Buy Axis Bank Ltd For Target Rs.992 - ICICI Securities
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Credit quality surprises positively; growth lags
Axis Bank’s (Axis) Q2FY22 earnings surprised positively on portfolio quality 1) despite elevated slippage (3.5% vs 4% in FY21) recoveries, upgrades pulled GNPAs down 32bps QoQ to 3.53%; 2) restructuring at mere 0.64%; and 3) credit cost contained at 1.4% (better than our estimate of 1.7%) reinforces adequacy of existing buffer. However, this was offset by 1) growth momentum (1% QoQ/10% YoY) lagging peers; 2) portfolio mix shift weighing further on NIMs (down 7bps QoQ to 3.39%); 3) operating cost being elevated with 36% YoY/17% QoQ growth. Moderating credit cost trend is encouraging and now growth acceleration coupled with NIM improvement would be critical triggers to deliver superior RoEs. We expect earnings CAGR of >58% over FY21-FY23E and RoE of >14% by FY23E. Maintain BUY with a revised target price of Rs992 (earlier Rs942) assigning 2.4x FY23 book. Key risks: 1) Lower-than-anticipated growth can cap RoE improvement; 2) elevated opex.
* Gross slippages are optically elevated but upgraded intra quarter; BB & below pool declines further: Gross slippages in Q2FY22 came in higher than expected at Rs54.5bn (3.5% run-rate) vs Rs65.2bn in Q1FY22. It was dominated by retail segment (>70%) and downgrades from BB & below rated entities (of Rs6.8bn).
Lower set of restructuring at 0.64% could be the rationale for the elevated slippages. On a gross basis it optically looks higher; however, 28% of slippages were upgraded in the same quarter. This is reflected in recoveries and upgrades of Rs47.6bn. Adjusted for this, slippages largely reflect flow through from covid-related stress. Write-offs of Rs25.2bn further aided decline in GNPAs to 3.53% (from 3.85%).
BB & below rated pool declined from Rs130bn to Rs117bn as Rs6.8bn slipped during the quarter and balance was upgraded. Nearly 98% of restructured corporate book is classified in BB & below. Cheque bounces remain elevated compared to precovid level; however, demand resolution at 98.8% is back to pre-covid levels. Recovery from written-offs accounts were 64% higher than Q1.
* Credit cost settles lower at 1.1%; cumulative provisions at ~2.1% of advances: A key driver of the earnings was credit cost containment at 1.1% (at Rs17.7bn). Adjusting from recovery written-off accounts, credit cost would be 1.4% (still better than our estimate of 1.7%). Specific loan loss provisions were Rs9.3bn. Positively, Axis neither utilised nor created any further contingency buffer during the quarter. Overall, it holds cumulative provisions (standard + additional ex-NPA) of Rs129.5bn translating to a standard asset coverage of 2.11% or 124% of GNPA. We, therefore, estimate credit cost of 1.5%/1.2% for FY22E/FY23E, respectively.
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