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Axis Bank reported a decent set of numbers with core operating profit growth of 13% yoy, while lower provisions of Rs.35,320 mn (-20% yoy), resulting in a net profit of Rs.21,602 mn (94% yoy growth) for Q1FY22.

Key Highlights of Q1FY22 Results

Gross NPA increased to 3.85% in 1QFY22 as compared to 3.7% in the last quarter and Net NPA was at 1.2% with provision coverage ratio (PCR) at 70%. The bank has non-NPA provisions of Rs.1,24,250 mn, of which COVID-related provisions are Rs.50,005 mn, restructuring provisions are Rs.7,030 mn, and weak assets and other provisions of Rs.67,100 mn. Slippages were high at Rs.65,180 mn (4.2% annualized), with retail slippages contributing 83% of total slippages. Asset quality for the Wholesale Bank is holding up well. Net slippage ratio on an annualized basis for this segment in the quarter stood at 0.27%. On the positive front, demand resolutions reached 99.5% of March 21 levels. Cheque bounces remain marginally elevated in Q1 FY22, but in the month of July, check bounce rates were back to March 21 levels. Bank has adopted a conservative policy with restructuring at just 0.33% of customer assets. 95% of the loans restructured under COVID 1 and 2 are secured, the LTV of the secured retail loans range from 40% to 60%. On a segmental basis, the restructured loans were 0.62% of the wholesale banking group book, 0.21% of the retail book and 0.03% of the commercial banking group. Management expects that normalization should return for the bank as well as for industry from Q3FY22.

Loan book grew by 12% yoy, with retail advances growing by 14% yoy. Within retail, home loans and LAP loans grew by 17%/27% yoy respectively. 80% of retail loans are secured, 85% of the corporate book is rated A- or above. Deposits witnessed 14% yoy growth, with CASA deposits growing faster at 20% yoy. Low cost deposits increased by ~300bps yoy to 42% of the total deposits, which resulted in a ~95bps reduction in cost of deposits on yoy basis. CASA and retail term deposits stand at 83% of the total deposits as compared to 80% last year

On the P&L front, NII grew by 11% yoy, with NIM at 3.46% during the quarter (growth of 6 basis points over last year). Sequentially, the NIMs were impacted by product mix change, interest reversals, CRR increase, and market pricing pressure in the wholesale segment. Fee income stood at Rs.26,680 mn growing 62% YoY. 62% of fees come from retail business, 38% comes from wholesale franchise. Fee growth is driven by a couple of things, one is a market share increase both in the FX loans business as well as the LC business. Staff cost increased by 32% yoy on account of increments and addition of 5,000 people to staff strength. This resulted in 450bps increase in Cost-Income ratio on yoy basis to 43.5%

OUTLOOK AND VALUATION

The second wave of Covid impacted retail collections, which is reflected in asset quality of the bank for the current quarter. However, bank continued its prudent policy by strengthening its balance sheet by creating adequate provisions. We expect the retail loan book to pick up and asset quality to improve, as the economic scenario improves. Stock is trading at 1.9x ABV of FY23. We recommend ‘Hold’ with a target price of Rs.804, with an investment horizon of 12-18 months.

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