Axis Bank AXBK.NS AXSB IN EQUITY: BANKS Solid performance on PPOP Global Markets Research Asset quality guidance buffering for known stressed exposures 18 October 2014 Rating Remains Action: In-line 2QFY15; TP increase to INR490, maintain Buy 2QFY15 PAT was in-line with the PPOP beat offset by higher provisions. Liability franchise improvement continues to aid margins further and the pickup in corporate fee/loan growth was encouraging. On asset quality, management is buffering up for some of the known problem accounts (gas power/Abhijit) in its unchanged guidance of INR65bn delinquency excluding which guidance looks conservative. We maintain Axis Bank as our top pick. • Balance sheet granularity improving: Axis’ granularity on both assets and liabilities continue to increase with bulk deposits now just 20% of deposits and retail assets (including Agri) contributing ~40% of its loan book. We see this as a big long-term positive and reason for re-rating. • PPOP growth drivers– How sustainable? (1) NIMs: Directionally NIMs may come off in 2HFY15 given the ~10bps base rate cut but NIMs as the FY15 is still likely to be higher than FY14. (2) While the pick-up in core fees was led by a spike in the large corporate book, we do not see Axis adding exposure to risky sectors and 12% y-y growth in corporate book looks reasonable. • No downward revision in delinquency guidance? Management maintained its guidance of INR65bn of delinquency, implying ~INR35-40bn of delinquency in 2HFY15 vs INR25bn in 1HFY15. We believe management is buffering for some known stressed cases like gas power/ Abhijit power exposure which when recognised would reduce asset quality uncertainty. Excluding these, management guidance is conservative, in our view. Catalysts: Lower delinquency in 2HFY15+ improving PPOP growth Valuations: Still seems reasonable, more re-rating likely; Top Pick We lift our TP to INR490/ largely due to a rollover. Axis continues to deliver on diversifying its asset mix and making its liability more granular. As some credit concerns ease over the next 12-18 months and corporate growth picks up we expect further re-rating. In our view, the current valuation at 1.75x Sep-16 book of INR235 is reasonable in that context. Year-end 31 Mar Currency (INR) PPOP (mn) FY14 Actual FY15F Old New FY16F Old New Closing price 17 October 2014 INR 402 Potential upside +22% Anchor themes Granularity in balance sheet and revenue lines have increased significantly and further re-rating is likely as asset quality concerns ebb. Nomura vs consensus Our FY15/16F PAT is marginally below consensus. Axis Bank could surprise positively if the asset quality turnaround is faster. Research analysts India Banks Amit Nanavati - NSFSPL [email protected] +91 22 4037 4361 New 114,561 130,086 129,206 152,041 154,258 177,850 181,374 62,177 69,664 69,525 83,078 84,267 100,039 102,066 Normalised net profit (mn) 62,177 69,664 69,525 83,078 84,267 100,039 102,066 26.47 29.65 29.59 35.36 35.87 42.58 43.45 FD norm. EPS growth (%) 19.6 12.0 11.8 19.3 21.2 20.4 21.1 FD normalised P/E (x) 15.2 N/A 13.6 N/A 11.2 N/A 9.2 Price/adj. book (x) 2.5 N/A 2.1 