumption of
220-260bps for FY18, factors in this haircut.

Within large corporate, BB and below rated pool stands at INR158bn (SMA II will also be
at similar levels). Of this, BB and below rated corporates, top 5 sectors contribute ~66%.
The top-5 sectors are: a) power (~33%); b) infra construction (~11%); c) iron & steel
(~11%); d) roads (~8%); and e) mining (~5%). Non-fund based outstanding of this pool is
closer to INR40bn.

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 Axis Bank

Chart 1: Watchlist (WL) comes down to INR60.5bn Chart 2: Sectoral composition of watch list
250.0 80.0
226.3
64
203.0 64.0
210.0
48.0

(%)
170.0
(INR bn)

32.0
137.9
130.0 16.0 11 7 6
110.9 5 4 2 1
94.4 0.0
90.0 79.4

Engineering

Telecommunicati
Iron & Steel

Trade Retail &

Infra. Roads
Power

Infra. Cons.

Cons. other than

Wholesale
60.5

on Services

Infra.
50.0
Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17

Q1FY18

Q2FY18 Source: Company

Chart 3: WL + Restructuring dispensations at 2.5% Chart 4: Low rated corporate portfolio (BB and below)
300.0 325.0
268.0
274.1
250.0 275.0

195.4 219.3
200.0 225.0 207.9
(INR bn)

(INR bn)

196.9 194.6
161.9
145.0
150.0 130.3 175.0 158.2
100.9
100.0 125.0

50.0 75.0
Q1FY17

Q2FY17

Q3FY17

Q4FY17

Q1FY18

Q2FY18

Q1FY17

Q2FY17

Q3FY17

Q4FY17

Q1FY18

Q2FY18
Source: Company

Table 1: Incremental stress creation elevated at ~ INR89bn

(INR mn) Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
Incremental slippages 11,855 26,035 20,821 14,740 36,380 87,720 45,600 48,110 35,190 89,360
Incremental restructuring 7,400 4,630 1,260 9,270 5,440 0 0 0 0 0
Total incremental stressed assets 19,255 30,665 22,081 24,010 41,820 87,720 45,600 48,110 35,190 89,360
Source: Company

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Table 2: largely attributable to divergence with RBI assessment
(INR bn) No. of accounts Fund-based outstanding

Steel 1 11.3
Power 3 16.9
IT/ITES 1 11.4
Others 4 9.1
Total 9 48.7
Source: Company

Table 3: GNPAs rise to ~ INR274bn on spike in slippages

Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
Gross NPA (INR bn) 42.5 44.5 57.2 60.9 95.5 163.8 204.7 212.8 220.3 274.0
Growth Q-o-Q (%) 3.4 4.7 28.6 6.3 56.9 71.4 25.0 4.0 3.5 24.4
Gross NPA (%) 1.4 1.4 1.7 1.7 2.5 4.2 5.2 5.0 5.0 5.9
Net NPA (INR bn) 14.6 16.4 25.1 25.2 40.1 77.6 82.9 86.3 97.7 145.0
Growth Q-o-Q (%) 11.0 12.5 53.0 0.3 59.0 93.5 6.9 4.0 13.2 48.5
Net NPA (%) 0.5 0.5 0.8 0.7 1.1 2.0 2.2 2.1 2.3 3.1
Provision coverage (%) 65.6 63.1 56.1 58.6 58.0 52.6 59.5 59.5 55.7 47.1

Table 4: Slippages at ~9.3%, with >90% contributed from corporate

(INR mn) Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
Incremental slippage 20,821 14,740 36,380 87,720 45,600 48,110 35,190 89,360
Incremental slippage (%) 2.8 1.9 4.3 10.2 5.2 5.5 3.8 9.3
Recoveries and upgrades 1,800 7,800 1,400 10,730 3,500 28,040 3,060 10,480
Writeoffs 2,000 3,300 320 8,730 1,220 11,940 24,620 25,170

Table 5: Advance growth improves to ~16%; CD ratio at ~98.5%

Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
Advances (INR bn) 2,846 2,981 3,154 3,388 3,449 3,532 3,472 3,731 3,855 4,102
Advances growth Q-o-Q (%) 1.3 4.7 5.8 7.4 1.8 2.4 (1.7) 7.5 3.3 6.4
Advances growth Y-o-Y (%) 23.5 23.1 21.0 20.5 21.2 18.5 10.1 10.1 11.8 16.1
Deposits (INR bn) 3,078 3,241 3,383 3,580 3,579 3,802 3,708 4,144 3,937 4,164
Deposit growth Q-o-Q (%) (4.5) 5.3 4.4 5.8 (0.0) 6.2 (2.5) 11.8 (5.0) 5.8
Deposit growth Y-o-Y (%) 13.2 14.2 16.2 11.0 16.3 17.3 9.6 15.8 10.0 9.5
CD ratio (%) 92.5 92.0 93.2 94.6 96.4 92.9 93.6 90.0 97.9 98.5

