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Earnings beat reinforces confidence; on a path to deliver superior RoEs

Axis Bank’s Q4FY21 earnings beat reaffirms our view that besides strengthening the balance sheet (through prudent and conservative buffers), it is equally focusing on building granularity to drive sustainable growth and deliver superior RoE.

Key positives: 1) Growth momentum after failing to cheer in Q3FY21, caught up pace with peers growing at 8% QoQ (9% YoY) and was broad-based across retail, SME and corporate; 2) slippages of Rs52.9bn (35bps QoQ).

What failed to cheer: 1) Despite 20bps QoQ/110bps YoY benefit of funding cost, NIMs were stable; incremental business written at lower yields; 2) retail slippages are running higher at ~4% in FY21.

We expect earnings CAGR of >65% over FY21-FY23E and RoE of >15% by FY23E. Maintain BUY with a target price of Rs942. Key risks: 1) Covid resurgence unfolding further stress; 2) lower-than-anticipated growth can cap RoE improvement.

* Gross slippages settle at <3% for FY21, lowest in 3 years:

In Q4, gross slippages came in exactly in-line with expectations at Rs52.85bn (<4% run-rate). This quarter as well it was primarily dominated by retail segment (65%) and downgrades from BB & below. Consequently, gross slippages in FY21 were contained at <3% (Rs172bn), lower than in 3 years. Retail stress - a mix of secured as well as unsecured lending (primarily cards) - ran higher at ~4% (similar to peers).

Lower set of retail restructuring at 0.1% could be the rationale for elevated retail slippages. However, these are adequately provided for and written-off to the extent required. BB & below pool, after remaining sticky for few quarters, showed downward trajectory to <2% (from 2.3-2.4% in past few quarters). More so, 38% of this pool is rated better by at least one credit rating agency.

* Credit cost settles lower at 2.2%; cumulative provisions at ~2% of advances:

One of the key drivers of earnings beat was credit cost being contained at 2.2% - much lower than 3% plus in 9MFY21. This is despite the bank making additional provision aggregating Rs8.0bn on accounting change in provisioning rates on loans to commercial banking segment. Plus, it has completely marked down security receipts from Rs16.8bn to zero (100% provided by FY21).

Specific loan loss provisions in Q4 were Rs70.4bn (including provision of Rs42.7bn on pro forma slippages provided earlier). Positively, the bank has neither utilised nor created any further contingency buffer (unlike peers). Overall, it holds cumulative provisions (standard + additional other than NPA) of Rs120bn (~2% of standard asset coverage or 120% of GNPA), including covid buffer of Rs50bn. We, therefore, estimate credit cost of 1.4%/1.2% for FY22E/FY23E.

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