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Growth accelerates, asset quality improves, but sustainability is key

* Axis Bank reported a beat on PAT at Rs26.8bn (up 182% yoy) vs. estimate of Rs22.3bn, mainly due to higher trading gains. Core operating profit growth was relatively moderate at 9% yoy (20% for ICICI), mainly due to moderate NII growth and higher opex.

* The bank surprised positively with healthy credit growth of 9% yoy/7% qoq, mainly led by strong traction in corporate/SME book. Retail too picked up at 10% yoy/5% qoq with historical high disbursements in Q4. Axis has not given any specific guidance on growth, but indicated that it will incrementally focus on sustainable growth and granular portfolio.

* The headline GNPA ratio improved qoq to 3.7% from 4.6% (pro forma) in Q3, mainly due to moderate slippages/higher w-offs. The bank retained Covid-19 provisions of Rs50bn (0.8% of loans vs. 1% for ICICI/0.6% for HDFCB) given remerging stress from the second Covid wave, but indicates that elevated stress formation/provisioning is largely behind.

* We expect RoA/RoE to improve from a low of 0.7%/7% in FY21 to 1.5-1.6%/15% by FY23- 24E, mainly driven by better growth trajectory and moderating credit cost. Retain Buy with a TP of Rs850, valuing the core bank at 1.9x FY23E ABV and subs at Rs56.

Healthy growth but margins remain subdued:

Overall credit growth was healthy at 9% yoy/7% qoq, mainly led by growth in corporate (7% yoy/9% qoq), SME (13% yoy/10% qoq) as well as retail (10% yoy/5% qoq). The bank clocked historically high disbursements, within which HL, LAP & Auto grew 73%/53%/20% yoy, respectively, while small business loans disbursements grew 71% yoy. However, reported NIM was largely flat and subdued at 3.56%, mainly due to the hit on interest-on-interest waiver income of Rs1.6bn, higher LCR and portfolio mix tilting toward corporate a bit. Although management has not given any guidance on growth, it believes with the major risk on asset quality largely behind and adequate provisioning buffer, the bank would look at accelerating growth once the impact of the second Covid wave recedes.

Headline asset quality improves but retains provisioning buffer to withstand any shock from second Covid wave:

The bank reported moderate slippages at Rs53bn (3.7% of loans), which coupled with heavy w-offs, led to a lower GNPA ratio of 3.7% on customer assets/3.9% on loans. The bank’s cumulative Covid provision stands at Rs50.1bn (0.8% of loans vs. 1% for ICICI/0.6% for HDFCB) in addition to standard/weak asset provisioning of another 1% of loans. Overall fund-based corporate stress pool declined to Rs74bn qoq (1.1% of loans), but including non-fund/investment pool, it stands at Rs155bn (2.3% of loans).

Outlook and valuations:

We expect the bank’s RoA/RoE to improve from a low of 0.7%/7% in FY21 to 1.5-1.6%/15% by FY23-24E, mainly driven by better growth/moderate credit cost. Valuations after the recent correction look attractive at 1.4x FY23E ABV, post stripping-off subs valuation. We retain Buy with a TP of Rs850, valuing the core bank at 1.9x FY23E ABV and subs at Rs56. Key risks to our call include slower growth/higher NPA formation due to Covid-induced disruption and returning of management instability, which has moderated a bit recently

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