Table 6: CASA continued momentum, retail deposits forming ~64% of deposits

Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
CASA (%) 43.0 44.0 43.0 47.0 43.0 45.0 48.0 51.0 49.0 50.0
Retail deposits (% of total dep.) 63.3 63.2 63.0 63.6 64.4 64.2 65.7 60.3 64.7 63.6
Retail dep. / branch (INR mn) 753 747 760 784 767 785 759 757 753 760
Retail bus. / branch (INR mn) 1,131 1,117 1,141 1,180 1,167 1,194 1,159 1,184 1,270 1,288

Table 7: NIMs under pressure (down 18bps QoQ to 3.45%)

(%) Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
Cost of funds 6.1 6.0 5.9 5.8 5.8 5.7 5.5 5.4 5.2 5.2
NIM 3.8 3.9 3.8 4.0 3.8 3.6 3.4 3.8 3.6 3.5
CASA 43.0 44.0 43.0 47.0 43.0 45.0 48.0 51.0 49.0 50.0
Source: Company

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 Axis Bank

Table 8: Retail fee income supports overall fee income growth

As % of total fee income Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
Corporate banking 22.5 25.2 23.6 22.5 23.5 24.1 19.3 22.5 16.6 20.6
Agri and SME Banking 3.8 4.8 4.7 5.2 5.6 4.8 4.8 5.6 3.7 3.9
Business banking 17.8 18.4 18.9 13.9 25.4 25.1 27.9 20.6 23.9 25.5
Retail banking 36.6 38.7 37.7 36.4 39.5 41.5 43.3 43.1 44.2 47.2
Others 19.2 12.9 15.2 21.9 5.9 4.4 4.7 8.1 11.6 2.7
Q-o-Q growth in non int. inc. (%) (14.5) (11.2) 14.5 15.2 1.6 (7.3) 33.9 (11.4) (0.4) (13.8)
Fee inc. to total inc. (%) 36.2 33.4 36.0 37.2 37.7 36.0 44.0 38.9 39.4 36.3
* Note The company has re-named Business Banking to Transaction Banking and has expanded
to included Forex, etc which was earlier covered within Treasury & DCM since Q1FY16. The
comparative nos. for Business Banking and Others are hence not comparable for prior periods
*During Q1FY17 some fees have been reclassified as TB fees from Treasury & DCM segment

Table 9: Cost-to-income ratio at ~47.0%

(%) Q116 Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218
Cost-income ratio 35.6 40.6 38.7 39.3 38.4 41.9 40.0 43.5 43.7 47.0
Tax rate 33.4 34.4 33.5 33.3 33.9 33.2 31.4 31.7 33.0 32.1
Source: Company

Table 10: Retail growth driven by personal, credit cards and auto loans
(INR mn) Q2FY18 Q2FY17 Growth YoY
Non-schematic loans & others 2,02,682 1,49,284 35.8
Loan against Property 1,47,405 1,34,356 9.7
Personal Loans & Credit Cards 2,39,533 1,79,141 33.7
Auto Loans 1,84,256 1,34,356 37.1
Retail agricultural 2,76,384 2,23,926 23.4
Housing loan 7,92,301 6,71,778 17.9
Total retail 18,42,560 14,92,840 23.4
Source: Company

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Financial snapshot (INR mn)

Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E
Interest income 112,351 111,591 0.7 110,525 1.7 222,876 458,160 504,943
Interest exp 66,955 66,452 0.8 64,364 4.0 131,318 266,132 280,818
Net int. inc. (INR mn) 45,396 45,139 0.6 46,161 (1.7) 91,558 192,028 224,126
Other income 25,855 25,397 1.8 29,998 (13.8) 55,854 121,746 141,513
Net revenues 71,252 70,535 1.0 76,160 (6.4) 147,411 313,774 365,639
Operating expenses 33,478 29,534 13.4 33,248 0.7 66,726 139,051 155,184
Staff expense 10,828 9,888 9.5 10,883 (0.5) 21,711 46,319 51,026
Other opex 22,650 19,645 15.3 22,365 1.3 45,015 92,732 104,158
Pre prov op profit(ppop) 37,773 41,002 (7.9) 42,912 (12.0) 80,685 174,723 210,455
Provisions 31,404 36,227 (13.3) 23,419 34.1 54,823 108,599 81,942
Profit before tax 6,369 4,774 33.4 19,492 (67.3) 25,861 66,124 128,513
Provision for taxes 2,045 1,584 29.2 6,436 (68.2) 8,482 21,160 41,125
PAT 4,324 3,191 35.5 13,056 (66.9) 17,380 44,963 87,388
Diluted EPS (INR) 1.8 1.3 35.3 5.4 (66.9) 7.2 18.8 36.5

