Buy Axis Bank Ltd For Target Rs. 1,400 By Emkay Global Financial Services Ltd
Prudent provisioning depresses earnings
The in-line NII and higher treasury income notwithstanding, Axis Bank reported a 10% miss on PAT (at Rs58bn) and 1.5% RoA, primarily due to significantly higher provisions as it tweaked its stress recognition policy on cash credit/overdraft (CC/OD) facility and owing to one-time settlement accounts. Adjusted for this technical impact, 1Q PAT is likely log at ~Rs64bn. Though the management had earlier given guidance for this policy change to ensure industry-best prudency, the extent of NPA formation is higher than expected. The management indicated that 1Q bore the impact of the stock plus flow, and so slippages during 9MFY26 should be relatively moderate (albeit elevated), as also the credit cost. Factoring this in, we cut FY26E/FY27E/FY28E earnings by 7%/3%/1%; we expect the RoA to dip to 1.6% in FY26E and gradually recover to 1.7%. The stock has already corrected recently and is trading at cheap valuations of 1.4x FY27E ABV/1.2x FY28E ABV. Hence, we retain BUY on Axis while maintaining our TP at Rs1,400, rolling forward the standalone bank valuation on 1.6x Jun-27E ABV and subs at Rs125/sh.
Slow growth, swift rate cuts hurt margins
Axis Bank maintained its sub-par credit growth at 8% YoY/2% QoQ, mainly due to a continued conscious slowdown in its retail book (6% YoY), including unsecured loans, given persistent higher overleveraging levels and portfolio de-risking. The deposits pool declined seasonally by ~1% QoQ, with CASA ratio too slipping, to ~40% vs ~41% in Q4FY25. This, coupled with swift rate cuts and higher NPA formation, led to a ~17bps dip in NIM to 3.8%. The management did not give guidance on growth for FY26, although it expects growth to be 300-400bps above the system in the medium term.
Prudent new stress recognition policy leads to higher NPA formation
Gross slippage was elevated to Rs82bn/3.3% of loans, mainly due to technical factors including new stress recognition policy adopted for CC/OD and one-time settlement accounts. This, along with persistent stress in unsecured loans and seasonally higher KCC slippages, led to a 19bps QoQ increase in GNPA ratio to 1.6%. The management stated that it has moved from DPD-based NPA recognition to qualitative judgement-based recognition. Separately, as regards OTS, the bank does not upgrade an account till the last installment is received in full. We believe this policy change would lead to elevated NPA flow in the near term, albeit largely even-out in the long term.
We retain BUY while maintaining our TP at Rs1,400
We appreciate the bank’s policy to adopt industry-best prudent practices, though it leads to earnings volatility. Factoring in the higher LLP, we cut FY26E-28E earnings by 1-7% with unchanged TP at Rs1,400, rolling forward the Standalone bank valuation on 1.6x Jun-27E ABV and subs at Rs125/sh and retain BUY. Key risks: Macro-dislocation and more-than-expected stress in unsecured loans leading to slower-than-expected growth/higher NPAs, and KMP attrition.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
