Axis Bank - Strong core again utilised to create provisioning buffer - ICICI Securities

Axis Bank's Q2FY21 earnings reflect strong core performance. NIM expanded 18bps to 3.58% QoQ, core fee income grew 4% and operating costs were contained at 5%, thereby supporting 16% growth in operating profit. However, the bank continued with its conservative stance of creating further provisioning buffer of Rs31.4bn taking cumulative additional provisions to 1.9% of advances. Rightly so, when it proactively downgraded accounts whereby BB & below exposure has risen 40bps to 2.6% of advances, coupled with estimated probable restructuring of non-BB corporate pool of 0.56% (Rs32bn) and retail/SME loans of 0.43% (Rs25bn) - an indicative stress pool of 3.6%. If these largely overlap 30-dpd pool of 2.3% or where moratorium was extended, then the contingency buffer seems sufficient. Else, it might call for elevated credit costs in the coming quarters. We are building-in slippages of 4.1%/2.4% and credit cost of 2.7%/1.8% over FY21E/FY22E, which is nullified by superior operating profit of 2.7% to assets, thereby potentially generating RoEs of 11.4% in FY22E. Maintain BUY.

- Indicative stress pool at ~3.6% for now: The bank's BB and below exposure has risen by 40bps to 2.6% (Rs148bn from Rs108bn) - 75% of increase (30bps) is on account of probable restructuring and 25% (10bps) due to internal reviews on moratorium pool. Besides, the bank has indicated probable restructuring in non-BB corporate pool at Rs32bn (0.56% of advances) and in retail/SME at Rs25bn. During Q2FY21, it has created Rs12.8bn provision towards loans under moratorium and Rs18.6bn towards probable restructuring, taking the cumulative contingency buffer to Rs108bn (1.9%). If the incremental stress pool is restricted to this, the provision seems adequate. We are building-in 2.7%/1.8% credit cost for FY21/FY22E.

- Collections, recoveries and stress analysis suggest improving signals: Stress test on the overall portfolio suggests 25% lower stress than initially estimated. Also, demand resolutions are inching closer to pre-Covid levels - 94% in September and 97% likely by October-end. Cheque bounce rates though are higher than pre-Covid levels, and the bank is working closely with customers to get them to honour obligations. Pro forma GNPLs at 4.28% (down from 4.72%) and 30-dpd assets at 2.3% suggest in-line with expected near-term incremental stress. Key monitorable would be: behaviour of loans under moratorium for which the bank has created provisioning of Rs31.3bn (at 10%). If 30-dpd, BB & below, estimated probable restructuring and standstill NPLs are culminating as a sub-set of this pool thereby arresting any further incremental stress, we believe our slippage assumption of 4.1%/2.4% over FY21/FY22E respectively more than factors-in the anticipated stress.

- Encouraging and better than expected core operating performance: The following metrics impart confidence of sustainability of strong core: i) NIM expansion of 18bps primarily on the back of 36bps QoQ (>100bps YoY) decline in cost of deposits; ii) loan growth of 12% - buoyed by secured retail lending and better rates for corporate loans; iii) retail disbursements back to 95% of last year's levels; iv) third-party distribution fee growth of 38% and transaction banking/forex related fees being back to 1.2x pre-Covid levels; and v) operating expenses to assets contained below 2%. With further buoyancy on growth and deployment of excess liquidity towards better rated secured assets with focus on portfolio protection, we believe risk-adjusted earnings can settle at relatively better levels than recent historical averages.

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.

Source : Equity Bulls

Keywords