N/A 1.9 N/A 1.6 Price/book (x) 2.5 N/A 2.1 N/A 1.9 N/A 1.6 Dividend yield (%) INR 490 Adarsh Parasrampuria - NFASL [email protected] +91 22 4037 4034 Reported net profit (mn) FD normalised EPS Target price Increased from 460 FY17F Old Buy 1.0 N/A 1.1 N/A 1.3 N/A 1.5 ROE (%) 17.4 17.0 16.9 17.5 17.8 18.2 18.5 ROA (%) 1.7 1.7 1.7 1.7 1.7 1.7 1.7 Source: Company data, Nomura estimates Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. Nomura | Axis Bank 18 October 2014 Key data on Axis Bank Relative performance chart Balance sheet (INRmn) Source: Thomson Reuters, Nomura research Notes: Performance (%) Absolute (INR) Absolute (USD) Rel to MSCI India 1M 0.9 0.0 2.3 3M 2.8 0.4 -0.1 12M 83.2 82.7 58.1 M cap (USDmn) Free float (%) 3-mth ADT (USDmn) 15,404.0 36.0 27.3 Profit and loss (INRmn) Year-end 31 Mar Interest income Interest expense Net interest income Net fees and commissions Trading related profits Other operating revenue Non-interest income Operating income Depreciation Amortisation Operating expenses Employee share expense Pre-provision op profit Provisions for bad debt Other provision charges Operating profit Other non-op income Associates & JCEs Pre-tax profit Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves FY13 271,826 -175,163 96,663 50,266 5,863 9,382 65,511 162,174 -3,517 FY14 306,412 -186,895 119,516 53,956 3,276 16,820 74,052 193,569 -3,639 FY15F 354,901 -216,145 138,756 60,431 5,500 15,900 81,831 220,587 -4,003 FY16F 414,016 -250,064 163,952 71,309 5,000 19,002 95,310 259,262 -4,404 FY17F 485,778 -294,199 191,580 84,144 5,000 22,488 111,633 303,213 -4,844 -41,855 -49,355 -56,758 -66,407 -77,696 -23,770 -26,013 -30,620 -34,194 -39,298 93,031 114,561 129,206 154,258 181,374 -14,799 -17,810 -25,437 -28,486 -29,035 -2,702 -3,261 0 0 0 75,531 93,490 103,769 125,772 152,339 75,531 -23,736 51,794 93,490 103,769 125,772 152,339 -31,313 -34,244 -41,505 -50,272 62,177 69,525 84,267 102,066 51,794 0 51,794 -9,855 41,939 62,177 0 62,177 -11,011 51,166 69,525 0 69,525 -12,644 56,882 20.6 20.9 16.8 25.2 22.1 7.8 7.8 16.0 16.0 16.7 19.2 14.8 23.6 13.0 17.9 23.1 20.0 19.6 19.6 16.8 16.5 11.7 12.5 11.2 16.1 10.5 15.0 12.8 11.8 11.8 11.8 19.0 19.0 15.5 15.6 15.5 84,267 102,066 0 0 84,267 102,066 -14,540 -16,721 69,727 85,345 Growth (%) Net interest income Non-interest income Non-interest expenses Pre-provision earnings Net profit Normalised EPS Normalised FDEPS Loan growth Interest earning assets Interest bearing liabilities Asset growth Deposit growth Source: Company data, Nomura estimates 18.2 16.5 17.0 19.4 21.2 21.2 21.2 20.0 20.0 20.3 19.9 21.2 16.9 17.1 17.0 17.6 21.1 21.1 21.1 20.0 20.0 20.1 19.8 21.2 As at 31 Mar Cash and equivalents Inter-bank lending Deposits with central bank Total securities Other int earning assets Gross loans Less provisions Net loans Long-term investments Fixed assets Goodwill Other intangible assets Other non IEAs Total assets Customer deposits Bank deposits, CDs, Other int bearing liabilities Total int bearing liabilities Non-int bearing liabilities Total liabilities Minority interest Common stock Preferred stock Retained earnings Reserves for credit losses