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Result and Price Analysis

2QFY23 marks the manifestation of sequentially higher NII (?104bn; 17% YoY and 6% QoQ) and 30% sequential increase in net profit at ?53bn. The bank’s reported slippages number were lower (?33.8bn v/s 36.8bn in 1QFY23) as GNPA and NNPA ratio narrowed down to 2.5% and 0.5% respectively against the GNPA and NNPA ratio of 2.82% and 0.73% in the previous quarter. The bank’s PCR (including TWO) stood sequentially higher at 93%. Moreover credit off-take (17.6% YoY) maintained, led by growth across segments. Furthermore, the BB & below book came down sequentially by 2bps to 0.62% of customer assets and reported lower restructured advances of ?30bn (~38bps of gross loan book). However, deposit growth remained lackluster at 10% YoY and 1% QoQ. The bank needs to mobilize deposits further to maintain a CDR of below 90%. Therefore, deposit growth is likely to be key monitor-able in coming quarters. The future outlook of asset quality is at manageable level as the strong standard asset coverage (1.4% of gross loans) is likely to absorb delinquencies from restructuring. In view of adequate covid buffer, glimpse of growth rejuvenation and manageable restructuring pool, we recommend a BUY.

NPA reducing; restructuring narrowed down further : Axis Bank’s total slippages were lower at ?33.8bn v/s ?36.8bn in the previous quarter. The up-gradation & recovery stood lower at ?28.3bn v/s ?29.6bn in 1QFY23. The write-offs were ~?17bn. It has resulted in 26bps reduction sequentially in GNPA ratio to 2.5%. GNPA/NNPA/PCR stood at 2.5%/0.51%/80% against 2.82%/0.73%/75% in the previous quarter. GNPA ratio inched down across segments. Retail GNPA at 1.5%, where SME and corporate GNPA ratio is at 1.7% and 4.2% respectively. The restructured pool reported lower meaningfully at ?30bn (38bps of GCA) v/s ?34bn in the previous quarter. The bank carries a provision of ~23% on restructured loans, which is in excess of regulatory limits. Corporate segment has 26bps of loan book under restructuring while Retail and SME segment carry restructuring of 55bps and 2bps respectively.

Around 95% of retail restructured book is secured (with LTV of 40% - 70%) and 100% provision made on unsecured retail restructured book. BB & below rated pool down by 2bps to 0.62% of gross customer assets. Fund based BB & below outstanding up by 1.7% sequentially, Moreover, Non fund based outstanding in BB & below pool inched down significantly. 100% of restructured corporate book classified as BB & Below. The provision expenses were sequentially higher at ?5.5bn (v/s ?3.6bn in the previous quarter). The bank’s PCR stood higher sequentially at 80%. PCR (including tech. write offs) stood at 93% and Aggregate PCR (Specific provision + covid provision + General Provision + Contingency Provision) stood at 132% of reported GNPLs and the contingent provisioning (covid + standard asset) stood 1.4% of the gross loan book.

Credit growth maintained; tepid deposit growth: The bank’s advances stood at ?7.3tn; 17.6% YoY and 4.2% sequentially. Corporate book (31.4% of book) grew healthy by 6% QoQ. Retail book (57.9% of book) growth was at 2.6% sequentially. SME book (10.7% of book) grew by 8.7% QoQ. Bank’s deposit stood at ?8.2tn and growth remain below par of 10.1% YoY and 0.9% QoQ. The CASA (QAB) stood at 43%. The bank’s CRAR stood at 16.42% with CET 1 of 14.55%. Additionally LCR of 121% with excess SLR of ?555bn. The RWA to assets sequentially up to 66%. The bank needs to grow the deposits to maintain a CDR of below 90%

Decent operational quarter driven by higher NIMs: The bank’s NII stood at ?104bn; grew by 17% YoY & 6% QoQ. The bank’s NIMs expanded by 36bps to 3.96% on the back of slightly higher cost of funds (4.09%) and cost of deposits (3.8%). Non – interest income grew by 31% QoQ. Management hopes to achieve a structural improvement in NIM going forward, owing to i) improvement in mix of loans versus investments on the assets side, ii) higher share of low cost deposits and iii) reduction in RIDF bonds (which have negative spread) as incremental allocations have stopped as the bank is PSL compliant. A strong NII growth and improved opex (C/I ratio: 46% v/s 52.5% in the previous quarter) led to PPoP sequential growth of 31%. Additionally, sequentially higher provisioning expenses (?5.5bn v/s ?3.6bn) has resulted in net profit of ?53bn; sequential growth of 30%. The bank’s quarterly ROA/ROE stood at 1.8%/18.5%

Outlook & Valuations

We value the standalone bank at PBV of 2.1xFY24E Adj. BVPS of ?478 and arrive at a price target of ?1,005. We recommend BUY with a potential upside of 22% from current levels

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