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Axis Bank reported a good set of numbers with operating growth of 12% yoy, while lower provisions of Rs.1,335 cr (-71% yoy), resulting in a net profit of Rs.3,614 cr (224% yoy growth) for Q3FY22.

Key Highlights of Q3FY22 Results

* Gross NPA fell to 3.17% in 3QFY22 as compared to 3.5% in the last quarter and Net NPA was at 0.91% with provision coverage ratio (PCR) at 72%. The bank has non-NPA provisions of Rs.13,404 cr, of which COVID-related provisions are Rs.5,012 cr, restructuring provisions are Rs.1,569 cr, and weak assets and other provisions of Rs.6,823 cr. 61% of the NPA provisions on loans for the quarter are from slow forward provisions towards aging of assets recognized in previous quarters. Gross loan slippages for the quarter were Rs.3,332 cr lower than Q2FY22 by 38%. Retail gross slippages declined 44% qoq. Gross loan slippage ratio for the quarter stood at 2.08%, improved by 304 basis points yoy and 131 basis points qoq. Net loan slippage for the quarter was Rs.97 cr, down from Rs.676 cr in Q2FY22 and a decline of 86% qoq and 98% yoy. Bank has adopted a conservative policy with restructuring at just 0.63% of customer assets. 89% of the loans restructured under COVID 1 and 2 are secured, the LTV of the secured retail loans range from 40% to 70%. On a segmental basis, the restructured loans were 0.64% of the wholesale banking group book, 0.83% of the retail book and 0.02% of the commercial banking group.

* Loan book grew by 17% yoy, with retail advances growing by 18% yoy. Within retail, home loans and LAP loans grew by 20%/28% yoy respectively. 80% of retail loans are secured, 87% of the corporate book is rated A- or above. Deposits witnessed 18% yoy growth, with CASA deposits growing faster at 22% yoy. Low cost deposits increased by ~300bps yoy to 44.7% of the total deposits, which resulted in a ~53bps 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 17% yoy, with NIM at 3.53% during the quarter (growth of 14 basis points over last quarter). Better product mix in loans and improvement in CASA ratio lead to improvement in NIM. The bank expects NIM for Q4FY22 to be better than 1HFY22 and in range of 3.45-3.5%. Fee income stood at Rs.3,344 cr growing 15% yoy and 3% qoq. 92% of the fee is granular, 65% of fee -- of our fee is on the Retail business and the balance from the Wholesale franchise. The fee for the quarter is after reducing fees across many charge types mainly in retail liability area. The bank continues to make significant investments in building digital and tech capabilities (40% yoy increase in tech spend) and technology spends stand at 7.8%-8% of total opex. Management expects cost to asset ratio to be ~2.2% in FY22 and then to 2% in FY23.

OUTLOOK AND VALUATION

The bank continued its prudent policy by strengthening its balance sheet by creating adequate provisions. We expect the retail and rural loan book to pick up and asset quality to improve, as the economic scenario improves. Stock is trading at 1.7x ABV of FY24E. We recommend ‘Hold’ with a target price of Rs.841, with an investment horizon of 12-18 months.

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