Published on 25/01/2018 2:36:17 PM | Source: Prabhudas Lilladher Ltd

Buy Axis Bank Ltd For Target Rs.651.00 - Prabhudas Lilladher

Axis Bank earnings were slightly below estimates on the back of higher provisions, though higher provisions helped improve PCR (calc) by 490bps to 58%. Asset quality improved despite relatively higher slippages of Rs44.3bn on large upgrade/recoveries of Rs40.1bn from the divergence related NPAs in Q2FY18 and also partly due to high write‐offs. Key positives for the bank continues to be strong CASA, improving retail/SME/better rated corporate and control on opex. We believe NIM pressure should bottom out and stabilize going ahead with tailwinds if MCLR increase from here on, while we see slippages & provisions gradually trending downwards in FY19 & FY20 helping improvement in return ratios, which makes us retain our positive stance intact directionally since our upgrade last month. The stock has run up sharply and hence leaves limited upside in the near term with PT of Rs651 based on 2.3x Sep‐19 ABV.

* Ex‐treasury PPOP better: Core PPOP growth of ~17% YoY was better with decent NII growth of 9% YoY and strong fee income of 25% YoY (partly on lower base). Margins were lower by 7bps at 3.3% as pressure on yields continued but bank expect margin to have bottomed out and retained guidance of 20bps decline from FY17 exit of 3.67% which currently has declined by 19bps for 9MFY18. We believe NIM pressure to subside in near term and should improve slightly in next few quarters.

* Slippages high but stronger recovery/upgrades: Bank continued to report relatively higher slippages of Rs44.3bn mainly from corporate book and within that from the “BB & below” rated pool. But asset quality improved as bank witnessed Rs40.1bn of recovery/upgrade on large upgrade in one steel a/c, recovery in one IT a/c related from the RBI divergent NPAs in Q2FY18 and one NPA a/c part of NCLT was sold to non‐ARC on cash basis with 40% haircut. “BB & Below” rated exposure which remains key a monitorable for asset quality increased QoQ to Rs161.2bn (3.8% of loans) from Rs158.2bn with overlap of restructuring dispensations & watchlist. Bank maintained its credit cost guidance of 220‐260bps with suitable PCR of 60‐65%.

Loan book growth strong; slippages to subside gradually: Loan book growth was strong at 21% YoY mainly contributed by strong SME/Retail (+27% each) growth and working capital loans in corporate book (49% growth). Bank continues to focus on retail/SME/Working capital and better rated corporate exposures helping improve overall asset quality of bank and in‐turn would help reduce slippages going ahead.

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