Proposed dividends Other equity Shareholders' equity Total liabilities and equity Non-perf assets FY13 FY14 FY15F FY16F FY17F 163,811 240,741 219,477 265,729 321,156 40,539 41,647 50,649 61,322 74,113 1,986,552 2,321,881 2,769,644 3,328,677 3,998,169 -16,893 -21,214 -31,849 -43,323 -55,745 1,969,660 2,300,668 2,737,794 3,285,353 3,942,424 1,137,375 1,135,484 1,289,266 1,541,725 1,842,609 23,556 24,102 24,648 25,193 25,739 70,666 89,808 109,220 132,237 159,819 3,405,607 3,832,449 4,431,053 5,311,559 6,365,860 2,526,136 2,809,446 3,244,714 3,933,133 4,766,242 403,855 452,639 509,288 576,310 649,806 35,656 50,270 70,270 90,270 110,270 2,965,647 3,312,355 3,824,273 4,599,713 5,526,319 108,881 137,889 167,694 203,033 245,383 3,074,528 3,450,244 3,991,967 4,802,746 5,771,701 4,680 4,698 4,698 4,698 4,698 326,399 377,506 434,388 504,115 589,460 331,079 382,205 439,086 508,814 594,159 3,405,607 3,832,449 4,431,053 5,311,559 6,365,860 23,934 35,051 45,499 59,347 74,326 Balance sheet ratios (%) Loans to deposits Equity to assets 78.6 9.7 82.6 10.0 85.4 9.9 84.6 9.6 83.9 9.3 1.2 0.74 0.50 70.6 12.2 17.0 1.5 0.77 0.55 60.5 12.8 17.0 1.6 0.92 0.72 70.0 12.4 16.5 1.8 0.86 0.82 73.0 12.0 15.9 1.9 0.73 0.88 75.0 11.7 15.4 22.14 22.14 22.14 3.60 39.76 141.50 141.50 141.50 26.47 26.47 26.47 4.00 48.77 162.69 162.62 162.69 29.59 29.59 29.59 4.60 55.00 186.91 186.89 186.91 35.87 35.87 35.87 5.29 65.66 216.59 216.59 216.59 43.45 43.45 43.45 6.08 77.21 252.92 252.92 252.92 18.1 18.1 18.1 0.9 2.8 2.8 5.16 14.52 6.36 8.16 40.4 42.6 31.4 19.0 18.5 1.65 27.0 2.41 15.2 15.2 15.2 1.0 2.5 2.5 5.49 14.08 5.95 8.13 38.3 40.8 33.5 17.7 17.4 1.72 26.2 2.58 13.6 13.6 13.6 1.1 2.1 2.1 5.41 13.83 6.06 7.78 37.1 41.4 33.0 18.2 16.9 1.68 25.3 2.51 11.2 11.2 11.2 1.3 1.9 1.9 5.34 13.50 5.94 7.56 36.8 40.5 33.0 17.3 17.8 1.73 26.5 2.58 9.2 9.2 9.2 1.5 1.6 1.6 5.20 13.19 5.81 7.38 36.8 40.2 33.0 16.4 18.5 1.75 27.6 2.61 Asset quality & capital NPAs/gross loans (%) Bad debt charge/gross Loss reserves/assets (%) Loss reserves/NPAs (%) Tier 1 capital ratio (%) Total capital ratio (%) Per share Reported EPS (INR) Norm EPS (INR) FD norm EPS (INR) DPS (INR) PPOP PS (INR) BVPS (INR) ABVPS (INR) NTAPS (INR) Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/book (x) Price/adjusted book (x) Net interest margin (%) Yield on assets (%) Cost of int bearing liab (%) Net interest spread (%) Non-interest income (%) Cost to income (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (%) Operating ROE (%) Operating ROA (%) Source: Company data, Nomura estimates 2 Nomura | Axis Bank 18 October 2014 Axis Bank conference call highlights 2QFY15: Loan growth – Higher-than-expected loan growth was driven by uptick in large and mid-corporate growth segment: • Corporate loan growth of 8% q-q was driven by largely drawdowns from existing project sanctions and increased working capital needs. • Seeing some slowdown in the auto book, especially in the car portfolio, as system growth has come off – Axis’ auto loan book composition is 60% cars and ~40% CVs. Margins and Liability franchise improves further with ~10bps q/q expansion in NIMs and CASA ratio