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Expansion in high yielding book to aid margin

* Axis Bank (AxisB) reported strong financial performance during Q3FY22 driven by strong growth in loan (17% YoY) and significant decline in the provisioning cost. Net profit was reported at Rs36 bn which grew by 15.3% sequentially. NIM improved by 14bps QoQ to 3.5% in Q3FY22 mainly driven by 10 bps sequential decline in CoF to 3.8%. Though higher OPEX (25.3% YoY) due to increase in tech spending somehow weighed on the bottom line.

* Gross slippages was reduced to Rs41.5 bn (slippages rate at 0.7% in Q3FY22 v/s 0.9% in Q2FY22), while after R&U and write-off net deduction to GNPA was Rs-8.5 bn. GNPA was improved by -36 bps sequentially to 3.17% with healthy PCR of 72%. Below rated assets pool reduced to 1.7% in Q3FY22 (from 1.9% in Q2FY22) and restructuring book at 0.7% remained contained. Credit cost (annualized) reduced to 0.8% during quarter compared 1.1% in the previous quarter. In Q3FY22, 92% of the incremental corporate disbursement was towards A and above rated entities and its share stood at 87% of corporate advances. With the decline in stress book and higher PCR, standard provisions at 2.0% of the loans to immune bank’s profitability amidst pandemic related business uncertainty.

* Advances growth picked to multi-quarter high level of 16.7% YoY on the back of strong pick up in the SME and retail credit. Share of CASA deposits stood at 45% and bank is remained well capitalized with CAR at 17.4%.

* Provisioning reduced by -71% YoY during the quarter. As the NPAs from the legacy portfolio is largely recognized, we expect further improvement in slippages and credit cost ratios. Besides, margin expansion due to pick up of growth in high yielding retail/SME book to aid profitability. Though, C/I ratio rising above 50% require close monitoring. RoE is expected to improve of 12.7% in FY24E from 7.1% in FY21.

* We assign ‘Buy’ rating to AxisB with target price of Rs940 valuing bank at P/ABV 2.25x FY24E.

Strong growth in profitability driven by high NII growth and low credit cost

NII grew at 5-quarter high growth of 17.4% YoY led by strong loan growth and contained CoF. NIM improved by 14bps QoQ to 3.53% in Q3FY22 on the back of strong NII growth. Fee income growth remained strong at 15.1% YoY, though other income growth at 1.7% YoY was impacted by weak trading income. OPEX growth at 25.3% YoY & 9.7% QoQ remained elevated due increase in investment in tech and other business expansion related expenses. C/I rose to 50.7% in Q3FY23 as the OPEX growth outpaced the income growth by the wide margin. Provisioning declined by - 71% YoY & -23.1% QoQ thereby providing a strong support to PAT which grew by 15.3% sequentially.

Credit growth picks up; retail, SME witness strong growth

Advances grew by 16.7% YoY led by strong growth in retail advances (18.5% YoY), SME (20.3% YoY). Higher credit growth in retail and SME segments indicate that the bank has started looking at high yielding assets. In retail segment, home and LAP grew at a stronger pace while the bank is still cautiously disbursing in the unsecured retail segment. Meanwhile corporate growth also remained at 5-quarter high at 12.9% in Q3FY22. Deposits grew by 18% YoY while CASA grew at 22% YoY.

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