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Axis Bank reported a good set of numbers with core operating growth of 31% yoy, while lower provisions of Rs.987 cr (-54% yoy), resulting in a net profit of Rs.4,118 cr (54% yoy growth) for Q4FY22

Key Highlights of Q4FY22 Results

• Gross NPA fell to 2.82% in 4QFY22 as compared to 3.2% in the last quarter and Net NPA was at 0.73% with provision coverage ratio (PCR) improving by ~300bps qoq to 75%. Gross loan slippages for the quarter were Rs.3,981 cr lower than Q3FY22 by 4%, with lower slippages across the segments. Gross loan slippage ratio for the quarter stood at 2.3%, improved by 140 basis points yoy and 20 basis points qoq. The net slippages for the quarter for the bank would be negative Rs.502 cr, adjusted for recoveries and upgrades of Rs.3,763 cr and recoveries from written off accounts of Rs.1,697 cr. Bank has adopted a conservative policy with restructuring at just 0.52% of customer assets. 88% of the loans restructured under COVID 1 and 2 are standard, the LTV of the secured retail loans range from 40% to 70%. On a segmental basis, the restructured loans were 0.46% of the wholesale banking group book, 0.72% of the retail book and 0.02% of the commercial banking group. The bank has non-NPA provisions of Rs.12,428 cr, of which COVID-related provisions are Rs.5,012 cr, restructuring provisions are Rs.1,411 cr, and weak assets and other provisions of Rs.6,005 cr.

• Loan book grew by 15% yoy, with retail advances growing by 21% yoy. Within retail, home loans and LAP loans grew by 20%/42% yoy respectively. 80% of retail loans are secured, 88% of the corporate book is rated A or above. Deposits witnessed 18% yoy growth, with CASA deposits growing faster at 16% yoy. Low cost deposits was flat at 45% of the total deposits, while CASA and retail term deposits stand at 81% of the total deposits as compared to 80% last year.

• On the P&L front, NII grew by 17% yoy, with NIM at 3.49% during the quarter (a dip of 4 basis points over last quarter). Bank expects net interest margin to improve in the medium term due to shift from investment to loans and within loans, product composition shifting towards better yielding assets. Fee income stood at Rs.3,758 cr growing 11% yoy and 12% qoq. 92% of the fee is granular, 66% of fee is on the Retail business and the balance from the Wholesale franchise. The bank continues to make significant investments in building digital and tech capabilities (40% yoy increase in tech spend) and technology spends stand at 8% of total opex to support growth. IT team strength has grown by 75% over the last 24 months with focus on modern engineering skills. We expect cost to asset ratio to be on the higher side, ~2%, due to continuing spending by the bank in this segment.

OUTLOOK AND VALUATION

We believe loan book to witness traction on account of inflation, thereby leading to higher demand for working capital on corporate front. Bank intends to invest in technology leading to high cost thereby leading to high cost to income. However, lower credit cost due to improving asset quality scenario should lead to higher ROE. Stock is trading at 1.5x ABV of FY24E. We recommend ‘BUY’ with a target price of Rs.841, with an investment horizon of 18-24 months.

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