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Healthy revival to aid improvement in return ratios

Axis Bank reported a strong set of numbers with a sequential pick-up in business growth, improved asset quality and better than estimated bottomline performance. NII was up 11% YoY to | 7555 crore aided by 7% QoQ rise in loans and stable margins, NIMs at 3.56% vs. 3.55% YoY, 3.59% QoQ. Despite ~20 bps fall in cost of funds sequentially, margins were stable as a result of higher LCR, loan mix shift toward better rated portfolios and also previous quarter had positive 8 bps impact of interest of IT refund.

Other income jumped 17% YoY, 23% QoQ with fee income growing 15% YoY, 16% QoQ to | 3376 crore while trading gains were boosted by the sale of strategic investment of ~| 300 crore. Provisions during the quarter declined sequentially by 28% to | 3295 crore (below our estimate). This included | 803 crore due to change in provisioning policy for commercial banking segment. As a result, PAT came in at | 2677 crore, higher than estimate. Asset quality performance improved as GNPA, NNPA ratio declined to 3.7%, 1.05% from 4.55% (proforma) and 1.19% (proforma) QoQ, respectively. Slippages declined from | 7993 crore (proforma) to | 5285 crore QoQ while write-offs for the quarter remained elevated at | 5553 crore.

The bank did not sell any NPAs to ARC during the quarter. Restructured book under Covid19 framework was at 0.3% of gross customer assets and has 26% provisions against the same. The bank has | 5012 crore worth provisions against potential impact of Covid-19, of which | 1882 crores, represents prudent provision above regulatory requirement and balance | 3130 crore is provision for loans under moratorium. The bank holds cumulative provisions (standard + additional other than NPA) of | 12010 crore and provision coverage ratio (specific+ standard+ additional + Covid) is 120% of GNPA as on March 2021.

Business growth was healthy as loan book increased 7% QoQ, 9.2% YoY to | 623720 crore. Growth was driven by retail loans, up 10% YoY, 7% QoQ to | 334514 crore, SME book increased 13% YoY and 10% QoQ to | 69850 crore while corporate book (including TLTRO) was up 16% YoY. Disbursement in consumer, home and LAP were up 45% YoY, 73% YoY and 53% YoY, respectively. Deposit traction was also healthy at 10.5% YoY and 8.1% QoQ to | 707306 crore led by 12.5% QoQ growth in CASA deposits. Thus, CASA ratio improved from 43.2% to 44.9% QoQ.

Valuation & Outlook

We believe the bank’s focus on calibrated approach on growth, b/s strengthening, strong liability profile along with healthy capitalisation makes it well placed to accrue earnings growth ahead. Selective lending, strong liability profile along with healthy capitalisation make it well placed to accrue healthy earnings growth and improvement in RoE. Resurgence of cases and subsequent lockdown may act as deterrent in collections but situation remains manageable. Healthy provision coverage provides comfort on smoother earnings trajectory ahead. We expect earnings to grow at ~34% CAGR in FY21-23E and improvement in RoE at ~14% in FY23E. Hence, we remain positive on the stock and arrive at a target price of | 900 (| 800 earlier), valuing the stock at ~2.1x FY23E core ABV. We maintain BUY rating

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