Impressive core revenue growth in Q2. Risk-reward attractive; Retain BUY
We retain BUY on Axis Bank and increase price target to Rs586 (Rs550 before) underpinned by earnings/BV upgrade. Earnings have been revised upwards by lifting NIM and core fee growth assumptions. Considering management's assessment of probable restructuring pool and encouraging collection trends (demand resolution at 97% in Oct), we believe that downside risks to our prevailing credit cost estimates has diminished. Hence, bank's return ratios will most likely recover sharply in FY22. The stand-alone bank trades at 1.4x FY22 P/ABV, and represents an attractive risk- reward.
Key highlights of standalone bank performance
- Axis Bank delivered a substantial 19% beat on our core PPOP estimate driven by strong core revenue (NII + Core Fees) growth delivery.
- NII growth was at 5% qoq and 20% yoy despite continued conservative stance of not recognizing interest income on weaker/stressed accounts. Despite 5 bps negative impact of this, the NIM improved by 18 bps qoq to stand at multi-quarter high of 3.6%.
- Margin expansion aided by core spread expansion with material decline in cost of deposits on the back of SA & TD rate reductions and improved granularity.
- Core fee income recovered sharply from the lower level of Q1 (66% qoq growth), and even stood marginally higher on yoy basis. Retail fees (62% of overall fees) grew 82% qoq, aided by material recovery in all fee steams (cards, distribution, assets-related, etc.).
- Loan growth was better-than-expected at 3% qoq and 11% yoy. Corporate portfolio expansion was driven A & Above rated loans, SME book growth was aided by disbursements under ECLGS scheme (Rs60bn+) and retail loan growth was led by secured products of mortgages and auto finance.
- Credit cost was high (annualized 3.2%), largely on account of bank making additional provisions of Rs31.4bn (of which Rs18.6bn towards probable restructuring pool). Resultantly, the stock of additional provisions rose to Rs108bn (now at 1.8% of adv. v/s 1.2% as of Q1).
- Core PCR on GNPLs also improved to 77% with the bank making some specific provisions and net slippages (excl. w/off) in Q2 being negative due asset classification stand still.
- BB & Below o/s increased from Rs64bn to Rs91bn on sequential basis - 75% of this increase is on account of estimated probable restructuring. Besides this, management conservatively assesses probable restructuring of Rs31bn in non-BB Corporate portfolio and Rs25bn in retail and commercial banking combined. SMA 1&2 comprises 2.3% of advances, but would largely be overlapping with above-mentioned exposures.
- The current susceptible pool (FB + NFB + Inv.) which is BB & Below and probable restructuring aggregate stands at Rs205bn (3.2% of customers assets). The stock of additional provisions (1.7% of customer assets) seems adequate to address this.
- Having raised Rs100bn equity capital during Q2 FY21, the CET-1 ratio of the bank improved 190 bps qoq to 15.4%.
Shares of AXIS BANK LTD. was last trading in BSE at Rs.493.7 as compared to the previous close of Rs. 504.85. The total number of shares traded during the day was 1562834 in over 32531 trades.
The stock hit an intraday high of Rs. 516.25 and intraday low of 489.5. The net turnover during the day was Rs. 783969327.