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Retail slippages running high; provisioning buffer to cushion earnings

Axis Bank’s Q1FY22 earnings were characterised by: 1) elevated retail slippages (>6.5% run-rate over and above 4% in FY21) partially offset by pristine corporate asset quality and stable MSME stress; 2) When it is read in conjunction with mere 0.33% restructuring, technical slippage profile (22% upgraded in the same quarter), June demand resolution at 99.5% of Mar’21 levels, gives confidence on improving trajectory; 3) credit cost contained at 2.3% even in challenging quarter reinforces adequacy of existing buffer; 4) growth momentum (12% YoY) is catching up pace with peers; 5) interest reversal and portfolio mix shift weighed on NIMs (down 10bps QoQ).

Focus on strengthening balance sheet (2% additional provisioning), investing in technology and building granularity to drive sustainable growth and deliver superior RoE was visible this quarter as well. We expect earnings CAGR of >65% over FY21-FY23E and RoE of ~15% by FY23E. Maintain BUY with a target price of Rs 942. Key risks: 1) Covid resurgence unfolding further stress; 2) lower-than-anticipated growth can cap RoE improvement.

* Gross slippages upwards of 4% due to retail stress: In Q1FY22, gross slippages came in higher than expectations at Rs65bn (>4% run-rate). This quarter as well it was dominated by retail segment (85%) and downgrades from BB & below. Retail stress - a mix of secured (55%) as well as unsecured lending (45%) - ran higher at ~6.5%. Lower set of retail restructuring at 0.2% could be the rationale for elevated retail slippages. However, management highlighted that 22% of incremental slippages were upgraded during the course of quarter itself. Also 7.5% of slippages reported are linked (to NPA) accounts, that otherwise continue to remain standard and performing. Corporate asset quality was pristine and MSME portfolio was also steady. BB & below pool, as was anticipated, moved up marginally to 1.94%. We believe slippages, being transitory in nature, would improve going forward. Also, July cheque bounce rates similar to and demand resolution at 99.5% of Mar’21 levels, gives some confidence.

* Credit cost settles lower at 2.3%; cumulative provisions at ~2% of advances: One of the key drivers of earnings beat was credit cost being contained at 2.3% (at Rs35bn). Of this, 90% was towards specific loan loss provisions. It also created Rs1.55bn provisioning on restructured requests not yet implemented but approved. Positively, the bank has neither utilised nor created any further contingency buffer (unlike peers). Overall, it holds cumulative provisions (standard + additional other than NPA) of Rs124bn (~2% of standard asset coverage or 118% of GNPA), including covid buffer of Rs50bn. We, therefore, estimate credit cost of 1.5%/1.3% for FY22E/FY23E.

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