First-half 2016 earnings of Rs 39 billion for Axis Bank were broadly in line with our full-year estimate of Rs 84 billion.
Loan growth at 23% has been ahead of our 17% expectation for the year. However, the bank sold Rs 18 billion of its bad loans in the power sector to an asset construction company at a discount to book value, thereby incurring a loss on its profit and loss statement of Rs 11 billion, which offset the gains from the additional loan growth on its overall earnings number.
We are keeping our diluted earnings per share estimate of Rs 37 for fiscal 2016 intact, along with our fair value of Rs 531 per share, or $43 per GDR, which is 2.4 times our estimated 2016 book value.
Our narrow moat rating on this bank remains unchanged, as we believe the bank is successfully transitioning from a corporate-only to a retail-also bank. As of September 2015, 40% of its loan book and 40% of its fee income came from retail clients. In an environment where system loan growth remains low at 9.4%, corporate loan growth wanes in the low single digits and retail growth is in the teens, Axis Bank has been able to utilise its retail client base to grow faster than the system at 23%, as retail loans were up 27%.
As far as expansion is concerned, the bank guided that it would continue to grow its branch network at approximately 250-300 branches per year. We notice that incremental branches opened by Axis tend to be in the less-populated areas of the country. 51% of Axis' branches were in semiurban and rural areas as of September 2015, versus 45% in March 2013.
We believe this is a good strategy, as branch presence in the locality is a key criteria for an individual to choose a banking relationship; however, the number of transactions completed per branch is actually declining. As a result, being present in more towns is more important than building out density for Axis, which is already present across urban India.
