RESULT UPDATE

AXIS BANK
Accelerated stress recognition mars performance
India Equity Research| Banking and Financial Services
COMPANYNAME
Dismal asset quality (multi-fold rise in slippages) took the sheen off of an EDELWEISS 4D RATINGS
otherwise operationally steady Q4FY18 (~18% loan growth and sustained
Absolute Rating HOLD
momentum in retail franchise), thereby resulting in a loss. Critically,
Rating Relative to Sector Underperform
slippages were due to up-fronting of stress from the watch-list and BB &
Risk Rating Relative to Sector Medium
below rated exposures as per the RBI’s recent recognition norms. The bank Sector Relative to Market Overweight
maintained provisioning coverage leading to significantly higher credit cost.
Major part of stress recognition seems to be over, but recovery is expected
to take a while. Returns profile will be modest as: a) >2% of book in still MARKET DATA (R: AXBK.BO, B: AXSB IN)
unrecognised stress (watch-list + RBI’s restructuring dispensation + below- CMP : INR 494
investment grade corporate rating); b) slower resolutions; and c) NIMs Target Price : INR 535

settling lower at 3.4% levels. Maintain ‘HOLD’. 52-week range (INR) : 628 / 448
Share in issue (mn) : 2,567.1
Asset quality takes a knock, recovery holds key M cap (INR bn/USD mn) : 1,268 / 19,132
Avg. Daily Vol.BSE/NSE(‘000) : 8,201.1
Slippages rose significantly to >INR165bn (>15% vs. run-rate of 5-6% in past six quarters)
largely coming from stress recognition in corporate slippages (INR140bn, >80% of
SHARE HOLDING PATTERN (%)
slippages) flowing from power (>41%) and construction (14%) segments. We do believe
Current Q3FY18 Q2FY18
large part of stress is recognised (loans to stressed sectors, viz. Power, I&S have reduced
Promoters * 26.4 26.7 28.6
from 9.2% in FY16 to 4.5%), but stress is still likely to flow in some more quarters given: a)
MF's, FI's & BK’s 12.8 13.8 9.1
additions to BB & below have not reduced; and b) stress pool (BB & below rated, watch-
FII's 47.7 45.5 46.3
list, RBI dispensation) is still at >2% levels. Recovery/resolutions hold key, which have
Others 13.2 14.1 16.0
been lower to our liking till now. Having said that, the bank has commendably maintained
* Promoters pledged shares : NIL
coverage of 65%, despite higher stress and consequently credit cost rose to 6.7%. This (% of share in issue)
will lead to normalisation of credit cost by H2FY19 by ~110-130bps.
PRICE PERFORMANCE (%)
Softer NIMs and core fee, extended pressure to keep core soft EW Banks and
Even as loan growth sustained (up 18% YoY), lower NIMs (higher interest income reversal Stock Nifty Financial
Services Index
and conversion to MCLR) restricted NII growth (flat YoY). Additionally, core fee income
growth of mere 1% YoY fed into >10% YoY dip in core profitability. The only silver lining 1 month (2.7) 4.8 3.1
3 months (19.9) (4.1) (10.0)
was extended retail momentum (advances up >23%, CASA up >18%, retail fees up > 22%).
12 months (4.5) 13.5 11.0

Outlook and valuations: Earnings volatile; maintain 'HOLD'

Even though retail continues to strengthen, earnings visibility remains weak. FY18
performance has rattled investors’ confidence. This, along with uncertainty at top
management level will cap valuations in near to medium term. We expect valuations to
be capped at 2x FY20E P/BV for RoE of sub-15% (post capital). At CMP, the stock trades at
Kunal Shah
1.8x FY20E P/ABV. We maintain ‘HOLD/SU’ with revised TP of INR535. +91 22 4040 7579
Financials (INR mn) kunal.shah@edelweissfin.com
Year to March Q4FY18 Q4FY17 Growth % Q3FY18 Growth % FY18 FY19E FY20E
Prakhar Agarwal
Net revenue 75,191 77,418 (2.9) 73,246 2.7 2,95,848 3,64,207 4,28,927 +91 22 6620 3076
Net profit (21,887) 12,251 NA 7,264 NA 2,757 78,853 1,07,538 prakhar.agarwal@edelweissfin.com