Ratios
NII/GII (%) 40.4 40.5 41.8 41.1 41.9 44.4
Cost/income (%) 47.0 41.9 43.7 45.3 44.3 42.4
Provisions / PPOP 83.1 88.4 54.6 67.9 62.2 38.9
Tax rate (%) 32.1 33.2 33.0 32.8 32.0 32.0
Bal. sheet data (INRbn)
Advances 4,102 3,532 16.1 3,855 6.4 4,102 4,328 5,150
Deposits 4,164 3,802 9.5 3,937 5.8 4,164 4,765 5,712
Investments 1,442 1,246 15.7 1,418 1.6 1,442 1,467 1,634

Asset quality
Gross NPA 274,023 163,787 67.3 220,309 24.4 274,023 289,025 327,095
Gross NPA (%) 5.9 4.2 5.0 5.9 6.1 5.8
Net NPA 145,023 77,612 86.9 97,660 48.5 145,023 101,975 98,026
Net NPA (%) 3.1 2.0 2.3 3.1 2.4 1.9
Provision coverage (%) 47.1 52.6 55.7 47.1 64.7 70.0
B/V per share (INR) 245.0 272.7
Adj book value / share 215.2 244.0
Price/ Adj. book (x) 2.4 2.1
Price/ Earnings 27.3 14.1

Change in Estimates
FY18E FY19E
New Old % change New Old % change Comments
NII 192,028 194,374 (1.2) 224,126 228,568 (1.9)
PPOP 174,723 185,108 (5.6) 210,455 216,739 (2.9)
Provisions 108,599 89,059 21.9 81,942 67,290 21.8 Factoring in higher than anticipated
credit cost, largely arriving from
deviation in RBIs annual inspection
PAT 44,963 65,312 (31.2) 87,388 101,625 (14.0)
NIMs 3.3 3.3 3.3 3.4

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 Axis Bank

Key highlights from Axis Bank's Q2FY18 concall

With respect to asset quality

Slippages came in at INR89.36bn (9.3%), of which corporate slippages stood at

INR81.1bn. The corporate slippages predominantly came from low rated accounts.
Watchlist slippages during the quarter was INR24.3bn (~27% of the slippages). Net
slippage (before write-offs) in retail and SME was at INR2.92bn and INR2.19bn
respectively.
The RBI has pointed out certain reclassifications in the Bank's asset classification and
provisioning as on FY17, subsequent to the annual Risk Based Supervision (RBS)
exercise conducted for FY17 (reports were presented in October). The Bank has
recorded the impact of such reclassifications in Q2FY18.

A total of 9 accounts were reclassified by RBI. As on Q1FY18, these 9 accounts were

classified as standard assets across most consortium banks, with only ~6% of their
outstanding classified as NPA across the sector. Banks system exposure to these 9
accounts will be closer to INR400bn. Further the bank highlighted that in none of the 9
accounts the lead banker is an NPL.
In Q2FY18, fund-based outstanding on these 9 accounts was INR48.67bn, all of which
now stands as NPA. Total provisions of INR16.18bn was made on these accounts
during the quarter. The total NFB exposure on these 9 accounts is INR9bn
Sectoral distribution of the 9 accounts is as follows:

o One account in the steel sector contributes INR11.28bn

o The power sector has 3 accounts amounting to INR16.85bn
o 4 accounts comprise a total of INR9.11bn ( basic material, sugar account etc)

o One account in the IT/ITES sector contributes INR11.43bn.

Of these 9 accounts 8 are consortium account and axis is lead in 1 account (power
segment). The bank was sole banker in IT/ ITES account, bank stated that a significant
part of this account is expected to get repaid soon, post a business sale transaction, for
which a binding agreement is already in place.
With respect to RBIs referred list under IBC : The Bank has total loan outstanding of
INR70.4bn against the IBC accounts mentioned in the two lists referred by RBI.
Incremental provisions of INR5.05bn on these select accounts have been made in
Q2FY18 taking the total provisioning to INR38.86bn with an improved provision
coverage ratio at 55%. For the full pool perspective the bank roughly estimates the
haircut of 60%, and the credit cost assumption factions in this haircut.
The credit cost for H1FY18 has been 256bps that includes 73 bps on account of RBS
impact and 14bps on account of additional provisioning done for IBC accounts. The
divergence related credit cost is expected to consume ~40 bps for FY18. Incorporating
this, and after evaluation of the underlying credit trends of the rest of the book, the
credit cost guidance for FY18 is revised upwards to 220-260 bps (from 175-225 bps).
PCR is expected to be maintained in the 60 to 65% range, the bank has also baked in
some recovery in these accounts (having said that lot depends on how the classification
pans out in other banks)
Within the large corporate the BB and below rated pool stands at INR158bn (SMA II
will also will be at similar levels). Of this BB and below rates , top 5 sectors contribute

