Axis Bank’s third-quarter earnings increased by 15% over the prior year, in line with our 14% full-year growth estimate. The stock was beaten down, owing to concerns over asset quality, and trades at a 21% discount to our unchanged INR 531 per share fair value estimate. However, we are reducing our GDR valuation by 3% to USD 39 to adjust for a 3% change in the USD/INR exchange rate.
While the company took additional provisioning into account this quarter to provide for specific accounts after the annual review from the Reserve Bank of India, our full-year provisioning estimates factored in the additional provisions. For the first nine months, the bank provided for INR 25 billion of bad loans, versus higher provisions of INR 34 billion already built into our model. We still recommend this narrow-moat private bank, as we believe it has the potential to continue expanding its loan book at 20% over the coming five years, and in turn earnings at 18% CAGR, while maintaining returns on equity at a healthy 18%.
Loan growth for the bank was modestly slower at 21%, versus our 23% expectation for 2016. Retail loans, which comprise 40% of total loans, are still increasing strongly at 27% over last year, but corporate loans have seen relatively slower increases, pulling down overall loan growth. We remain confident that the last quarter should help in overall loan-growth pickup. Deposits increased in line at 16%, with CASA remaining steady at 43% over last year.
Axis continues to make strides in improving its physical and digital footprint. Its branch network expanded by 10% year over year to reach 2,805 branches. However, its ATMs shrunk by 2% to 12,631 as of December. The bank is seeing a drastic rise in digital transactions. As per a survey conducted by Forrester Research, 49% of customer-initiated transactions now occur over digital channels, with 37% at ATMs and 14% at branches. This bodes well for Axis, which targets improving its cost/income ratio to 39% by year-end.
