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‘Business growth improves’

Axis Bank (AXSB IN) reported strong performance for Q1FY23 on the profitability as well as the assets quality fronts. While core operating performance is in line with our estimates, significant decline in the credit cost provided a boost to the profitability despite elevated operating cost. The bank reported 91% YoY growth in PAT of Rs41 bn (above our estimate of Rs37 bn) led by strong core operating performance and significant decline in the credit cost. NII grew by 7-quarter high rate of 20.9% YoY. On sequential basis, NII grew at a strong 6.4% leading to 11 bps QoQ improvement in NIM to 3.60%. Fee income growth remained strong at 34.0% YoY offsetting the MTM loss of - Rs6.7 bn owing to increase in the yield. Though, business growth moderated during the quarter and advances de-grew by -0.9% QoQ (5% below our estimates) impacted by weak corporate segment.

* GNPA improves on lower slippages: GNPA improved by 6 bps QoQ and 109 bps YoY to 2.76% mainly led by decline in the gross slippages. Gross slippages reported at Rs37 bn with quarterly slippages rate declining to 0.5% (from 0.6 in Q4FY22). 63% of the total slippages came from the retail segment during the quarter. R&U stood at Rs29.6 bn in Q1FY23 v/s Rs37.6 bn in the previous quarter. Net slippages rate remained modest at 0.1% (Rs7.3 bn) during the quarter.

* Stress eases; maintains healthy provisioning buffer: Sustaining the last 4- quarter decline trend, BB & below rated book declined -15.9% QoQ to Rs58 bn and 100% of restructured corporate book classified as BB & below rated. Pool of vulnerable assets (include BB & below rated fund, non-fund exposures and investments) reduced to 1.2% of loans (from 1.3% in previous quarter). Restructured book (RAB) declined to Rs34 bn or 0.5% of loans (from 0.6% of loans in Q4FY22). AXSB IN maintained 24% of provisions against RAB with 100% provisioning against unsecured retail loans. Cumulative provisions stood at 1.7% of loans of Rs118 bn (includes Covid related provisions of Rs50 bn) which indicates a healthy provisioning buffer against future assets quality uncertainties.

View and Valuation: We have cut our credit cost/slippages estimates over the next two fiscals due to easing legacy NPAs issues, decline in stress book and high standard assets provision. Weak loan growth disappoints us , though strong growth momentum in retail and SME book to boost margin; re-pricing of assets is the additional trigger for NIM improvement. Though we remain cautious on high operating expenditure (C/I ratio rose to 52.5% in Q1FY23 v/s 50.4% in Q4FY22), while the management again defended the move saying it is right time to invest for the future.

We re-iterate our BUY rating on AXSB IN with a target price of Rs1,000 per share. We value the core banking business at 2.1x FY24E P/Adjusted Book Value (maintained our valuation multiple) arriving at Rs940 per share and its subsidiaries are valued at Rs60 per share.

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