Dil. EPS (INR) (8.5) 5.1 NA 3.0 NA 1.1 30.2 41.2 Abhishek Agrawal
Adj. BV (INR) 201.9 232.5 269.5 +91 22 4040 7402
abhishek.agrawal@edelweissfin.com
Price/ Adj book (x) 2.4 2.1 1.8
Price/ Earnings (x) 459.7 16.4 12.0 April 26, 2018
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
Table 1: Key takeaways from Q4FY18 earnings
(INR mn) Q4FY18 Q4FY17 Growth (%) Q3FY18 Growth (%) Comments
Net interest income 47,305 47,286 0.0 47,315 (0.0) NII growth softer following pressure in NIMs
(further down 10bps QoQ).
Other income 27,887 30,132 (7.5) 25,931 7.5 Non-interest income lower on account of lower
treasury income. Meanwhile, retail fees was
also softer.
Operating expenses 38,469 33,670 14.3 34,708 10.8
Staff expense 10,789 9,480 13.8 10,629 1.5
Other opex 27,680 24,191 14.4 24,079 15.0
Pre prov Op profit (PPP) 36,722 43,747 (16.1) 38,538 (4.7) With NIMs pressure likely to perisist the core
operating performance will continue to be soft
in near term
Provisions 71,795 25,813 NA 28,110 NA Credit cost rose to 6.7% as bank maintained
coverage ratio of 65%
Profit before tax -35,073 17,935 NA 10,428 NA
Provision for tax -13,186 5,684 NA 3,163 NA
Profit after tax -21,887 12,251 NA 7,264 NA
EPS (INR) (8.5) 5.1 NA 3.0 NA

Balance sheet (INR bn)

Advances 4,397 3,731 17.8 4,209 4.4 Loan growth maintain momentum, largely
broad based in nature. Retail segment
continues to gains (up 23% YoY)
Deposits 4,536 4,144 9.5 4,090 10.9
CD Ratio (%) 96.9 90.0 102.9

Asset quality
Gross NPA 3,42,486 2,12,805 60.9 2,50,005 37.0 Slippages were due to up-fronting of stress
from the watch-list and BB & below rated
exposures as per the RBI’s recent recognition
norms
Net NPA 1,65,917 86,266 92.3 1,17,695 41.0
Gross NPA (%) 6.8 5.0 5.3
Net NPA (%) 3.4 2.1 2.6
Provision coverage 51.6 59.5 52.9

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Table 2: Slippages were due to up-fronting of stress from the watch-list and BB & below rated exposures as per the RBI’s recent
recognition norms. Thus, overall stress book came in at ~9.9%
(INR bn) Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18
BB & Below Advances 194.1 274.1 219.3 207.9 196.9 194.6 158.2 161.2 89.9
Watch List 226.3 203.0 137.9 110.9 94.4 79.4 60.5 53.1 4.3
Corporate Restructured Advances 84.8 76.7 68.8 62.4 54.9 54.3 38.6 35.3 10.8
SDR / S4A / 5-25 Advances 41.9 52.6 51.6 43.5 46.1 49.7 52.8 52.9 10.9
Total (adjusted for overlaps) 303.9 334.7 268.6 235.5 207.6 189.9 174.4 159.3 91.1
GNPLs 60.9 95.5 163.8 204.7 212.8 220.3 274.0 250.0 342.5
GNPLs + Net Outstanding 364.8 430.2 432.4 440.1 420.4 410.2 448.4 409.3 433.5
Loan book 3,387.7 3,449.3 3,531.7 3,471.7 3,730.7 3,854.8 4,101.7 4,209.2 4,396.5
Overall stess (%) 10.8 12.5 12.2 12.7 11.3 10.6 10.9 9.7 9.9
Source: Company

Table 3: GNPLs rose but coverage maintained resulting in higher credit cost
Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418
Gross NPA (INR bn) 44.5 57.2 60.9 95.5 163.8 204.7 212.8 220.3 274.0 250.0 342.5
Growth Q-o-Q (%) 4.7 28.6 6.3 56.9 71.4 25.0 4.0 3.5 24.4 (8.8) 37.0
Gross NPA (%) 1.4 1.7 1.7 2.5 4.2 5.2 5.0 5.0 5.9 5.3 6.8
Net NPA (INR bn) 16.4 25.1 25.2 40.1 77.6 82.9 86.3 97.7 145.0 117.7 165.9
Growth Q-o-Q (%) 12.5 53.0 0.3 59.0 93.5 6.9 4.0 13.2 48.5 (18.8) 41.0
Net NPA (%) 0.5 0.8 0.7 1.1 2.0 2.2 2.1 2.3 3.1 2.6 3.4
Provision coverage (%) 63.1 56.1 58.6 58.0 52.6 59.5 59.5 55.7 47.1 52.9 51.6
Source: Company

