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Result and Price Analysis:

4QFY22 marks the manifestation of sequentially lower provisioning expenses (₹9.9bn v/s ₹13bn in the previous quarter) and 14% sequential increase in net profit at ₹41bn. The bank’s reported slippages number were lower (₹39.8bn v/s 41.5bn in 3QFY22) with GNPA and NNPA ratio narrowing down to 2.82% and 0.73% respectively against the GNPA and NNPA ratio of 3.17% and 0.91% in the previous quarter. The bank’s PCR (including TWO) stood sequentially higher at 91%. Credit off-take (13.5% YoY) maintained, led by growth across segments. Furthermore, the BB & below book came down sequentially by 13bps to 0.75% of customer assets and reported lower restructured advances of ₹40bn (~52bps of gross loan book). On business front, credit growth (13.5% YoY & 6.4% QoQ) and healthy deposit growth (16.2% YoY & 6.5% QoQ) were superior against previous quarter. The future outlook of asset quality is at manageable level as the strong standard asset coverage (1.8% of gross loans) is likely to absorb delinquencies from restructuring. In view of adequate covid buffer, glimpse of growth rejuvenation and manageable restructuring pool, we recommend BUY.

NPA reducing; restructuring narrowed down further:

Axis Bank’s total slippages were moderately lower at ₹39.8bn v/s ₹41.5bn in the previous quarter. The up-gradation & recovery stood higher at ₹38bn v/s ₹33bn in 3QFY22. The write-offs were ~₹17bn. It has resulted in 35bps reduction sequentially in GNPA ratio to 2.82%. GNPA/NNPA/PCR stood at 2.82%/0.73%/75% against 3.17%/0.91%/72% in the previous quarter. GNPA ratio inched down across segments. Retail GNPA at 1.4%, where SME and corporate GNPA ratio is at 2.2% and 4.9% respectively. The restructured pool reported lower meaningfully at ₹40bn (52bps of GCA) v/s ₹46bn in the previous quarter. The bank carries a provision of ~24% on restructured loans, which is in excess of regulatory limits. Corporate segment has 46bps of loan book under restructuring where retail and SME segment carry restructuring of 72bps and 2bps respectively.

Around 89% of retail restructured book is secured (with LTV of 40% - 70%) and 100% provision made on unsecured retail restructured book. Restructuring is unlikely to exceed current levels (in terms of %) going forward. BB & below rated pool down by 13bps to 0.75% of gross customer assets. Fund based BB & below outstanding decreased by 3% sequentially, Moreover, Non fund based outstanding in BB & below pool inched down significantly. 98% of restructured corporate book classified as BB & Below. The provision expenses were sequentially lower at ₹9.9bn (v/s ₹13bn in the previous quarter). It includes the write-off amounting to ₹17bn. The bank’s PCR stood higher sequentially at 75%. PCR (including tech. write offs) stood at 91% and Aggregate PCR (Specific provision + covid provision + General Provision + Contingency Provision) stood at 132% of reported GNPLs and the contingent provisioning (covid + standard asset) stood 1.8% of the gross loan book.

Growth maintained; well-adjusted with risk: The bank’s advances stood at ₹7.1tn; 13.5% YoY and 6.4% sequentially. Corporate book (32.6% of book) grew marginally by 0.6% QoQ. Retail book (56.5% of book) growth was healthy at 8.8% sequentially. SME book (10.9% of book) grew by 13.5% QoQ. Retail disbursement grew 21% YoY and 30% QoQ. Around 80% of retail book remain secured and it is well diversified. Moreover, 100% of PL (6.4% loan contribution) and 71% of CC (2.2% of loan) portfolio is to salaried class. Axis bank is the 4th largest credit card issuer in the country with market share of ~12%. Wholesale disbursements were flat sequentially. The bank witnessed 44% YoY growth in Mid-corporate book against 13% YoY growth in overall corporate segment. Around 88% of Corporate book is now rated A - and above with 92% of incremental sanctions in FY22 being to corporate rated A- and above and 61% of sanction to those who are AA- & above. SME loan grew by 13.5% QoQ and disbursement were up by 27% sequentially. Around 96% of SME book is secured with predominantly working capital financing. 86% of SME book is rated SME3 or better, with 83% of incremental sanctions is SME3 or above. The bank has disbursed ~₹90bn under ECLGS. Bank’s deposit stood at ₹8.2tn and growth remain strong at 16.2% YoY and 6.5% QoQ. The CASA (QAB) stood at 44%. The bank’s CRAR stood at 18.54% with CET 1 of 16.34%. Additionally LCR of 116% with excess SLR of ₹962bn provides a strong liquidity position for the bank. The RWA to asset sequentially down to 61%.

Decent operational quarter driven by lower provisions: The bank’s NII stood at ₹88bn; grew by 16.7% YoY & 2% QoQ. The bank’s NIMs squeezed marginally to 3.49% on the back of higher cost of fund (3.83%) and cost of deposit (3.65%). Interest reversal has impacted 2bps to the NIMs. Non – interest income grew by 10% QoQ. Management hopes to achieve a structural improvement in NIM going forward, owing to i) improvement in mix of loans versus investments on the assets side, ii) higher share of low cost deposits and iii) reduction in RIDF bonds (which have negative spread) as incremental allocations have stopped as the bank is PSL compliant. A strong NII growth and improved opex (C/I ratio: 50.4% v/s 50.7% in the previous quarter) led to PPoP sequential growth of 4.9%. Additionally, sequentially lower provisioning expenses (₹9.8bn v/s ₹13.3bn) has resulted in net profit of ₹41bn; sequential growth of 14%. The bank’s quarterly ROA/ROE stood at 1.5%/15.9%.

Outlook & Valuations

We value the standalone bank at PBV of 2.3xFY23E Adj. BVPS of ₹417 to arrive at a price target of ₹960. We recommend BUY on Axis Bank.

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