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Banking and Financial Services
66% . The top five sectors are a) power (33%) b) Infra construction (11%) c) Iron &
Steel (11%) d) Roads (8%) and e) Mining 5%. The non-fund based outstanding to this
pool is closer to INR40bn

As on Q2FY18, the power NPLs stood at INR33bn and the provisions held against these
stood at 45%.

Divergence post RBIs AQR exercise has been coming down, just to state for Axis bank
divergence was INR100bn earlier which was INR50bn for this review.
Entire contingency provisions (INR2.6bn) has been utilized this quarter

The Restructuring (including all dispensations of Restructured Accounts, SDR, S4A and
5:25, etc) stands at 1.6% of book (INR73.9bn).
SRs outstanding : INR30bn

GNPLs compositions: INR50bn ( retail + SME, with 50% split each) and INR220bn
corporate GNPLs.

With respect to book

Loan growth momentum is back largely broad based in nature. Corporate growth
(10% YoY) was higher driven by working capital (36% YoY growth) demand . SME
growth has also shown signs of picking up (15% YoY). Retail growth continues to
maintain momentum (up > 23% YoY, now form 45% of the loans).
The growth in the retail book is more diversified now with growth picking up in
Personal loans/credit cards/ Small business banking segment. Thus contribution of
home loans has come down to 43% ( from 54% in FY13). The growth in the new
business drivers viz. Education loans of > 115%, Small business banking grew > 79%. The
growth in the retail portfolio is driven by both deepening of relationship and expansion
of branches.

Management expects the growth in the corporate loan book to continue.

85% of the incremental corporate credit is towards A and better rated companies. On
outstanding basis 70% of corporate exposure are A rated and above

NIMs impact due to higher slippages (including RBIs divergence) is 6bps (of this 4bps
was on account of RBI divergence accounts). NIMs during the quarter at 3.45% with
domestic NIMs of 3.71% (versus 3.85% in previous quarters). The management
maintained that they expect NIMs for full year FY18 to be lower than FY17 by 20bps.

Management sees some transient impact due to implementation of GST. But believes
that GST will benefit the SME sector in longer terms as it will improve transparency
significantly which will further help in better risk evaluation and loan pricing.

Other highlights
Deposit another excellent quarter , CASA grew > 24% YoY and the CASA ratio came in
at 50%, CASA on daily average basis was 46%.

Have adequate capital to grow for the opportunity available. At the basic the bank will
try to maintain CET atleast 150bps over the regulatory requirement (currently CET
requirement stands at 8.8%).

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 Axis Bank

Retail fee grew 23% and now form 48% of fees. Card fee continues to growth stronger
(up 36% YoY)
Expect opex growth to continue to be lower in H2FY18.

Expect that by end of FY18, only 10% of book would be base rate linked.

Telecom is not part of top 10 industry segment, the exposure is 1% (fund based
exposure is INR25bn) and there is nothing material in stressed pool from this segment.
Non-fund based exposure is INR80bn ( fairly short term and to the top 3 names in the
segment).
Another 100 branches were opened during the quarter, but the shape and form has
changed. The branch model will continue to be a essential for distribution thus
investment on these will continue.
RWA : INR4.96tn

Digital banking transaction trend

o 60% of Bank active customers are Digitally active

o 40% of Mobile Banking customers bank only on Mobile App.
o Mobile Banking logins stand at 4.3x of Internet Banking logins

Subidiary performance:
o Axis Finance: Loan book grew 65% YoY at INR53bn (IPO finance, LAS has
contributed to the growth). The products which are difficult to operate from banks
platform will be rolled out from this subsidiary.
o Axis Securities: Cumulative client base rose to 1.59mn, PAT grew 44%
o Axis AMC: 46% YoY growth in AAUM, PAR growth > 52% H1FY18

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Key highlights from Axis Bank's Q1FY18 concall

With respect to asset quality

Gross slippages during the quarter was INR35.11bn, with GNPLs of 5.03%. Corporate
slippages during the quarter was INR23.17bn. Of the corporate slippages outside of
watch-list large part is driven by 4 sectors viz. I&S, Infra, construction , power. Net
retail slippages at 7.58bn and Net SME slippages at INR2.28bn.
The non-corporate slippages were also higher during the quarter, largely driven by
retail segment following slippages in the agri segments (seasonal plus effect of farm
loan waiver)
Credit cost during the quarter was 1.95% (well within the guidance of 1.75-2.25% for
the full year FY18). Management continued to maintain the guidance expect credit cost
to revert to longer term averages by FY19.