Table 4: Incremental slippages were driven by corporate segment (> 80% of slippages)
(INR mn) Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418
Incremental slippage 14,740 36,380 87,720 45,600 48,110 35,190 89,360 44,280 165,000
Incremental slippage (%) 1.9 4.3 10.2 5.2 5.5 3.8 9.3 4.3 15.7
Recoveries and upgrades 7,800 1,400 10,730 3,500 28,040 3,060 10,480 40,080 34,010
Writeoffs 3,300 320 8,730 1,220 11,940 24,620 25,170 28,220 38,870

Table 5: Advance growth maintained at ~18%; CD ratio at ~96.9%

Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418
Advances (INR bn) 2,981 3,154 3,388 3,449 3,532 3,472 3,731 3,855 4,102 4,209 4,397
Advances growth Q-o-Q (%) 4.7 5.8 7.4 1.8 2.4 (1.7) 7.5 3.3 6.4 2.6 4.4
Advances growth Y-o-Y (%) 23.1 21.0 20.5 21.2 18.5 10.1 10.1 11.8 16.1 21.2 17.8
Deposits (INR bn) 3,241 3,383 3,580 3,579 3,802 3,708 4,144 3,937 4,164 4,090 4,536
Deposit growth Q-o-Q (%) 5.3 4.4 5.8 (0.0) 6.2 (2.5) 11.8 (5.0) 5.8 (1.8) 10.9
Deposit growth Y-o-Y (%) 14.2 16.2 11.0 16.3 17.3 9.6 15.8 10.0 9.5 10.3 9.5
CD ratio (%) 92.0 93.2 94.6 96.4 92.9 93.6 90.0 97.9 98.5 102.9 96.9

Table 6: CASA continued momentum, retail deposits forming 63% of deposits

Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418
CASA (%) 44.0 43.0 47.0 43.0 45.0 48.0 51.0 49.0 50.0 49.0 54.0
Retail deposits (% of total dep.) 63.2 63.0 63.6 64.4 64.2 65.7 60.3 64.7 63.6 66.5 63.0
Retail dep. / branch (INR mn) 747 760 784 767 785 759 757 753 760 757 772
Retail bus. / branch (INR mn) 1,117 1,141 1,180 1,167 1,194 1,159 1,184 1,270 1,288 1,296 1,330

Table 7: NIMs under pressure (down 10bps QoQ to 3.3%)

(%) Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418
Cost of funds 6.0 5.9 5.8 5.8 5.7 5.5 5.4 5.2 5.2 5.1 5.1
NIM 3.9 3.8 4.0 3.8 3.6 3.4 3.8 3.6 3.5 3.4 3.3
CASA 44.0 43.0 47.0 43.0 45.0 48.0 51.0 49.0 50.0 49.0 54.0

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Table 8: Core fee income softer, a key monitorable henceforth
As % of total fee income Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418
Corporate banking 25.2 23.6 22.5 23.5 24.1 19.3 22.5 16.6 20.6 16.0 15.8
Agri and SME Banking 4.8 4.7 5.2 5.6 4.8 4.8 5.6 3.7 3.9 4.7 5.3
Business banking 18.4 18.9 13.9 25.4 25.1 27.9 20.6 23.9 25.5 26.3 23.7
Retail banking 38.7 37.7 36.4 39.5 41.5 43.3 43.1 44.2 47.2 46.0 42.1
Others 12.9 15.2 21.9 5.9 4.4 4.7 8.1 11.6 2.7 7.1 13.1
Q-o-Q growth in non int. inc. (%) (11.2) 14.5 15.2 1.6 (7.3) 33.9 (11.4) (0.4) (13.8) 0.3 7.5
Fee inc. to total inc. (%) 33.4 36.0 37.2 37.7 36.0 44.0 38.9 39.4 36.3 35.4 37.1

Table 9: Cost-to-income ratio at > 50% levels

(%) Q216 Q316 Q416 Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418
Cost-income ratio 40.6 38.7 39.3 38.4 41.9 40.0 43.5 43.7 47.0 47.4 51.2
Tax rate 34.4 33.5 33.3 33.9 33.2 31.4 31.7 33.0 32.1 30.3 37.6

