Axis Bank’s first-quarter 2015 earnings grew 18% over last year, broadly in line with our estimates. Net interest income grew strongly (up 16%) as margins continue to expand with increased retail loans exposure (32% of its total loans in 2014). However, non-interest income declined by 5% as fee income, which contributes 82% of non-interest income, was sluggish (up 5%). This shows corporate lending and the investment cycle is yet to pick up despite regulatory changes that make it easier to do business in India. During the conference call, management guided to a rebound in fee income later in the year. We forecast full-year non-interest income will grow by 20%, and will be watching developments on this side of the bank’s revenue stream carefully, as it can substantially impact overall profits.
On the expenses front, both operating expenses (up 17%) and provisions (down 46%) were below our expectations, which points to the bank’s ability to control costs in a challenging environment, further reaffirming our narrow economic moat rating on Axis. Since provisioning numbers vary widely from quarter-to-quarter, we anticipate the full-year numbers will match more closely with the growth in advances, which were up 16% during the year. As such, we anticipate Axis will maintain its provisions-to-average loans ratio at its historic average of 1% in 2015, which we're comfortable with given 88% of its retail loans are secured against an asset. Two-thirds of its incremental retail loans are to existing banking clients, giving the bank better insights into the customer’s credit history prior to sanctioning a loan. Overall, the stock is trading at a premium to our recently upgraded fair value estimate of INR 1721.68 per share, or USD 28.69 per GDR. We believe now is not the best time to invest as the stock has moved up by 158% since touching a low of INR 783 per share in September 2013 (when it traded in four-star territory).
