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Asset quality stable; Recoveries at an all-time high

Axis Bank offers a wide range of banking services in India that includes cash and credit management services, retail banking, investment management and treasury services amongst others.

• Pre-provisioning profit down 11.0% YoY to Rs. 5,928cr as operating expense grew 36.2% YoY due to higher volumes and collection expenses.

• CASA deposits grew by 18.6% YoY as CASA ratio stood at 42.0%; Total loans increased 7.9% YoY.

• Although the quarter saw inflated costs and stress on margins, we remain positive on the stock with solid balance sheet and necessary steps taken to make product mix favourable. Hence we reiterate our BUY rating on the stock based on 2.1x FY23E BVPS with a revised target price of Rs. 889.

Lower provisioning boosts PAT

The quarter saw a muted growth in interest income to Rs. 16,336cr (+2.2% YoY) and on the other hand the interest expense took a small dip to Rs. 8,436cr (-2.5% YoY) as cost of deposits slid down 68bps YoY to 3.69% this quarter. As a result, Net interest income stood at Rs. 7,900cr (7.8% YoY; 1.8% QoQ) with Net interest margin at 3.39% in Q2FY22. Non-interest income up by 6.4% YoY on the back of 17.0% YoY growth in Fees and commission. However, the other operating expense grew by 36.2% YoY to Rs. 5,771cr mainly due to higher business volumes, higher collection expense and IT statutory costs. Hence, Pre-provision profit was down 11.0% YoY to Rs. 5,928cr. Provisions were set at Rs. 1,735cr (-60.0% YoY) boosting PAT to 86.2% YoY growth this quarter to Rs. 3,133cr.

Asset quality strengthens as net slippages decline

Strong growth in granular CASA deposits continues to drive loan growth as CASA (on QAB basis) grew by 18.6% YoY with CASA ratio at 42% (+201bps YoY). Led by retail loans (+13.1% YoY), total loans and advances grew by 7.9% YoY. GNPA/NNPA stood at 3.53%/1.08% (vs. 3.85%/1.2% in Q1FY22) as net slippages decline 82% on sequential basis. Overall restructuring stood at 0.64% of gross customer assets and retail at 0.80% as the overall provision coverage ended at 24% on the restructured book. Liquidity Coverage ratio (LCR) improved 617bps on a sequential basis to 124% as overall Capital adequacy ratio stood at 20.04% at the end of the quarter.

Key concall highlights

• Management has mentioned that margins have been impacted due to a product mix change which will become favourable in the upcoming quarters.

• Out of the overall operating expense, ~7.5% increase on sequential basis is due to one-off expense which is unlikely to be repeated in the future.

• The quarter saw 64% increase in recoveries from written off retail accounts, making Q2FY22 the best quarter in terms of recoveries in the last 18 months.

Outlook and valuation

The quarter saw weak operational performance and stressed margins due to increase in opex. The proposed change in the product mix is expected to reduce the operational costs and strong granular deposits is expected to aid loan growth. We remain positive on the stock as the bank witness strong collections and improved asset quality. Hence we reiterate our BUY rating on the stock based on 2.1x FY23E BVPS with a revised target price of Rs. 889.

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