Table 10: Retail growth driven by personal, credit cards and auto loans
(INR mn) Q4FY18 Q4FY17 Growth YoY
Non-schematic loans & others 247,757 167,993 47.5
Loan against Property 165,171 134,394 22.9
Personal Loans & Credit Cards 289,050 201,592 43.4
Auto Loans 206,464 167,993 22.9
Retail agricultural 289,050 268,789 7.5
Housing loan 867,149 739,169 17.3
Total retail 2,064,640 1,679,930 22.9
Source: Company

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Financial snapshot (INR mn)

Year to March Q4FY18 Q4FY17 % change Q3FY18 % change FY18 FY19E FY20E
Interest income 117,712 111,682 5.4 117,216 0.4 457,803 528,931 600,886
Interest exp 70,407 64,396 9.3 69,900 0.7 271,626 303,264 328,249
Net int. inc. (INR mn) 47,305 47,286 0.0 47,315 0.0 186,177 225,668 272,636
Other income 27,887 30,132 (7.5) 25,931 7.5 109,671 138,540 156,290
Net revenues 75,191 77,418 (2.9) 73,246 2.7 295,848 364,207 428,927
Operating expenses 38,469 33,670 14.3 34,708 10.8 139,903 159,681 181,457
Staff expense 10,789 9,480 13.8 10,629 1.5 43,130 49,168 55,192
Other opex 27,680 24,191 14.4 24,079 15.0 96,774 110,513 126,266
Pre prov op profit(ppop) 36,722 43,747 (16.1) 38,538 (4.7) 155,945 204,526 247,470
Provisions 71,795 25,813 178.1 28,110 155.4 154,728 88,565 89,324
Profit before tax (35,073) 17,935 NA 10,428 NA 1,217 115,961 158,145
Provision for taxes (13,186) 5,684 NA 3,163 NA (1,540) 37,108 50,607
PAT (21,887) 12,251 NA 7,264 NA 2,757 78,853 107,538
Diluted EPS (INR) (8.5) 5.1 NA 3.0 NA 1.1 30.2 41.2

Ratios
NII/GII (%) 40.2 42.3 40.4 40.7 42.7 45.4
Cost/income (%) 51.2 43.5 47.4 47.3 43.8 42.3
Provisions / PPOP 195.5 59.0 72.9 99.2 43.3 36.1
Tax rate (%) 37.6 31.7 30.3 (126.6) 32.0 32.0
Bal. sheet data (INRbn)
Advances 4,397 3,731 17.8 4,209 4.4 4,397 5,320 6,437
Deposits 4,536 4,144 9.5 4,090 10.9 4,536 5,494 6,692
Investments 1,539 1,288 19.5 1,424 8.1 1,539 1,720 1,934

Asset quality
Gross NPA 342,486 212,805 60.9 250,005 37.0 342,486 347,333 364,842
Gross NPA (%) 6.8 5.0 5.3 6.8 6.0 5.2
Net NPA 165,917 86,266 92.3 117,695 41.0 165,917 145,945 128,828
Net NPA (%) 3.4 2.1 2.6 3.4 2.7 2.0
Provision coverage (%) 51.6 59.5 52.9 51.6 58.0 64.7
B/V per share (INR) 247.2 271.6 304.0
Adj book value / share 201.9 232.5 269.5
Price/ Adj. book (x) 2.4 2.1 1.8
Price/ Earnings 459.7 16.4 12.0

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Key highlights from Axis Bank's Q4FY18 concall

With respect to asset quality

 NPA recognition cycle is almost complete. The bank has recognized a substantial
portion of the NPA’s w.r.t the Feb 12 RBI circular.
 The SMA account portfolio is now <0.5% of gross customer assets, which is the lowest
since 2014

 Not a lot of follow on provisions to come from the new slippages in this quarter
 Normalisation of credit cost towards 100-110bps in the second half of this year

 All upgrades during the quarter will be added to the BB rating pool. On the other
hand, downgrades from BBB to BB was at the same run rate as previous quarters
(INR25bn). A lot of the large accounts have already been downgraded. One-two more
quarters of downgrade is still left. However, some upgrades happened from BB to BBB
(<INR10bn).
 INR14bn was related to SDR,S4A related equity investments. 10% of the slippages
were from this pool during the quarter.

 Slippages relating to retail and SME came in at INR4.9bn and INR0.7bn respectively
which is in line with the earlier reported numbers
 Funded exposure to power is about INR97bn and most of it is functional projects.
Majority of the WIP projects has already slipped into NPA. 1/4th of these assets are in
BB and 3/4th in BBB.
o There is possible resolution happening and interest developing for these projects
but haircuts is a given.

