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AXSB continued to build higher-than-expected provisions on its pro forma portfolio as it continued to search for stability in its back book coverage. The sustained build-up in standard asset provisions was a negative surprise. Although prudence is generally welcome, at 2.1% standard asset cover, the road to credit cost normalisation is longer than originally envisaged. We trim our FY21 full-year earnings estimates by ~13% and continue with our BUY recommendation with a revised target price of Rs 705.

* Signs of stability in asset quality: On a pro forma basis, slippages rose to Rs 6.7bn (~1.6% annualised over 9MFY21), driven by unsecured retail loans, which contributed to 80%+ of pro forma NPA accretion. Consequently, pro forma GNPLs rose to ~4.6%, despite aggressive 'rule-based' write-offs during the quarter (to the tune of Rs 43bn). Stress accretion in the corporate and SME portfolios appears to be within expected threshold limits thus far, given the minor difference between reported and pro forma GNPAs (30bps and 60bps respectively). The BB and below rated pool of corporate loans dipped sequentially to ~Rs 87bn (1.5% of advances) - slippages from this pool accounted for nearly all of the corporate pro forma slippages during the quarter. Retail collection efficiency has been inching up even as demand resolution for December clocked in at 98% (vs. 94% earlier).

* Provisioning continues to haemorrhage: In line with the overarching theme of prudence, the bank continued to make elevated provisions, higher than our forecasts. Non-tax provisions were stubborn at ~Rs 46bn (+33% YoY,~39% ahead of our estimates), driven by pro forma loan loss provisions of ~Rs 50bn. Reported PCR now stands at ~79% (pro forma at ~74%); in addition, the bank holds non-specific provisions of ~Rs 119bn (2.1% of loans). We find (1) the current level of elevated provisions, and (2) guidance on the need for further ‘prudent’ provisions inconsistent with management narrative of benign asset quality, especially, given the already-elevated stock of non-specific provisions. We build LLPs of 1.9% over FY21-23E.

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