Axis Bank (AXSB) reported weak earnings, with PAT impacted by lower income and higher opex, while provisions remained elevated. NII income was impacted due to the reversal of proforma slippages. On the business front, retail disbursements were strong q-o-q, while disbursements under the ECLGS scheme supported growth in the SME book.
AXSB holds cumulative additional provisions of Rs 119 bn (~2% of loans). Overall, the bank has approved total restructuring of ~0.42% of loans and does not intend to provide any fresh approvals. The total funded and non-funded BB & below pool stood at ~2.4% of loans. We increase our FY22/FY23e earnings by 21%/10% and estimate AXSB to deliver RoA/RoE of 1.6%/15.4% in FY23. Maintain Buy.
Asset quality outlook improving; prudential provisioning to aid earnings
Q3FY21 PAT stood at Rs 11.2 bn (-36% y-o-y), impacted by low other income and high opex. NII grew 14% y-o-y (flat q-o-q), affected by interest reversals of Rs 6.14 bn on proforma slippages. NIM, thus, stood flat at 3.59% (3.89% ex. interest reversal). Other income stood flat, with fee income growing 6% q-o-q to Rs 29.1 bn, impacted by the reversal of Rs 1.34 bn and lower treasury gains. Opex grew 19% q-o-q on an increase in staff cost and collection expenses.PPoP grew 6% y-o-y to ~Rs 60.1 bn. For 9MFY21, NII/PPoP grew 18%/7% and PAT was up 30% y-o-y to Rs 39.1 bn.
Provisions stood elevated at Rs 46 bn (+33% y-o-y) as the bank made provisions on proforma slippages. The loan book grew 6% y-o-y (1% q-o-q), with retail loans up 4% q-o-q, while the corporate book de-grew 4% q-o-q. The SME portfolio grew 6% q-o-q, led by disbursements under the ECLG scheme. Deposits grew ~11% y-o-y, driven by 16% y-o-y growth in CASA deposits; thus, the CASA ratio stood at 43%.
Reported slippages were negligible due to the SC order; however, proforma slippages stood at Rs 67.4 bn. Asset quality improved, with GNPL/NNPL declining 18%/25% q-o-q. Therefore, the GNPL/ NNPL ratio improved 74bp/24bp q-o-q to ~3.4%/~0.7%. PCR improved ~180bp q-o-q to 79%. However, the proforma GNPA/NNPA ratio would have come in at 4.55%/1.19% with PCR of 75%.
Valuation and view
AXSB has delivered a resilient performance amid a challenging macro environment and appears well-positioned to report strong earnings traction – as fresh slippages subside, while improved underwriting and an increasing retail mix help maintain strong control on credit cost. On the business front, retail disbursements have showed strong q-o-q growth and surpassed pre-COVID levels. The bank has adopted conservative accounting policies and further strengthened the balance sheet by making additional provisions. AXSB has guided for moderation in Q4 slippages. Nonetheless, credit cost would remain elevated as the bank remains cautious on the overall impact. We estimate AXSB to deliver RoA/RoE of 1.6%/15.4% in FY23. Maintain Buy, with TP of Rs 750 (1.8x Sep’22e ABV).