 Majority of the slippages during this quarter are accounts which are still not yet
recognized as NPA by other banks.

With respect to operating metrics

 There is no structural pressure on NIMs going forward. Overall there was about a 10bps
pressure in Q4FY18.

 Education loans and small business banking continue to grow strongly. Working Capital
loans grew at 55% YoY. The bank is also preparing to move towards a deeper DCM
franchise in the future.

 9% deposit growth YoY. 71% of new origination from existing bank customers. 51% of
overall sourcing from branches and essential for customer acquisition. Opened 114
branches this quarter. New branches continue to get smaller in size.

 Fee growth should be a tad bit lower than the growth rate in advances going forward

 UK subsidiary is small one whose audit is still not completed

 80% of the incremental sanctions going to A and above corporate accounts

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Other highlights

 Loans grew at a 24% CAGR over the last 10 years with capital consumption at 55bps
(CET1). The bank expects the trend to continue going forward.

 INR25,630mn warrants were issued earlier and will expiring in June 2019. This will
contribute to the capital build up and hence provide adequate growth opportunities
for the next 2 years.

 The bank is of the view that in the medium term - margins should be stable around
FY18 levels, RoE upwards of 18% and CASA growth should be in mid teens.
 Non funded book is INR24bn from the non NPA pool out of which INR10bn would
exposure to houses whose loans are recognized as NPA.

 INR29bn worth of SR’s outstanding

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Key highlights from Axis Bank's Q3FY18 concall

With respect to asset quality

 The slippages during the quarter was INR44.28bn (down from INR89.36bn, but still
elevated at 4.3% mark). Of this the corporate slippages stood at INR29.8bn and 93%
of it came from low rated BB & below accounts. The slippages in retail segment were
INR9.34bn and SME slippages were INR5.13bn.
 There is the net rise in BB and below rated book of INR3bn with the movement being
a) addition of INR12bn due to upgrade of an NPLs account (steel account) b)
downgrades into BB and below of INR20bn (the run-rate of addition into this pool has
been to the tune of INR20-25bn over last few quarters) and c) the rest is slippages (viz
INR28-29bn).

o The large part of the BB and below rated are dominated by power , I&S and Infra
segment, cumulatively forming > 60% of this book.

o The non-fund based exposure to this pool should broadly be ~INR50bn.

 Further to this recoveries and upgrades were INR40bn as during Q3FY18 the Bank
recovered substantial amount in cash from an IT/ITES account (likely aegis) and also
upgraded one account in the Steel Sector (likely JSPL) . These two accounts were part
of the 9 accounts that were reclassified as NPA by the Bank in Q2FY18.
o Of the balance 7 accounts ( RBS downgraded account) , the bank expects some
recovery to play out in current quarter as well.

o The bank sold some NPLs (indication of the amount to be closer to INR20bn) during
the quarter to various funds (not ARCs) on fully cash basis (one of the large loans
were sold at 40% haircut).

 The credit cost for Q3FY18 came in at 233bps taking 9mFY18 credit cost to 250bps.
The bank continues to retain credit cost guidance for FY18 in the range of 220-260
basis points and trend to long term normalised levels by FY19 end.

 Coverage ratio improved to 66% ( from 60% in previous quarter), bank aims to maintain
PCR within 60-65% on sustainable basis.

 With respect to RBI’s referred list under IBC : The Bank has total loan outstanding of
INR60.7bn against the IBC accounts mentioned in the two lists referred by RBI.
Incremental provisions of INR2.37bn on these select accounts have been made in
Q3FY18 taking the total provisioning to INR41.23bn. There are no major Non-fund
exposure to these accounts (likely to be in range of INR1-2bn).

 SRs outstanding : INR30bn ( stable QoQ), there were no sale to ARCs.

 There are no contingency provisions.

With respect to operating metrics

 Loan growth was 21% YoY and momentum is back largely broad based in nature (29%
retail, 27% YoY growth in SME). The growth in corporate book has been driven by
working capital requirement with higher tilt towards better rated corporate (growth
is largely driven by taking market share from other banks). The retail piece continue
to deliver momentum a) retail asset up > 29% b) retail fee > 35% YoY (49% of fee
income), CASA up > 14% YoY with CASA ratio of 49%

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 SME growth during the quarter gained momentum ( up > 27% YoY, this is optically
higher on lower base) , broadly granular in nature. The bank highlighted that that GST
related issues have phased out and expect the growth in segment to sustain.

