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Re-rating imminent due to better asset quality

Axis Bank’s earnings were positive on asset quality though PPoP was a miss led by a QoQ opex spike. NII was ahead due to slightly better NIM while loan growth was in-line that was largely led by retail and SME. Corporate growth was muted. Opex saw a 17% QoQ spike also driven by aggressive focus on collections and 7.5% of the spike was one-time in nature. Hence PPoP was a miss. Overall asset quality surprised positively.

While gross slippages were higher, jump in recoveries QoQ resulted in much lower net slippages that led to a sharp reduction in provisions. GNPA/NNPA improved QoQ by 32bps/12bps to 3.8%/1.2%. Restructured pool rose QoQ from 57bps to 103bps on which PCR is 24%. Buffer provisions to loans stand at 104bps. As we roll forward to Sep’23 ABV, we raise multiple to 2.4x due to better asset quality and lower provisions. Raise TP at Rs970. Retain BUY.

Q2FY22 earnings–PPoP miss due to opex spike; PAT beat due to lower provisions

NII was a beat at Rs79bn (est. Rs77bn) while NIM was a tad higher at 3.79% (est. 3.73%) due to better yields (due to lower int. reversals) and lower cost of funds. Loan growth was in-line at 10% YoY (est. 10%) driven by retail/SME. Corporate growth was weak. Deposits grew by 18.1% YoY (est. 13.4% YoY) that was largely driven by average CASA growth of 20%+ YoY. Other income was mainly in-line at Rs38.0bn (est. Rs37.5bn).

Fee income at Rs32.3bn (est. Rs28.5bn) was a beat due to better business. Opex spiked by 17% QoQ to Rs57.7bn (est. Rs49bn) and was higher led by both, employee cost and other opex. Of the QoQ spike 7.5% was due to a one-time expense. Asset quality was better with calc. GNPA/NNPA being lower at 3.78%/1.16% (est. 4.0%/1.24%) due to superior recoveries. Owing to lower net slippages, provisions were a beat at Rs17.35bn (est. Rs30bn). PAT surprised positively at Rs31.3bn (est. Rs26.7bn).

Asset quality largely in-line with private peers; recoveries jump QoQ

Gross slippages were higher at Rs54.6.2bn (est. Rs42bn) while net slippages were much lower at Rs7.1bn (est. Rs24.6bn) due to strong recoveries at Rs47.6bn (est. Rs17.4bn). Sequential decline in retail slippages was 23%. BB & below exposure (fund+non-fund) also improved QoQ from 213bps to 189bps due to repayment and upgrades.

Total restructured pool increased QoQ from 57bps to 103bps and 93% of the retail restructuring is secured. Coverage on the restructured pool is 24% or Rs15.3bn while PCR on the unsecured portion is 100%. Buffer provisions of Rs50.1bn remain unutilised from the previous quarter. Hence overall excess provisions are 105bps (ICIC Bank ~110bps). CAR/CET-1 is adequate at 20.0%/15.8%. On the opex front the bank suggested that near term opex to assets could spike by 8-10bps post which it would reach 2% once growth is sustainable.

Retail/SME/commercial banking saw better credit flow

Loan growth was mainly driven by retail/SME which grew by 16%/18% YoY while corporate growth was muted at 1% YoY which was contrary to private peers. The bank suggested that its corporate customers have been pairing down debt and private capex remains muted. Retail disbursals were up 54% YoY led by home loans (+86% YoY), personal loans (+72% YoY). Corporate were flat YoY while commercial banking saw a sharp QoQ uptick.

Valuation and risks

Opex rise of ~2% for FY22/23 would be more than offset by a reduction in provisions which could see FY22/23 PAT higher by ~5%. Axis warrants a re-rating to its 5-yr avg. multiple given the gap in expected RoE between Axis and ICICI. Rolling forward to Sep’23 ABV we raise multiple to 2.4x (earlier 2.2x) and TP to Rs970 (earlier Rs825). Retain BUY. Risks: higher stress.

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