improving to 45%: • Domestic NIM was 4.3% and overseas book NIM was 1.7% during the quarterImprovement in domestic NIM was largely led by ~10bps q-q improvement in yield on advances. • Management expects some moderation in NIMs going forward as 80-85% of the domestic loans which is linked to the base rate becomes repriced on a 10bps base rate cut that the bank did this month, as yields may contract by 7-8bps. • Management indicated that the robust growth in retail term deposits of +30% y-y was largely driven by customer pull rather than the company push. Core fee growth improves as corporate growth picks up: • Core fee growth at 11% y-y growth was better than expected primarily due to positive 7% y-y growth in large corporate fees vs contraction in last few quarters and continued momentum in retail fees. • Trading profits in 2Q15 of INR2.7bn were largely by bonds’ gains. Opex growth adjusted for base was 15% y/y: • Opex growth during 2Q15 was up 18% y-y, however, adjusted for some writebacks in employee costs in 2Q14 the growth would have been around 15% y-y. Management guided towards opex growth of ~15% y-y for FY15F. Asset quality and provisions – Some uptick seen but remains well within guidance: • Management maintained credit cost guidance of ~75-85bps and delinquency expectation of INR65bn (Slippages + Restructuring) for FY15F keeping some buffer for 2H15F. • Provisioning during the quarter included INR6.4bn of specific provisions, INR0.7bn of standard and FX exposure linked provisioning. • Slippages of INR9.1bn included INR1.94bn of delinquency from the restructured book. Large write-offs of ~INR6bn driven by tax planning purposes. • Exposure to SC judgement linked names: Exposure to steel names is only to strong balance sheet companies. In the power sector, Axis does not have any exposure is to projects which have a fixed tariff PPA – as per MCA (ministry of corporate affairs) data, Axis has ~INR28bn exposure to names we believe could face debt servicing challenges but ~50% of this exposure is to Abhijit group (stress known since last 2 years). • ~45% exposure to power sector is towards operational projects – Similar to Mar-14 levels. 3 Nomura | Axis Bank 18 October 2014 Fig. 1: Strong PPOP growth led by ~10bps q/q improvement in NIMs and uptick in fee growth INRm n 2Q14 1Q15 2Q15 y/y q/q Interest income 76,090 82,894 86,024 13.1% 3.8% Interest expenses 46,723 49,789 50,775 8.7% Net interest incom e 29,367 33,105 35,249 20.0% Non-interest income 17,661 16,911 19,476 10.3% 15.2% 15.5% Fee income growth trends improve with Fees 14,320 13,779 15,910 11.1% 50 2,603 2,710 5320.0% 3,290 529 860 -73.9% Trading profits Misc 2.0% Higher CASA and LDR ratios aided NIM 6.5% expansion of ~10bps q/q. 4.1% some uptick in corporate fees and robust 62.7% growth in retail fees of +30% y/y 19,530 21,059 23,102 18.3% 9.7% 6,439 7,518 7,860 22.1% 4.6% Overheads 13,090 13,541 15,242 16.4% Pre prov profit 27,498 28,957 31,623 15.0% 6,875 3,866 7,250 5.5% Operating expenses Staff Expenses Provisions Com m ents 12.6% PPOP growth was encouraging despite higher 9.2% opex. Core PPOP growth was up 18% y/y 87.5% 20,623 