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Buy Axis Bank Ltd For Target Rs.775

Asset quality indicators point towards significantly lower credit cost in FY22/23

Adjusted for the impact of stress recognition (proforma slippages and restructuring) in the form of significant interest reversals and accelerated provisioning, the earnings performance of AXSB was reasonably healthy. Rather, the manifestation of stress at a palatable 1.5% of customer assets was lower than anticipated by the management and investors. Notably, reversion of collection efficiency to normal levels (98% in December v/s 97% pre‐Covid) and normalization of resolution rates across collection buckets and in various products, point towards lower and stable slippages in the coming quarters. In addition, the bank has consistently underwritten better‐quality loans (by products and customer credit standing) in Corporate, Retail and SME segments. So, while the management has explicitly guided at elevated provisions in Q4 FY21 for further strengthening the balance sheet, the credit cost should come down from FY22. This underpins our sharp RoA expansion thesis for the bank over FY21‐23. Margins too will be supportive of this with LDR expected to improve and excess balance sheet liquidity being redeployed as loans over the coming quarters. Robust capital position and a leading market position in most product segments will likely drive 12‐15% loan growth in the next two years. AXSB trades at an undemanding valuation of 1.4x FY23 P/ABV (10% discount to ICICIBC) adjusted for the value of its subsidiaries.  

Management Commentary

Asset Quality ‐ Proforma GNPLs, Collection Efficiency, Restructuring

* Bounce rates have continued to improve m‐o‐m  ‐  98% demand resolution in December v/s 94% in September and 97% pre‐Covid.  

* Resolutions across collection buckets and across products at pre‐Covid levels – Beefing up of the collection infra has helped.  

* Restructuring requests were much lower than initial expectations  ‐  approved restructured loans at 42 bps of customer assets.  

* Restructuring as a % to respective loan books ‐ Corporate 0.8%, Retail 0.3% and SME 0.02%.

* 60% of restructured book overlaps with BB and below  ‐  the linked but not restructured non‐fund based facilities stand at Rs8.7bn.

* Overall provision coverage of 26% on restructured book, with unsecured retail provided at 100%.

* Standard assets coverage improved to 2.1%, by raising provisions on restructured book and making NPL‐like provisions on SC stand‐still accounts. Fee and interest income have been reversed on SC stand‐still accounts.  

* Bank did not utilize any Covid provisions created in the earlier quarters  ‐ total Non‐NPL provisions at Rs118.6bn, of which Rs50bn is Covid provisions and remaining is towards restructuring and other weak accounts.     

* Latest stress test points towards 45‐50% reduction in likely slippages compared to initial estimates of April.

* Q4 will see elevated provisioning, while proforma slippages will be lower than Q3  ‐  continuance of excess provisions to further strengthen the balance sheet.   

Retail Assets, Corporate Banking & SME loans

* Disbursements in secured segments like HL, LAP & Auto were up 23% yoy, 11% yoy and 10% yoy, SBB disbursement up 35% yoy.

* HL logins and disbursements in December were highest ever.  

* In unsecured loans, bank’s focus is on ETB customers.  

* Corporate loans (incl. TLTRO investments) grew 11% yoy.

* 94% of incremental sanctions in Q3 were A‐ and above ‐ 83% share on stock basis.

* Deepening engagement with better‐rated corporates – added 450+ new relationships in 9m FY21.

* Focused on lifting NIMs through right pricing – thus pursuing a balanced growth approach.    

* SME loans grew 6% qoq and are 91% secured.

* Focus remains on collateralized lending – bank capitalizing on growth opportunities within risk parameters.   

* 80% of portfolio is A‐ and above when benchmarked on external ratings.

* Portfolio spread across 35 sectors and is regionally well diversified with ATS is of Rs35mn.  

* ECLGS sanctions Rs106bn to 25000+ customers – Disbursements at Rs89bn across SMEs, Individuals and Small Businesses.

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