 The growth in the retail book is more diversified now with growth picking up in
Personal loans/credit cards/ Small business banking segment (proportion cumulatively
rising to 26% from 19% in FY13). Thus contribution of home loans has come down to
42% ( from 54% in FY13). The growth in the new business drivers viz. Education loans of,
Small business banking, continued to register strong momentum. The growth in the
retail portfolio is driven by both deepening of relationship and expansion of branches.

 Deposit growth came in at 10% YoY (optically lower given higher base set in Q3FY1 post
demonetisation). The growth in term deposits has been driven by retail tem deposits
( up > 12%) with 3% YoY dip in wholesale deposits.

 NIMs during the quarter at 3.38% with domestic NIMs of 3.6% (versus 3.71% in
previous quarters). The management expects NIMs to have bottomed out and few
tailwinds being a) liquidity tightening which gives pricing power to banks b)
improvement in asset quality numbers and c) benefit of recent capital raising.The
management maintained that they expect NIMs for full year FY18 to be lower than
FY17 by 20bps.
 This quarter saw a fairly reduction in employee base during the quarter (impact of
digital playing through), which translated into slower staff opex growth

Other highlights

 Trading income at INR2bn.

 Another 104 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.
 The overall power exposure at INR160bn with BB and below rated at 36% and BBB
rated being 30%.

 The conversion time limit for warrants is 18 months till June 2019.
 Subsidiary performance:
o Axis Finance: Loan book grew 82% YoY at >INR65bn (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 1.73mn, PAT grew >30% for 9mFY18

o Axis AMC: 50% YoY growth in AAUM, PAT growth > 8% for 9mFY18.

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Company Description
Axis Bank is the third-largest private sector bank in India in terms of asset size, with a
balance sheet of >INR6.4tn. It has a network of over 3,703 branches and extension counters
across the country. The bank earns substantial fee income from transaction and merchant
banking activities.

Investment Theme
Even though retail continues to strengthen and capital infusion will provide succor, visibility
in corporate earnings remains weak. Current quarter marks improved performance, but
higher unrecognised stress suggests limited asset quality visibility. We expect valuations to
be capped at 1.9x FY20E P/BV for RoE of sub-13% (post capital). We maintain ‘HOLD/SP’.

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

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Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Macro Interest income 445,422 457,803 528,931 600,886
GDP(Y-o-Y %) 6.6 6.5 7.1 7.6 Interest expended 264,490 271,626 303,264 328,249
Inflation (Avg) 4.5 3.6 4.5 5.0 Net interest income 180,931 186,177 225,668 272,636
Repo rate (exit rate) 6.3 6.0 6.0 6.5 Non interest income 116,913 109,671 138,540 156,290
USD/INR (Avg) 67.1 64.5 66.0 66.0 - Fee & forex income 78,804 88,671 101,390 115,938
Sector - Misc. income 4,108 4,830 9,150 12,352
Credit growth 9.0 12.0 14.0 17.0 - Investment profits 34,002 16,170 28,000 28,000
Deposit growth 14.0 12.0 13.0 14.0 Net revenue 297,844 295,848 364,207 428,927
CRR 4.0 4.0 4.0 4.0 Operating expense 121,999 139,903 159,681 181,457
SLR 20.0 20.0 19.5 19.0 - Employee exp 38,919 43,130 49,168 55,192
G-sec yield 6.5 6.5 7.0 7.1 - Other opex 83,081 96,774 110,513 126,266
Company Preprovision profit 175,845 155,945 204,526 247,470
Op. metric assump. (%) Provisions 121,170 154,728 88,565 89,324
Yield on advances 9.3 8.4 8.4 8.0 Loan loss provisions 107,192 163,080 87,565 88,324
Yield on investments 7.7 7.1 6.7 6.4 Investment depreciation 2,390 (2,110) - -
Yield on asset 8.5 7.7 7.6 7.3 Other provisions 11,588 (6,242) 1,000 1,000
Cost of funds 5.2 4.6 4.4 4.1 Profit Before Tax 54,676 1,217 115,961 158,145
Net interest margins 3.5 3.1 3.3 3.3 Less: Provision for Tax 17,883 (1,540) 37,108 50,607
Cost of deposits 5.0 4.4 4.2 3.8 Profit After Tax 36,793 2,757 78,853 107,538
Cost of borrowings 7.0 6.5 6.1 5.9 Shares o /s (mn) 2,395 2,567 2,612 2,612
Spread 3.3 3.1 3.2 3.3 Adj. Diluted EPS (INR) 15.4 1.1 30.2 41.2
Tax rate (%) 32.7 (126.6) 32.0 32.0 Dividend per share (DPS) 5.0 - 8.0 8.0
Balance sheet assumption (%) Dividend Payout Ratio(%) 35.9 - 29.2 21.4
Credit growth 10.5 18.1 19.9 20.0
Deposit growth 15.8 9.5 21.1 21.8 Growth ratios (%)
SLR ratio 17.9 18.5 18.0 17.5 Year to March FY17 FY18 FY19E FY20E
Low-cost deposits 51.4 53.8 53.4 54.2 NII growth 7.5 2.9 21.2 20.8
Gross NPA ratio 5.3 7.1 6.0 5.2 Fees growth (1.3) 12.5 14.3 14.3
Net NPA ratio 2.3 3.8 2.7 2.0 Opex growth 20.8 14.7 14.1 13.6
Net NPA / Equity 15.5 26.2 20.6 16.2 PPOP growth (5.9) (1.5) 26.3 24.3
Capital adequacy 14.9 17.4 16.9 16.6 PPP growth 9.2 (11.3) 31.2 21.0
Incremental slippage 6.0 8.3 3.2 3.0 Provisions growth 226.6 27.7 (42.8) 0.9
Provision coverage 59.5 51.6 58.0 64.7 Adjusted Profit (55.3) (92.5) NA 36.4

