Maintain BUY on Axis Bank - Back to square one - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

Axis Bank's (Axis) Q1FY22 earnings missed estimates (10% miss) on account of higher-than-expected provisions (243bps annualised). The bank's journey towards normalised credit costs and steady-state profitability has yet again been derailed and interrupted by deterioration in asset quality. Although the headline asset quality trends are consistent with those of other lenders (lower collections and higher slippages), incremental slippages (4.5% annualised) disappointed with the mix largely driven by the retail portfolio (7%, ~100bps higher than ICICI Bank). While Axis held healthy surplus COVID provisions (0.8% of loans), and maintained a comfortable PCR at ~70%, the bank's performance on asset quality has been inconsistent. Although we expect credit costs to normalise in H2FY22, we expect Axis to revert to steady-state profitability by FY23E. Maintain BUY with an SOTP price of INR 825.

In-line NII/PPOP growth with steady balance sheet growth: Axis Bank reported muted NII/PPOP growth of 11%/10% YoY with compression in NIM by 10bps sequentially to 3.5%. Fee income traction was muted (-21% QoQ) due to a sharp drop in retail disbursements during the quarter (~50% of Q4FY21). YoY loan growth was clocked in at 12% on a favourable base, driven by retail (+14% YoY) and SME segments (+18% YoY). The bank continued to strengthen its granular deposit franchise (average CASA ratio up 342bps YoY), driving best-in-class cost of deposits (3.8%).

Mix of retail slippages hard to explain: Axis Bank reported elevated gross slippages at 4.5%, predominantly driven by retail (7%, 83% of total slippages), broadly reflective of the overall environment during Q1FY22 in terms of economic activity, collections, and recoveries. However, ~45% of net slippages emerged from retail unsecured loans, implying a ~10% annualised slippage ratio, which is hard to explain. Given ~80-95% of the unsecured retail portfolio is skewed towards ETB customers, the elevated slippages, taken alongside the stress in this portfolio during H2FY21, are surprising. The bank's restructured portfolio remained low at 0.4% of loans (Q4FY21: 0.3%) even as the BB & below pool rose marginally to 2.1% (Q4FY21: 2.0%). With the COVID surplus buffer at 0.8% of loans and PCR at 70%, we expect normalisation in slippages and credit costs during FY23E.

Road to normalised credit costs holds the key: The improvement in Axis Bank's performance during H2FY21 was interrupted once again - however, we expect collection and recoveries to rebound in line with the economic environment. We expect the bank's performance to stabilize in H2FY22 and to inch closer to 1.5% ROA by FY23E. Maintain BUY with SOTP price of INR 825 (standalone bank at INR755, 1.9x Mar'23 ABVPS).

Shares of AXIS BANK LTD. was last trading in BSE at Rs. 731.75 as compared to the previous close of Rs. 756.15. The total number of shares traded during the day was 451070 in over 11392 trades.

The stock hit an intraday high of Rs. 756.1 and intraday low of 729.5. The net turnover during the day was Rs. 334013489.

Source : Equity Bulls

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