No impact in GNPLs and provisions pertaining to accounts that was refereed to NCLTs.
Bank expects that some provisions will be made towards these accounts from Q2FY18
(amortised over 3 quarters), having said that these are already captured into the
estimates for full year credit cost guidance.
The Bank has made enhanced standard asset provisioning at 1% on four sectors - power,
infrastructure construction, iron and steel, and telecommunication services. Against
these sectors, an additional provision of INR1.84bn has been made during the quarter.
Little bit of stress seen in power portfolio outside of the watchlist. Overall power
portfolio at INR200bn of which INR55bn is in watchlist. Having said that the
management stated that these outside stress has already been factored in the credit
cost guidance.

Power accounts in watchlist are lumpy, so when they slip there will be some lumpyness
and will not be evenly spread, The cases are at different stages of resolution (1 account
is SDR) and will evolve over later part of year (so some .

Contingent provisions INR2.60bn (havent used anything this quarter, large part of
this largely towards power sector)

No SDR done during the quarter.

S4A done during the quarter was INR3.84bn (one account)

SRs no addition (last quarter INR29.5bn)

There was one account in watchlist of INR2.9bn wherein 5:25 refinancing was
implemented.

All the write-off during the quarter were technical write-offs,

All the divergence pertaining to FY16 was already addressed in FY17, thus there was no
impact because of divergence.

With respect to book

Loan growth during the quarter was >11% largely driven by retail segment ( up > 22%
YoY), SME growth of > 10% and corporate advance growth of > 3% YoY (but working
capital loans grew > 23%, thus suggesting de-growth in the term loans). Management

10 Edelweiss Securities Limited

 Axis Bank

expect corporate loan growth to trace back to double digit growths over the course of
the year.
The growth in the retail book is more diversified now with growth picking up in
Personal loans/credit cards/ Small business banking segment. Thus contribution of
home loans has come down to 44% ( from 44% in FY13). The growth in the new
business drivers viz. MFI grew 16%, Education loans of > 140%, Small business banking
grew > 80%. The growth in the retail portfolio is driven by both deepening of
relationship and expansion of branches.
Management sees some transient impact due to implementation of GST. But believes
that GST will benefit the SME sector in longer terms as it will improve transparency
significantly which will further help in better risk evaluation and loan pricing.

Other highlights

The guidelines of higher risk weights on unrated exposure , has not been implemented
(for the industry as a whole)

NIMs during the quarter at 3.63% with domestic NIMs of 3.85% (versus 4.11% in
previous quarters). The management maintained that they expect NIMs for full year
FY18 to be lower than FY17 by 20bps.
Raised INR35bn of T-I and INR50bn of Tier II bonds during the quarter. Because of this
the need for deposit was lower and thus whole sale deposits has come down
( wholesale TD has dipped 7% YoY)
< 15% of the power book is renewable ( all of this is standard)

Opex growth during the quarter was 19% (3 percentage points are one-off , bonus
entitlement towards some set of contracted employees were increased) ,
management expect these to normalise over course of the year and maintains opex
growth guidance for the full year at low to mid teens growth.
Impact on the capital because of IND-AS could be to the tune of 50bps.

Expect to maintain PCR of 65% for FY19

RWA- INR4.84tn

11 Edelweiss Securities Limited

Banking and Financial Services

Company Description
Axis Bank is the third-largest private sector bank in India in terms of asset size, with a
balance sheet of >INR6.3tn. It has a network of over 3,485 branches and extension counters
across the country. The bank earns substantial fee income from transaction and merchant
banking activities.

Investment Theme
Continued disappointment from outside watch-list slippages has shaken investors
confidence, as sanctity of watch-list claims stands challenged. Not only was stress creation
been much higher than anticipated, but the road to recovery is also expected to be arduous
given: a) 4.2% of the book in un-recognised stress (watch-list + RBIs restructuring
dispensation + below-investment grade corporate rating); b) Slower resolutions; and c)
Pressure on NIMs, which will keep earnings recovery modest in near term. Consequently,
we downgrade the stock to HOLD from BUY.

Key Risks
Deterioration of macro environment can result in even higher slippages and slow down
business growth.

