Axis Bank higher-than-industry credit growth seen

 Key highlights

·         Credit growth for the bank to be ~5% higher than systemic growth. Retail and MSME to drive credit at growth rates of ~25% and ~20% respectively. Corporate credit to remain sluggish due to lack of private investment. However, the bank is well placed to participate in any opportunity that arises due to public investment.

·         Decline in interest rate to impact net interest margin in the short term due to time lag in repricing of liability compared to assets. However, the decline is not expected to be significant. The bank maintains its full-year NIM guidance of 3.5%-3.8% (margin guidance has been wide). We expect NIM compression of ~10-15bps in the near term.

·         Corporate fee income continues to remain subdued due to slow business momentum. Retail fee growth will remain the key driver, which we believe should growth at +25% during FY16. The fee income should grow faster in FY16 compared to FY15, but it will be lower than balance sheet growth.

·         Calibrated growth in operating expenses to help the bank maintain its cost-to-income ratio, which currently stands at 43%. The bank expects to add 200-250 branches, largely in metro and urban centers. The head count is expected to see addition in FY16 compared to decline in FY15.

·         The bank has not given any stressed-asset guidance for FY16 unlike Rs 65bn for FY15, which included slippages and fresh restructuring. The end of asset-quality forbearance on restructuring increased pressure on slippages. The bank expects stressed assets in FY15 to be lower than FY15. Barring some spillover of restructuring pertaining to Q4FY15 (amounting to Rs4bn), all the indicated stressed assets in FY16 will be slippages, which should be higher than FY15’s Rs 28.5bn. Hence, the bank has guided for slightly higher credit cost of ~80-85bps compared to 75bps in FY15.

·         Asset quality pressure in sectors such as iron and steel, power, engineering, construction, and roads continue. Efforts are being made at the industry level to find a resolution to viable projects by elongating the repayment cycle under the 5/25 scheme, which will allay the asset quality concerns in large projects.

 Outlook and valuation

Though the slippage in FY16 will remain high, the outstanding contingent provision of Rs 10bn can provide cushion to the earnings. We expect ~18% credit growth with NIM of ~3.75% for FY16. Fee income should increase by ~15% with stable C/E ratio. This will drive PAT CAGR of 16% and return ratios of 1.75% over FY15-17.  At CMP of Rs 565, the stock trades at 2.4x FY17E adjusted book value per share (ABVPS) of Rs 239. We maintain Buy with a price target of Rs 660 (unchanged/ Rs 660 earlier).