25,091 24,373 18.2% -2.9% Provision for tax 7,000 8,423 8,266 18.1% -1.9% Profit after tax 13,623 16,668 16,107 18.2% -3.4% NIM Cost to Income 3.79% 41.5% 3.88% 42.1% 3.97% 42.2% 0.18% 0.69% 0.09% NIM improvement led by higher LDRs and 0.11% CASA ratio Provisions/PPOP 25.0% 13.4% 22.9% -2.07% 9.58% Tax rate 33.9% 33.6% 33.9% -0.03% 0.34% Profit before tax Balance sheet data Advances 2,013,032 2,305,352 2,421,981 20.3% 5.1% Higher than expected loan growth was Deposits 2,553,651 2,720,042 2,837,276 11.1% 4.3% driven by 8% q/q growth in corporate segment Credit to Deposit 78.8% 84.8% 85.4% 6.5% 0.6% CASA Ratio 42.9% 42.4% 44.5% 1.7% 2.2% Asset quality Gross NPA 27,345 34,633 36,131 32.1% Net NPA 8,383 11,135 11,798 40.7% NPA coverage (%) 69.3% 67.8% 67.3% Gross NPA (%) 1.19 1.34 1.34 0.15 0.00 within guided range Net NPA(%) 0.37 0.44 0.44 0.07 0.00 LLP/Loans 1.28 0.70 1.22 (0.06) 0.52 -2.0% 4.3% There was some uptick in both restructuring 6.0% and slippages during the quarter resulting to -0.5% higher LLPs of ~120bps but remains well Fees breakdow n 2Q14 1Q15 2Q15 y/y Retail banking 4,582 5,098 6,046 31.9% Business banking 1,146 1,378 1,273 11.1% -7.6% uptick in corporate fee growth. Retail fee Agri & SME banking 1,002 551 955 -4.8% 73.2% growth trends remain robust growing +30% y/y Treasury 3,150 3,307 3,023 -4.0% -8.6% Large & Mid corp Total q/q 18.6% Improvement in core fee growth was led by 4,296 3,445 4,614 7.4% 33.9% 14,320 13,779 15,910 11.1% 15.5% Source: Company data, Nomura research 4 Nomura | Axis Bank 18 October 2014 Fig. 2: Positive surprise on loan growth was led by ~8% q/q uptick in large and mid corporate segment INRm n 2Q14 1Q15 2Q15 y/y q/q Total Advances 2,013,032 2,305,352 2,421,981 20.3% 5.1% Large Corporates 986,385 1,018,410 1,101,760 11.7% 8.2% SME 328,910 374,710 377,010 14.6% 0.6% Retail 697,736 912,230 943,211 35.2% 3.4% 438,257 556,460 575,358 31.3% 3.4% Personal loans & cards 60,869 82,101 84,889 39.5% 3.4% Auto loans 66,956 91,223 84,889 26.8% -6.9% Others 42,608 45,612 56,593 32.8% 24.1% Housing loan Source: Company data, Nomura research Fig. 3: Margins improve on the back of higher yield, LDR and CASA Net Interest Margin (%) 3.97 3.89 3.86 3.88 3.79 3.75 3.71 3.70 3.57 3.55 3.46 2Q15 1Q15 4Q14 3Q14 2Q14 1Q14 4Q13 3Q13 2Q13 1Q13 4Q12 3.37 3Q12 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1 3.0 Source: Company data, Nomura research Fig. 4: LDRs continue to expand further 50 LDR 85.0% 79% 78% 77% 77% 40 41.6 41.5 73% 73% 41.0 39.1 35 42.4 42.9 42.6 3Q14 75.0% 45.0 44.4 82% 2Q14 83% 81% 44.5 42.4 40.0 Source: Company data, Nomura research 2Q15 1Q15 4Q14 4Q13 3Q13 2Q13 1Q13 2Q15 1Q15 4Q14 3Q14 2Q14 1Q14 4Q13 3Q13 2Q13 1Q13 25 4Q12 60.0% 3Q12 30 4Q12 71% 65.0% 3Q12 70.0% 45 85% 85% 80.0% CASA ratio (%) 1Q14 90.0% Fig. 5: CASA ratio back to 45% led by 20% y/y growth in SA Source: Company data, Nomura research Fig. 6: Some uptick in impairments but remains well within management guidance of INR65bn for FY15F INRm n 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Gross slippages 6,810 6,180 5,890 3,010 6,260 9,110 1640 Recoveries+ Upgradations 720 2660 1220 