The retail segment of the bank has been strengthening, any blip in that may lead to further
weakening of the earning profile.

12 Edelweiss Securities Limited

 Axis Bank

Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E
Macro Interest income 409,880 445,422 458,160 504,943
GDP(Y-o-Y %) 7.9 6.6 6.8 7.4 Interest expended 241,551 264,490 266,132 280,818
Inflation (Avg) 4.9 4.5 4.0 4.5 Net interest income 168,330 180,931 192,028 224,126
Repo rate (exit rate) 6.8 6.3 5.8 5.8 Non interest income 93,715 116,913 121,746 141,513
USD/INR (Avg) 65.5 67.1 65.0 66.0 - Fee & forex income 79,826 78,804 89,969 104,364
Sector - Misc. income 3,640 4,108 6,778 9,150
Credit growth 9.3 9.0 12.0 14.0 - Investment profits 10,249 34,002 25,000 28,000
Deposit growth 8.6 14.0 12.0 13.0 Net revenue 262,044 297,844 313,774 365,639
CRR 4.0 4.0 4.0 4.0 Operating expense 101,008 121,999 139,051 155,184
SLR 20.8 20.0 20.0 20.0 - Employee exp 33,760 38,919 46,319 51,026
G-sec yield 7.5 6.5 6.5 6.5 - Other opex 67,248 83,081 92,732 104,158
Company Preprovision profit 161,036 175,845 174,723 210,455
Op. metric assump. (%) Provisions 37,099 121,170 108,599 81,942
Yield on advances 9.7 9.3 8.6 8.2 Loan loss provisions 38,005 107,192 107,599 80,942
Yield on investments 7.4 7.7 7.1 6.5 Investment depreciation 840 2,390 - -
Yield on asset 8.7 8.5 7.8 7.5 Other provisions (1,746) 11,588 1,000 1,000
Cost of funds 5.4 5.2 4.6 4.2 Profit Before Tax 123,938 54,676 66,124 128,513
Net interest margins 3.6 3.5 3.3 3.3 Less: Provision for Tax 41,701 17,883 21,160 41,125
Cost of deposits 5.4 5.0 4.4 4.0 Profit After Tax 82,237 36,793 44,963 87,388
Cost of borrowings 7.3 7.0 6.6 6.2 Shares o /s (mn) 2,383 2,395 2,395 2,395
Spread 3.3 3.3 3.2 3.3 Adj. Diluted EPS (INR) 34.5 15.4 18.8 36.5
Tax rate (%) 33.6 32.7 32.0 32.0 Dividend per share (DPS) 5.0 5.0 6.0 8.0
Balance sheet assumption (%) Dividend Payout Ratio(%) - 35.9 35.2 24.2
Credit growth 18.1 10.5 15.9 18.1
Deposit growth 11.0 15.8 15.0 19.9 Growth ratios (%)
SLR ratio 19.0 17.9 18.0 17.5 Year to March FY16 FY17 FY18E FY19E
Low-cost deposits 47.3 51.4 52.7 53.4 NII growth 18.3 7.5 6.1 16.7
Gross NPA ratio 1.7 5.3 6.1 5.8 Fees growth 12.3 (1.3) 14.2 16.0
Net NPA ratio 0.7 2.3 2.4 1.9 Opex growth 9.7 20.8 14.0 11.6
Net NPA / Equity 4.7 15.5 17.4 15.0 PPOP growth 21.7 (5.9) 5.6 21.9
Capital adequacy 15.3 14.9 14.6 14.2 PPP growth 20.3 9.2 (0.6) 20.5
Incremental slippage 2.4 6.0 5.2 2.8 Provisions growth 59.3 226.6 (10.4) (24.5)
Provision coverage 58.6 59.5 64.7 70.0 Adjusted Profit 11.8 (55.3) 22.2 94.4

Operating ratios
Year to March FY16 FY17 FY18E FY19E
Yield on advances 9.7 9.3 8.6 8.2
Yield on investments 7.4 7.7 7.1 6.5
Yield on assets 8.7 8.5 7.8 7.5
Cost of funds 5.4 5.2 4.6 4.2
Net interest margins 3.6 3.5 3.3 3.3
Cost of deposits 5.4 5.0 4.4 4.0
Cost of borrowings 7.3 7.0 6.6 6.2
Spread 3.3 3.3 3.2 3.3
Cost-income 38.5 41.0 44.3 42.4
Tax rate 33.6 32.7 32.0 32.0

13 Edelweiss Securities Limited

 Banking and Financial Services

Balance sheet (INR mn) RoE decomposition (%)

