Axis Bank - Conservatism to cushion earnings volatility; on road to superior returns - ICICI Securities

Axis Bank's Q3FY21 earnings come as a reassurance that it is treading a conservative path to cushion earnings volatility in FY22 and deliver superior RoEs. This is evidenced from every relevant metric: 1) proforma slippages of Rs67bn (>4% run rate) with restructuring restricted to a mere 0.42% (against estimate of 1.5%); 100% provisioning on unsecured retail slippages; 2) interest and fee income reversal for proforma NPAs; 3) not monetising MTM gain on the SLR portfolio; 4) provided for social security employee liability much in advance. What encourages: i) stress test outcome being 45-50% lower than envisaged in April; ii) not utilising excess buffer and carrying additional provisioning of Rs118bn (2% of advances) on stress pool ('BB' & below + restructuring) of 2.5%; iii) 9MFY21 slippage run rate settling much lower at 2.5%. What failed to cheer: 1) slower growth momentum (6% YoY, 1% QoQ), especially run-down in corporate book; and 2) 'BB' & below pool remaining sticky at 2.4% of advances. We expect earnings CAGR of 63% over FY21E-FY23E and RoE of >14.4% for FY22E/FY23E. Maintain BUY with a target price of Rs814. Key risks: 1) higher stress unfolding in FY22; 2) lower than anticipated growth can cap RoE improvement.

- Prudence and conservatism to further strengthen balance sheet: Prudence was the undertone of Q3FY21 performance wherein the bank is trying to recognise and provide (upfront) for the anticipated stress. This will help it move towards sustainability sooner than envisaged. Bank recognised proforma slippages of Rs67bn in Q3FY21 (cumulative slippages of Rs105bn in 9MFY21 working out to a run rate of 2.5%). Of this, 84% was towards the retail segment (50:50 between secured and unsecured lending) and balance 16% in corporate and commercial banking. Moving out of the moratorium, substantial deferment has been recognised in Q3FY21, with some residual portion being further recognised in Q4 (though lower than Q3). Approved restructuring at 0.42% (of which 60% is from 'BB' & below pool) and certainty of no more restructuring being approved, suggests the bank has been too cautious in accepting restructuring proposals (estimate was 1.5%) and allowed it to flow into slippages. This, coupled with abnormally higher write-offs (predominantly corporate loans), led to proforma GNPAs of 4.55% in Q3FY21 vs 4.28% QoQ.

- Adequately covered the incremental stress: On the incremental proforma slippages, the bank has provided Rs39bn (>60% coverage) and further increased it on the existing stress pool, thereby sustaining coverage at 75% (despite write-off of >15% of GNPAs). It has not utilised the provisioning buffer already created and the cumulative provision of Rs118bn (including standard and additional towards non-NPAs) is equivalent to ~2% of advances. This seems sufficient when seen in conjunction with the stress pool of Rs226bn ('BB' & below including NFB and investments - Rs141bn, net NPA - Rs74bn, and restructuring - Rs11bn). In addition, it has reversed fee and interest income related to these slippages, which shows the level of conservatism the bank has adopted. We therefore gain confidence that if the situation stabilises (without further deterioration in the macros), credit cost can settle at 1.4%/1.2% for FY22E/FY23E. However, considering the higher upfront provisioning in FY21E, credit cost will still be elevated at 2.8%. Overall, by the current approach, the bank is moving towards a clean slate and hence its goal of 15-18% RoE looks achievable in the medium term.

- Upfront provisioning need not necessarily imply higher stress: Management clearly highlighted that the prudent and conservative provisioning by it should not be viewed as signs of higher stress, or anticipated asset quality behaviour, in the coming quarters. Bank instead expects proforma slippages in Q4FY21 to be lower than in Q3. Furthermore, it added that results of stress tests convey that the post-pandemic pain seems 45-50% lower than earlier envisaged in April.

- Growth fails to cheer: Bank's loanbook growth moderated to 6% YoY (compared to 11% in Q2FY21) largely due to run-down in corporate portfolio. Retail segment still witnessed 4% QoQ growth and SME grew 6%. The focus is more on secured and better quality profile - 83% of the total retail disbursements were secured in nature, while corporate disbursements were largely cashflow-driven and to high-rated entities. Bank has added 452 new relationships with corporates aiding 11% YoY growth in the segmental portfolio and 6% QoQ growth in SME portfolio. Overall, blend of right pricing and secured lending will result in a robust and better risk-adjusted return portfolio. We expect loan growth of 6%/14%/18% for FY21E/FY22E/FY23E respectively.

- Margins, despite interest reversals, stay put: NII incorporated interest reversal of Rs6.1bn, which resulted in margins being lower by 18bps. Yet, NIMs were flat at 3.6% showing similar improvement in spreads benefiting from lower funding cost. Bank is not willing to sacrifice margins for the sake of growth and hence we anticipate margins of 3.5%/3.6%/3.6% for FY21E/FY22E/FY23E respectively.

- Higher opex resulted in elevated 'cost to income' ratio: Staff costs rose 23% YoY and 19% QoQ as the bank rolled out increments in September and also increased its headcount by ~10% in the past nine months. Moreover, it has provided for social security code based on actuarial valuations while rise in non-staff costs is due to higher IT spend, marketing cost and variable costs towards increased disbursements. As a result, the 'cost to income' ratio rose to 45.3% from 38.0% QoQ and 43.9% YoY.

Shares of AXIS BANK LTD. was last trading in BSE at Rs.631.9 as compared to the previous close of Rs. 658.6. The total number of shares traded during the day was 777468 in over 17891 trades.

The stock hit an intraday high of Rs. 663.6 and intraday low of 627.5. The net turnover during the day was Rs. 497893182.

Source : Equity Bulls

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