Impressive core revenue growth in Q2. Risk‐reward attractive; Retain BUY
We retain BUY on Axis Bank and increase price target to Rs586 (Rs550 before) underpinned by earnings/BV upgrade. Earnings have been revised upwards by lifting NIM and core fee growth assumptions. Considering management’s assessment of probable restructuring pool and encouraging collection trends (demand resolution at 97% in Oct), we believe that downside risks to our prevailing credit cost estimates has diminished. Hence, bank’s return ratios will most likely recover sharply in FY22. The stand‐alone bank trades at 1.4x FY22 P/ABV, and represents an attractive risk‐ reward
Key highlights of standalone bank performance
* Axis Bank delivered a substantial 19% beat on our core PPOP estimate driven by strong core revenue (NII + Core Fees) growth delivery.
* NII growth was at 5% qoq and 20% yoy despite continued conservative stance of not recognizing interest income on weaker/stressed accounts. Despite 5 bps negative impact of this, the NIM improved by 18 bps qoq to stand at multi‐quarter high of 3.6%.
* Margin expansion aided by core spread expansion with material decline in cost of deposits on the back of SA & TD rate reductions and improved granularity.
* Core fee income recovered sharply from the lower level of Q1 (66% qoq growth), and even stood marginally higher on yoy basis. Retail fees (62% of overall fees) grew 82% qoq, aided by material recovery in all fee steams (cards, distribution, assets‐related, etc.).
* Loan growth was better‐than‐expected at 3% qoq and 11% yoy. Corporate portfolio expansion was driven A & Above rated loans, SME book growth was aided by disbursements under ECLGS scheme (Rs60bn+) and retail loan growth was led by secured products of mortgages and auto finance.
* Credit cost was high (annualized 3.2%), largely on account of bank making additional provisions of Rs31.4bn (of which Rs18.6bn towards probable restructuring pool). Resultantly, the stock of additional provisions rose to Rs108bn (now at 1.8% of adv. v/s 1.2% as of Q1).
* Core PCR on GNPLs also improved to 77% with the bank making some specific provisions and net slippages (excl. w/off) in Q2 being negative due asset classification stand still.
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