Operating ratios
Year to March FY17 FY18 FY19E FY20E
Yield on advances 9.3 8.4 8.4 8.0
Yield on investments 7.7 7.1 6.7 6.4
Yield on assets 8.5 7.7 7.6 7.3
Cost of funds 5.2 4.6 4.4 4.1
Net interest margins 3.5 3.1 3.3 3.3
Cost of deposits 5.0 4.4 4.2 3.8
Cost of borrowings 7.0 6.5 6.1 5.9
Spread 3.3 3.1 3.2 3.3
Cost-income 41.0 47.3 43.8 42.3
Tax rate 32.7 (126.6) 32.0 32.0

11 Edelweiss Securities Limited

 Banking and Financial Services

Balance sheet (INR mn) RoE decomposition (%)

As on 31st March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Share capital 4,790 5,133 5,224 5,224 Net int. income/assets 3.5 3.1 3.3 3.3
Reserves & Surplus 552,835 629,320 704,298 788,810 Fees/Assets 1.6 1.6 1.6 1.6
Net worth 557,625 634,453 709,522 794,033 Invst. profits/Assets 0.6 0.3 0.4 0.3
Sub bonds/pref cap - 5,000 10,000 15,000 Net revenues/assets 5.7 5.0 5.2 5.2
Deposits 4,143,788 4,536,227 5,493,588 6,691,520 Operating expense/assets (2.3) (2.4) (2.3) (2.2)
Total Borrowings 1,050,309 1,475,162 1,580,656 1,687,531 Provisions/assets (2.3) (2.6) (1.3) (1.1)
Other liabilities 262,955 262,455 317,570 384,260 Taxes/assets (0.3) - (0.5) (0.6)
Total liabilities 6,014,677 6,913,296 8,111,336 9,572,344 Total costs/assets (5.0) (4.9) (4.1) (3.9)
Loans 3,730,694 4,396,503 5,319,769 6,436,920 ROA 0.7 - 1.1 1.3
Cash and Equivalents 502,562 434,549 471,100 535,615 Equity/assets 10.4 10.0 9.7 9.2
Gilts 930,079 1,112,107 1,273,364 1,466,334 ROAE (%) 6.8 0.5 11.7 14.3
Others 357,855 426,654 446,639 467,624
Fixed assets 37,469 39,717 36,170 32,348 Valuation parameters
Other Assets 456,019 503,766 564,294 633,504 Year to March FY17 FY18 FY19E FY20E
Total assets 6,014,677 6,913,296 8,111,336 9,572,344 Adj. Diluted EPS (INR) 15.4 1.1 30.2 41.2
Credit growth 10.5 18.1 19.9 20.0 Y-o-Y growth (%) (55.5) (93.0) NA 36.4
Deposit growth 15.8 9.5 21.1 21.8 BV per share (INR) 232.8 247.2 271.6 304.0
EA growth 11.7 15.4 17.9 18.6 Adj. BV per share (INR) 207.6 201.9 232.5 269.5
SLR ratio 17.9 18.5 18.0 17.5 Diluted P/E (x) 32.1 459.7 16.4 12.0
C-D ratio 96.8 104.4 103.3 101.7 Price/ Adj. BV (x) 2.1 2.0 1.8 1.6
Low-cost deposits 51.4 53.8 53.4 54.2 Price/ Adj. BV (x) 2.4 2.4 2.1 1.8
Provision coverage 59.5 51.6 58.0 64.7 Dividend Yield (%) 1.0 - 1.6 1.6
Gross NPA ratio 5.3 6.8 6.0 5.2
Net NPA ratio 2.3 3.4 2.7 2.0
Incremental slippage 6.0 8.3 3.2 3.0
Net NPA / Equity 15.5 26.2 20.6 16.2
Capital adequacy 14.9 17.4 16.9 16.6
- Tier 1 11.9 14.3 13.9 13.5