As on 31st March FY16 FY17 FY18E FY19E Year to March FY16 FY17 FY18E FY19E
Share capital 4,766 4,790 4,790 4,790 Net int. income/assets 3.6 3.5 3.3 3.3
Reserves & Surplus 526,883 552,835 581,963 648,236 Fees/Assets 1.8 1.6 1.6 1.7
Net worth 531,649 557,625 586,753 653,026 Invst. profits/Assets 0.2 0.6 0.4 0.4
Sub bonds/pref cap - - 5,000 10,000 Net revenues/assets 5.6 5.7 5.3 5.4
Deposits 3,579,676 4,143,788 4,764,860 5,711,658 Operating expense/assets (2.1) (2.3) (2.4) (2.3)
Total Borrowings 992,264 1,050,309 1,118,646 1,188,733 Provisions/assets (0.8) (2.3) (1.9) (1.2)
Other liabilities 151,088 262,955 305,027 362,983 Taxes/assets (0.9) (0.3) (0.4) (0.6)
Total liabilities 5,254,676 6,014,677 6,780,286 7,926,400 Total costs/assets (3.8) (5.0) (4.6) (4.1)
Loans 3,387,737 3,730,694 4,327,604 5,149,849 ROA 1.7 0.7 0.8 1.3
Cash and Equivalents 333,254 502,562 422,981 482,326 Equity/assets 10.4 10.4 9.7 9.2
Gilts 870,196 930,079 1,059,031 1,207,568 ROAE (%) 16.8 6.8 7.9 14.1
Others 349,866 357,855 407,491 426,518
Fixed assets 35,232 37,469 34,197 30,650 Valuation parameters
Other Assets 278,391 456,019 528,982 629,488 Year to March FY16 FY17 FY18E FY19E
Total assets 5,254,676 6,014,677 6,780,286 7,926,400 Adj. Diluted EPS (INR) 34.5 15.4 18.8 36.5
Credit growth 18.1 10.5 15.9 18.1 Y-o-Y growth (%) 11.2 (55.5) 22.2 94.4
Deposit growth 11.0 15.8 15.0 19.9 BV per share (INR) 223.1 232.8 245.0 272.7
EA growth 9.9 11.7 12.6 16.9 Adj. BV per share (INR) 215.7 207.6 215.2 244.0
SLR ratio 19.0 17.9 18.0 17.5 Diluted P/E (x) 14.9 33.4 27.3 14.1
C-D ratio 101.4 96.8 97.5 96.0 Price/ BV (x) 2.3 2.2 2.1 1.9
Low-cost deposits 47.3 51.4 52.7 53.4 Price/ Adj. BV (x) 2.4 2.5 2.4 2.1
Provision coverage 58.6 59.5 64.7 70.0 Dividend Yield (%) 1.0 1.0 1.2 1.6
Gross NPA ratio 1.7 5.3 6.1 5.8
Net NPA ratio 0.7 2.3 2.4 1.9
Incremental slippage 2.4 6.0 5.2 2.8
Net NPA / Equity 4.7 15.5 17.4 15.0
Capital adequacy 15.3 14.9 14.6 14.2
- Tier 1 12.5 11.9 11.5 11.1

Peer comparison valuation

Market cap Diluted P/E (X) Price/ Adj. BV (X) ROAE (%)
Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E
Axis Bank 18,919 27.3 14.1 2.4 2.1 7.9 14.1
DCB Bank 871 21.1 17.1 2.3 2.0 11.8 11.9
Federal Bank 3,771 21.7 17.4 2.1 1.9 10.6 10.9
HDFC Bank 73,467 26.9 22.3 4.7 4.0 18.2 19.0
ICICI Bank 27,023 14.7 10.7 2.3 2.0 11.9 14.9
IndusInd Bank 15,724 27.9 22.2 4.4 3.8 16.5 17.9
Karnataka Bank 909 8.7 7.2 0.9 0.8 9.6 10.8
Kotak Mahindra Bank 31,575 35.2 28.8 4.5 4.0 14.5 14.5
Yes Bank 13,157 3.9 3.0 0.7 0.6 18.2 20.3
Median - 21.7 17.1 2.3 2.0 11.9 14.5
AVERAGE - 20.8 15.9 2.7 2.3 13.2 14.9
Source: Edelweiss research

14 Edelweiss Securities Limited

 Axis Bank

Additional Data
Directors Data
Sanjiv Misra Director & Non Executive Chairman Shikha Sharma Managing Director & CEO
V. Srinivasan Deputy Managing Director Rajiv Anand Executive Director
Rajesh Dahiya Executive Director Prasad Menon Director
Samir K. Barua Director Som Mittal Director
Rohit Bhagat Director Usha Sangwan Director
S. Vishvanathan Director Rakesh Makhija Director
Ketaki Bhagwati Director B. Babu Rao Director

