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Improving asset quality outlook; earnings set to gain momentum

PCR steady at >70%; additional provisioning buffer provides comfort

* Axis Bank (AXSB) reported a strong quarter, with PAT above our estimates, aided by lower provisions. Business growth was strong across segments, with retail disbursements at an all-time high.

* On the asset quality front, the slippage trend subsided sequentially (INR52.8b v/s INR67.4b in 3Q) and total restructuring stood at 0.3% of loans. Also, the total funded and non-funded book declined to 2.0% of loans (v/s 2.4% in 3QFY21). Also, AXSB has ~72% coverage on GNPL and additionally holds a provision buffer of 2% (including standard provisions) to protect the balance sheet against any potential stress.

* However, the resurgence of COVID and state-wise lockdown would be a key monitorable in the near term. We increase our FY22/FY23E earnings by 12%/6% and estimate AXSB to deliver RoA/RoE of 1.7%/16.4% in FY23. Maintain Buy

PAT beat aided by lower provisions; robust growth trends across segments

* 4QFY21 PAT stood at INR26.8b (significantly above our estimate), largely aided by lower provisions. PPoP growth stood at 9% YoY. For FY21, NII/PPoP/PAT was up 16%/10%/305% YoY.

* NII grew 11% YoY (+2.5% QoQ), impacted by interest-on-interest refund and higher LCR. Thus, NIMs stood at 3.56% (v/s 3.59 in 3QFY21).

* Other income grew 17% YoY, with fee income rising 15% YoY to INR33.8b and higher treasury gains (INR7.9b). Opex grew 8% YoY on an increase in staff cost (+21% YoY). Hence, the C/I ratio declined to 43.8% (v/s 45.3% in 3QFY21). Therefore, Core PPoP grew 9% YoY to ~INR60.8b.

* Provisions stood at INR32.9b (28% QoQ decline, 21% below our estimate). The bank currently holds an additional provision buffer of ~2% of loans. It approved total restructuring of INR18.5b (0.3% of loans) with 26% PCR.

* The loan book grew 7% QoQ with strong growth across segments. This was led by retail loans growing at 5% QoQ and retail disbursements rising at an all-time high of 44% QoQ. Also, the corporate/SME portfolio grew 9%/9%. On the liability front, deposits were up ~8% QoQ, led by 13% QoQ growth in CASA deposits; thus, the CASA ratio improved to 45% (quarterly avg. CASA stood at 42%).

* On the asset quality front, slippages stood at INR52.8b; along with higher recovery and write-offs, this resulted in improvement in the GNPA/NNPA ratio by 85bp/14bp QoQ to 3.70%/1.05%. As a result, PCR stood at 72.4%. The funded/non-funded BB & below pool declined to INR74.4b/INR45.7b (~2.0% of loans). Standard restructured loans under the COVID resolution framework stood at INR18.5b, corresponding to 0.3% of gross customer assets; the bank carries a provision of 26% on this

Highlights from management commentary

* The total COVID-related provision buffer stood at INR50b (0.8% of loans), while the total additional provision buffer (COVID, standard and restructured) stood at ~2% of loans.

* Gross slippages were in line with expectations. 64% of gross slippages were from the retail book. Thus, the annualized retail slippage ratio stood at 3.7%.

* The sourcing of retail loans from branches stood at 59% in 4QFY21.

Valuation and view

* AXSB has delivered a strong performance and appears well-positioned to report robust earnings traction. Moreover, moderation in fresh slippages, coupled with improved underwriting and an increasing retail mix, would help maintain strong credit cost control. On the business front, retail disbursements reached an all-time high during the quarter, with strong disbursements seen in Home Loans (+45% QoQ) and LAP (+51% QoQ).

* AXSB delivered strong sequential growth across segments. On the asset quality front, total restructuring stood at 0.3% of loans. Furthermore, the bank has ~72% coverage on GNPL and also holds an additional provision buffer of 2% to protect the balance sheet against any potential stress. We expect credit cost to decline to 1.5%/1.3% over FY22/FY23. We increase our FY22/FY23E earnings by 12%/6% and estimate AXSB to deliver RoA/RoE of 1.7%/16.4% in FY23. Maintain Buy, with revised TP of INR925 (2.0x FY23E ABV).

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