Peer comparison valuation

Market cap Diluted P/E (X) Price/ Adj. BV (X) ROAE (%)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
Axis Bank 19,132 16.4 12.0 2.1 1.8 11.7 14.3
DCB Bank 887 18.7 15.0 2.2 1.9 11.9 13.0
Federal Bank 2,830 13.7 11.0 1.5 1.3 10.8 12.3
HDFC Bank 74,538 23.8 19.1 3.6 3.1 17.3 17.4
ICICI Bank 26,809 12.9 9.5 2.1 1.8 13.2 16.3
IndusInd Bank 16,585 25.2 19.9 4.2 3.5 17.4 18.8
Karnataka Bank 659 5.8 4.7 0.6 0.6 10.0 11.5
Kotak Mahindra Bank 33,280 30.4 25.0 4.3 3.7 15.0 15.9
Yes Bank 11,201 14.8 11.2 2.8 2.3 19.6 21.8
Median - 16.4 12.0 2.2 1.9 13.2 15.9
AVERAGE - 18.0 14.1 2.6 2.2 14.1 15.7
Source: Edelweiss research

12 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
V. R. Kaundinya Director

Auditors - S.R. Batliboi & Co. LLP

*as per last annual report

Holding - Top 10
Perc. Holding Perc. Holding
BNY Mellon 5.44 Dodge & Cox 3.67
Harris Associates LP 3.40 Capital Group Companies INC 3.09
Blackrock 2.69 Vanguard Group 2.38
ICICI Prudential Asset Mgmt Co 1.77 Franklin Templeton India Pte Ltd 1.61
General Insurance 1.51 FMR LLC 1.47
*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
11 Apr 2018 United India Insurance Company Limited Buy 45000.00
06 Apr 2018 United India Insurance Company Limited Buy 15487.00
23 Mar 2018 Shri Sidharth Rath Sell 40000.00
23 Mar 2018 Shri Sunil Bahl Sell 21000.00
13 Mar 2018 Shri Veerabhadrappa Sell 17000.00
*in last one year

13 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 HOLD SU M

Bajaj Finserv BUY SP L Bank of Baroda BUY SP M
Bharat Financial Inclusion BUY SP M Capital First BUY SO M
DCB Bank HOLD SP 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 BUY SP L
Indiabulls Housing Finance BUY SO M IndusInd Bank BUY SP L
Karnataka Bank BUY SP M Kotak Mahindra Bank BUY SO 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 SP M
Manappuram General Finance BUY SO H Max Financial Services BUY SO L
Multi Commodity Exchange of India HOLD SU 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 M
South Indian Bank BUY SO 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

14 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 LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f20
bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c89
e548e5001b4f8141cf423fd58c07b02,
st=Maharashtra
aditya.narain@edelweissfin.com Date: 2018.04.27 00:06:10 +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

26-Apr-18 Yes Bank As good as it gets; 352 Buy

Result Update
25-Apr-18 MMFS All-round strong performance; 507 Hold
sustenance key;
Result Update
25-Apr-18 IDFC Retail gaining strength; 47 Buy
Bank merger holds key;
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
700
(INR)

297 600

149 500
(INR)

- 400
Apr-14

Sep-14
Feb-14

Mar-14

Jun-14

Dec-14
Jul-14

Aug-14

Oct-14

Nov-14
May-14
Jan-14

300

200
Dec-17
Aug-17

Oct-17
Apr-17

Apr-18
Nov-17
May-17

Feb-18
Sep-17

Jan-18

Mar-18
Jun-17

Jul-17

Axis Bank

15 Edelweiss Securities Limited

Banking and Financial Services

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 Axis Bank
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