1490 970 5130 1070 1930 140 2120 5970 1.37% 1.23% 1.11% 0.52% 1.09% 1.50% Write offs Slippage ratio Total restructured loans 42,110 % of Loans 2.13% Additions in Qtr 6,860 48,070 2.39% 10,310 49,000 2.32% 6,700 60,790 2.64% 11,150 62,890 66,900 2.73% 2.76% 4,800 5,700 Source: Company data, Nomura research 5 Nomura | Axis Bank 18 October 2014 0.4 0.4 0.2 3Q12 4Q12 3Q12 0.0 Source: Company data, Nomura research 2Q15 0.4 0.4 1Q15 0.4 4Q14 0.4 3Q14 0.3 2Q14 0.3 2Q14 0.3 1Q14 0.4 0.4 1Q14 0.3 0.94 4Q13 0.3 1.22 Restructuring (INRmn) 3Q13 1.10 2Q15 1.06 1.34 1Q15 1.10 1.34 1.25 3Q14 1.10 4Q13 0.6 1.06 3Q13 1.10 0.8 2Q13 1.19 1Q13 1.0 4Q14 1.2 Slippage (INRmn) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 % of Net NPAs 2Q13 % of Gross NPAs 1.4 1Q13 1.6 Fig. 8: Total impairments remains within guided range 4Q12 Fig. 7: Asset quantity trends remains comfortable Source: Company data, Nomura research Fig. 9: Stable mix of >A rated corporate at +60% levels 120% 3% 3% 3% 4% 5% 6% 6% 6% 7% 9% 8% 9% 27% 30% 33% 34% 34% 32% 31% 32% 31% 30% 31% 30% 40% 39% 38% 37% 37% 36% 37% 35% 33% 35% 16% 15% 14% 15% 16% 16% 16% 14% 18% 15% 9% 12% 11% 11% 11% 12% 11% 4Q14 1Q15 2Q15 <BBB or unrated 3Q14 BBB 2Q14 A 1Q14 80% AA 4Q13 100% AAA 60% 41% 40% 19% 6% 8% 6% 7% 7% 1Q13 2Q13 3Q13 0% 23% 4Q12 20% 3Q12 40% Source: Company data, Nomura research Fig. 10: Qtrly RoA break-down – Margins remain strong – Provisioning likely to come off from 2QFY15 levels ROA Tree 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Net Interest Incom e/Assets 3.14% 3.21% 3.23% 3.22% 3.25% 3.36% 3.41% 3.47% 3.64% Fees/Assets 1.87% 1.89% 2.15% 1.51% 1.95% 1.81% 2.15% 1.50% 1.73% Investment profits/Assets 0.28% 0.19% 0.29% 0.49% 0.01% 0.04% 0.23% 0.27% 0.28% Net revenues/Assets 5.30% 5.29% 5.67% 5.21% 5.20% 5.21% 5.79% 5.25% 5.65% Operating Expense/Assets -2.35% -2.25% -2.27% -2.02% -2.16% -2.27% -2.30% -2.21% -2.39% Provisions/Assets -0.69% -0.50% -0.72% -0.80% -0.76% -0.23% -0.54% -0.41% -0.75% Taxes/Assets -0.74% -0.81% -0.79% -0.81% -0.77% -0.91% -0.97% -0.88% -0.85% Total Costs/Assets -3.99% -3.78% -3.56% -3.78% -3.63% -3.69% -3.40% -3.81% -3.50% ROA 1.52% 1.73% 1.89% 1.58% 1.51% 1.81% 1.98% 1.75% 1.66% Equity/Assets 8.36% 8.29% 9.00% 9.55% 9.83% 10.39% 10.22% 10.26% 10.57% 18.16% 20.93% 20.96% 16.56% 15.31% 17.37% 19.43% 17.04% 15.75% ROE Source: Company data, Nomura research 6 Nomura | Axis Bank 18 October 2014 Valuations: Still reasonable, more re-rating likely; Top Pick We increase our TP to INR490 largely due to a rollover. Axis continues to deliver on diversifying it asset mix and making its liability more granular. As some credit concerns ease over the next 12-18 months and corporate growth picks up we expect further rerating. In our view, the current valuation at 1.75x Sep-16 book of INR235 is reasonable in that context. Risks: (1) (1) A slower-than-expected recovery in corporate capex execution; and (2) higher than expected delinquency. Fig. 11: ROA decomposition ROA decomposition FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15F FY16F FY17F Net Interest Income/Assets 2.93% 2.96% 3.42% 3.39% 3.29% 3.27% 3.46% 3.46% 