Axis Bank: Maintain ‘buy’, biz growth remains flattish

Highlights from the management commentary: Gross retail slippages stood ~Rs 54billion (84% of total slippages).

Contingent provisioning stays intact, provide comfort on the trajectory ahead: Axis Bank reported an in-line Q1FY22, with a PAT of Rs 21.6billion and core PPOP growth of 13% YoY. Business growth remains flattish, while margin moderated by 10bp QoQ due to interest reversals, excess liquidity, and change in its product mix. Fresh slippages stood elevated at Rs 65.2billion (Rs 52.8billion in 4QFY21), led by the retail segment (84% of total).

As a result, asset quality ratios deteriorated by ~15bp QoQ. Restructuring stood at 0.33% of loans (additional 11bp of restructuring, which is approved, but not implemented). While slippages could remain elevated in the near term, healthy PCR of ~70%, coupled with additional provision buffer of 2% (including standard provisions) is likely to protect the balance sheet against any potential stress. We estimate AXSB to deliver a RoA/RoE of 1.6%/15.2% in FY23E. We maintain our ‘buy’ rating.

Business growth remains flat; margin declines by 10bp sequentially : PAT stood at Rs 21.6billion (in line) in 1QFY22, with a PPOP of Rs 64.2billion (up ~10% YoY; in line). NII grew 11% YoY (+2.7% QoQ), while margin fell 10bp QoQ to 3.46% due to interest reversals on slippages, higher liquidity, and change in product mix. Other income grew 39% YoY (-23% QoQ), with fee income growing 62% YoY to Rs 26.7billion (-21% QoQ) affected by muted business activity.

Treasury gains stood at Rs 5billion. Opex grew 32% YoY due to increase in staff cost (+32% YoY) and collection expenses. C/I ratio stood at 43.5% (v/s 43.8% in 4QFY21). Core PPOP grew 13% YoY to ~Rs 59.2billion. Provisions stood at Rs 35.3billion (-20% YoY/+7% QoQ). The bank currently holds an additional provision buffer of ~2% of loans. AXSB implemented a restructuring of Rs 21.9billion (0.33% of loans), with a PCR of 23%. It has an additional 11bp of restructuring, approved, but not implemented.

Loan book grew 12% YoY (flat QoQ), with retail loans growing 14% and retail disbursement up 3.33x (sequential decline). Also, its corporate/SME portfolio grew by 8%/19% YoY. On the liability front, deposits grew ~2% QoQ, led by 7% growth in term deposits. CASA ratio moderated to 43% (quarterly average CASA stood at 42%). On the asset quality front, slippages stood elevated at Rs 65.2billion, led by the retail segment (84%), while upgrades/recovery and write-offs stood at Rs 25.4billion and Rs 33.4billion, respectively. The GNPA/NNPA ratio increased by 15bp QoQ each to 3.85%/1.2%, with PCR ~70%. Funded/non-funded BB and below pool increased to `80.4billion/`44.2billion (~2% of loans).

Highlights from the management commentary: Gross retail slippages stood ~Rs 54billion (84% of total slippages). Around 55% of Retail slippages came from secured products, where the LTV is 35-55%. Demand resolution declined over Apr-May’21. It reached 99.5% of Mar’21 levels in Jun’21. Check bounce rates were higher over 1QFY21, but were similar to Mar’21 levels in Jul’21. Around 99% of restructuring is backed by security, where the LTV is 40-60%. Total ECLGS disbursements stood at Rs 121billion (97% is under ECLGS 1 and 2, while it was nil under ECLGS 4).