Axis Bank: Buy

Axis Bank, with its large deposit base and fee income, may be among the private banks best placed to thrive in a rising interest rate scenario. The bank has continued to deliver strong profit growth (35 per cent for the nine months ended December 2010) on a high base. The stock has corrected by 20 per cent over the last three months on concerns of rising interest rates. At th current price of Rs 1,284, the stock is trading at 2.37 times its estimated FY12 book value of Rs 540 and 13 times its FY12 estimated earnings. The stock trades at a premium to most banks barring HDFC Bank and Kotak Mahindra Bank. However, the premium is justified given that the bank has clocked higher than industry average credit growth consistently over the last four year period (loan book grew at 41 per cent annually over FY07-FY10) and may continue to do so going forward. The advance book grew by 46 per cent for the year ended December 2010. Axis Bank has among the highest proportions of low-cost deposits (42 per cent) in the banking space. Axis Bank also has a relatively lower base rate for lending which ensures it remains competitive, while maintaining reasonable margins. Axis Bank's strong fee income (core fee income took care of three fourth of operating expenses in nine months ended FY11) and low provisioning requirement due to improving asset quality are other key positives. The bank's investment banking income may receive a boost too from the acquisition of ENAM's investment banking business. These synergies may further improve as Axis Bank provides retail broking to its depositors. The bank has one of the lowest net non-performing asset ratios in the banking system (0.29 per cent). Axis Bank is investing heavily in branch expansion and currently has the third largest ATM network in India. Such increased focus on expanding its network would enable it to target more low-cost deposits. Despite spike in operating expenses due to expansion and rising employee costs, the cost-income ratio continues to be low at 42 per cent. The bank has already raised its base rate by 50 bps and prime lending rates by 75 bps during in the December quarter which aided its sequential margin expansion to 3.81 per cent. With 85 per cent of the advances given on floating rates interest rate risk is somewhat mitigated for the bank. However, lending rates may rise at a lower pace than deposit rates, putting the margin under pressure. The credit-deposit ratio of the bank is at a stretched 79 per cent as of December 2010 and may have to moderate. Capital adequacy of the bank inclusive of the nine month profits, stands at 13.79 per cent. Higher rate of loan growth would mean faster erosion of capital adequacy ratio. The management has indicated another round of core capital infusion sometime in the next fiscal.

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