3.47% 3.38% Fees/Assets 1.80% 2.11% 2.22% 2.21% 2.18% 2.02% 2.05% 1.90% 1.91% 1.88% Investment profits/Assets 0.23% 0.23% 0.49% 0.19% 0.04% 0.20% 0.09% 0.14% 0.11% 0.09% Net revenues/Assets 4.96% 5.30% 6.13% 5.78% 5.51% 5.48% 5.60% 5.50% 5.49% 5.35% Operating Expense/Assets -2.44% -2.31% -2.57% -2.47% -2.46% -2.34% -2.29% -2.28% -2.22% -2.15% Provisions/Assets -0.66% -0.75% -0.95% -0.66% -0.47% -0.59% -0.61% -0.63% -0.60% -0.51% Taxes/Assets -0.65% -0.78% -0.92% -0.90% -0.84% -0.80% -0.91% -0.85% -0.88% -0.89% Total Costs/Assets -3.75% -3.84% -4.44% -4.03% -3.77% -3.73% -3.80% -3.77% -3.70% -3.55% ROA 1.21% 1.46% 1.69% 1.75% 1.74% 1.75% 1.80% 1.73% 1.78% 1.80% Equity/Assets 6.89% 7.62% 8.97% 9.05% 8.57% 9.45% 10.33% 10.25% 10.03% 9.73% ROE 17.6% 19.1% 18.9% 19.3% 20.3% 18.5% 17.4% 16.9% 17.8% 18.5% RORWA 1.51% 1.86% 1.98% 2.01% 1.98% 2.11% 2.28% 2.21% 2.24% 2.26% Source: Company data, Nomura estimates Fig. 12: TP of INR490 Fig. 13: Valuations still reasonable 1yr fwd P/B chart 3.5 Risk free rate 8.5% Equity Risk Premium 5.0% Beta Cost of Equity 1.15 2.5 2.0 5.0% Normalised ROE 21.1% Stage 2 grow th 18.0% Sep-15 PT 490 Implied Sep-16 P/B 2.09 Implied Sep-16 P/E 12.36 Source: Nomura estimates 3.0 14.3% Terminal grow th Axis 1.5 1.0 0.5 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Valuation assum ptions Source: Company data, Bloomberg, Nomura estimates 7 Nomura | Axis Bank 18 October 2014 Appendix A-1 Analyst Certification We, Adarsh Parasrampuria and Amit Nanavati, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company. Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies. Materially mentioned issuers Issuer Axis Bank Ticker AXSB IN Price INR 402 Price date Stock rating Sector rating Disclosures 17-Oct-2014 Buy N/A A1,A2,A3 A1 The Nomura Group has received compensation for non-investment banking products or services from the issuer in the past 12 months. A2 The Nomura Group had a non-investment banking securities related services client relationship with the issuer during the past 12 months. A3 The Nomura Group had a non-securities related services client relationship with the issuer during the past 12 months. Axis Bank (AXSB IN) INR 402 (17-Oct-2014) Buy (Sector rating: N/A) Rating and target price chart (three year history) Date 26-Aug-14 08-Jul-14 08-Jul-14 28-Jun-14 16-May-14 23-Apr-14 18-Oct-13 10-Jan-13 16-Oct-12 31-Aug-12 31-Oct-11 31-Oct-11 17-Oct-11 Rating Target price Closing price 460.00 397.60 Buy 377.65 2,300.00 377.65 Suspended 381.84 2,000.00 351.00 1,720.00 303.96 1,500.00 231.24 1,620.00 273.60 1,350.00 229.18 1,200.00 198.36 Buy 231.87 1,400.00 231.87 Not Rated 224.37 For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology Our TP of INR490 is based on 2.1x Sept-16F book of INR235. Axis continues to deliver on diversifying it asset mix and making its liability more granular. As some credit concerns ease over the next 12-18 months and corporate growth picks up we expect further re-rating. Current valuations at 1.75x Sep-16 book is reasonable in that context. MSCI India is the benchmark index for the stock. 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