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Fortifying balance sheet for better tomorrow

* Axis reported a lower PAT of Rs11bn (vs. estimate of Rs19bn) mainly due to higher opex and elevated provisions. The bank has maintained a provisioning buffer of 2.1% of loans (best among peers) to largely absorb the asset quality pain in FY21 and walk into FY22 with a stronger balance sheet to ride the ensuing growth wave.

* Overall credit growth continues to disappoint (up 6% yoy) due to corporate drag, but clocks better growth in retail/SME. The bank resisted giving numerical guidance on growth in FY22, but we expect a better growth trajectory on the back of the strong balance sheet and reviving retail/corporate credit demand.

* Overall proforma GNPA ratio of 4.6% was in line with the expectation, while restructuring pool at 0.4% (with no major risk of spill over in Q4) was far lower than management’s own guidance, pointing to lower LLP in FY22/FY23 (160/110bps vs. 260bps in FY21).

* We like Axis’ aggressive stance to front-load provisions, which could depress RoA/RoE at 0.7%/7% in FY21E but should improve to 1.5%/15% by FY23E, aided by better growth, cost ratios and moderate provisions. Retain Buy with a TP of Rs850, valuing core bank at 1.9x FY23 ABV and subs at Rs40.

Growth remains elusive, but outlook better:

Overall credit growth was muted at 6% yoy/1% qoq due to a continued drag in corporate book as the bank consciously onboarding corporates at a lower rates. However, disbursements in secured retail segments like HL, LAP & Auto grew 23%/11%/10% yoy, while SBB disbursements grew 35% yoy, indicating accelerating growth momentum in retail. SME growth continued its positive stance with ECLGS disbursements amounting to Rs89bn. Reported NIM stood at 3.6% as the bank continued to reverse interest on proforma NPAs. Axis resisted giving numerical guidance on growth in FY22, but we expect a better growth trajectory for the bank on the back of the strong balance sheet and reviving retail/corporate credit demand.

Asset quality well in control, but prudently maintains higher provisioning buffer:

The bank’s reported GNPA level is low at 3.4% (down 74bps qoq) but proforma NPA stands at 4.6% (up 27bps qoq from 4.3% in Q2). Gross slippages as per IRAC norms were higher but in line at Rs67bn (4.9% of loans), mainly from retail including unsecured loans. However, overall restructuring pool turned out to be far lower at 0.4% of loans compared to an earlier estimate of 1.7%. That said, the bank continues to build a healthy provisioning buffer to meet any eventuality, with the specific PCR now at 79% and the overall contingent provisioning buffer at Rs118bn (2.1% of loans), including Rs50bn specifically for Covid-19.

Outlook and valuations:

We like Axis’ aggressive stance to front-load provisions, which could depress RoA/RoE at 0.7%/7% in FY21E but should improve to 1.5%/15% by FY23E, aided by better growth, cost ratios and moderate provisions. Retain Buy with a TP of Rs850, valuing core bank at 1.9x FY23 ABV and subs at Rs40. Key risks to our call include higher-thanexpected NPAs and management instability, which has moderated a bit recently.

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