Auditors - S.R. Batliboi & Co. LLP

*as per last annual report

Holding - Top 10
Perc. Holding Perc. Holding
BNY Mellon 5.82 Cinnamon Capital 4.32
BlackRock 2.57 Vanguard Group 2.45
Genesis Indian Investment 1.99 ICICI Prudential Asset Management 1.79
GIC 1.68 Abu Dhabi Investment Authority 1.63
Lazard 1.62 Templeton Asset Management 1.44
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
15 May 2017 National Insurance Company Limited Sell 1183488.00
02 May 2017 United India Insurance Company Limited Sell 15000.00
18 Apr 2017 General Insurance Corporation of India Buy 200000.00
18 Apr 2017 General Insurance Corporation of India Sell 335000.00
17 Apr 2017 United India Insurance Company Limited Sell 15000.00
*in last one year

15 Edelweiss Securities Limited

 RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk

Allahabad Bank HOLD SU M Axis Bank BUY SO M

Bajaj Finserv HOLD SP L Bank of Baroda BUY SP M
Bharat Financial Inclusion BUY SO M Capital First BUY SO M
DCB Bank HOLD SU M Dewan Housing Finance BUY SO M
Equitas Holdings Ltd. BUY SO M Federal Bank BUY SP L
HDFC HOLD SP L HDFC Bank BUY SO L
ICICI Bank BUY SO L IDFC Bank HOLD SP L
Indiabulls Housing Finance BUY SO M IndusInd Bank BUY SP L
Karnataka Bank BUY SP M Kotak Mahindra Bank HOLD SP M
L&T FINANCE HOLDINGS LTD BUY SO M LIC Housing Finance BUY SP M
Magma Fincorp BUY SP M Mahindra & Mahindra Financial Services HOLD SU M
Manappuram General Finance BUY SO H Max Financial Services BUY SO L
Multi Commodity Exchange of India BUY SP M Muthoot Finance BUY SO M
Oriental Bank Of Commerce HOLD SP L Power Finance Corp BUY SO M
Punjab National Bank BUY SP M Reliance Capital BUY SP M
Repco Home Finance BUY SO M Rural Electrification Corporation BUY SO M
Shriram City Union Finance BUY SO M Shriram Transport Finance BUY SO L
South Indian Bank BUY SP M State Bank of India BUY SP L
Union Bank Of India HOLD SP M Yes Bank BUY SO M

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

16 Edelweiss Securities Limited

 Axis Bank

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES
Aditya Narain LIMITED, ou=HEAD RESEARCH,
cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27
990f20bf0213f69235fc3f1bcd0fa1c300927
Head of Research
NARAIN
92c20, postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a
8e0c89e548e5001b4f8141cf423fd58c07b
aditya.narain@edelweissfin.com 02, st=Maharashtra
Date: 2017.10.18 01:29:30 +05'30'

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Allahabad Bank, Axis Bank, Bharat Financial Inclusion, Bajaj Finserv, Bank of Baroda, Capital First, DCB Bank, Dewan Housing Finance, Equitas Holdings
Ltd., Federal Bank, HDFC, HDFC Bank, ICICI Bank, IDFC Bank, Indiabulls Housing Finance, IndusInd Bank, Karnataka Bank, Kotak Mahindra Bank, LIC
Housing Finance, L&T FINANCE HOLDINGS LTD, Max Financial Services, Multi Commodity Exchange of India, Manappuram General Finance, Magma
Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance
Capital, Rural Electrification Corporation, Repco Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian
Bank, Union Bank Of India, Yes Bank
Recent Research

Date Company Title Price (INR) Recos

17-Oct-17 DCB Bank Soft quarter; 184 Hold

Result Update
17-Oct-17 Bajaj Finserv Stellar show; fairly valued; 5,354 Hold
Result Update
16-Oct-17 Dewan Sharp uptick in growth; stable 558 Buy
Housing NIMs and asset quality;
Finance Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594

One year price chart

446
(INR)

575
297
540

149 505
(INR)

- 470
Apr-14

Sep-14
Feb-14

Mar-14

Jun-14

Dec-14
Jul-14

Aug-14

Oct-14

Nov-14
May-14
Jan-14

435

400
Apr-17
Feb-17

Sep-17
Mar-17

Jun-17
Dec-16

Jul-17

Aug-17
Oct-16

Oct-17
Nov-16

May-17
Jan-17

Axis Bank

17 Edelweiss Securities Limited

Banking and Financial Services

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18 Edelweiss Securities Limited

 Axis Bank
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