Key points
* Axis Bank’s FY2014 annual report highlights the structural changes in the business which include increasing the granularity in deposits and asset base, and diversifying the fee income further. This should result in a sustainable improvement in the operating performance going ahead.
* The bank has contained its exposures to risky sectors such as power (5.5% of book in FY2014 vs 6.8% in FY2013). Moreover, the rating profile of corporate loans (61% are rated as “A” and above) and SME loans (80% are rated as “SME- 3” and above) remains healthy. The proportion of secured loans increased to 83.4% from 82.8% in FY2013 due to focus on secured retail loans.
* With a stable net interest margin, healthy asset quality, steady growth in fee income and strong capital adequacy (tier-1 CAR of 12.6%), we expect the bank to sustain the strong earnings performance (15.5% CAGR over FY2014-16). Therefore, the bank is likely to maintain its superior return ratios (RoA 1.8% and RoE of 17.5%). The stock currently trades at 1.7x FY2016E book value which is a discount of about 20% to the mean valuation. We maintain our Buy rating on the stock with a price target of Rs2,135 (2x FY2016E book value).
Valuations
With a stable net interest margin, healthy asset quality, steady growth in fee income and strong capital adequacy (tier-1 CAR of 12.6%), we expect the bank to sustain the strong earnings performance (15.5% CAGR over FY2014-16). Therefore, the bank is likely to maintain its superior return ratios (RoA 1.8% and RoE of 17.5%). The stock currently trades at 1.7x FY2016E book value which is a discount of about 20% to the mean valuation. We maintain our Buy rating on the stock with a price target of Rs2,135 (2x FY2016E book value).
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