Axis Bank - Q4FY21 Result Update - ICICI Securities

Earnings beat reinforces confidence; on a path to deliver superior RoEs

Axis Bank's Q4FY21 earnings beat reaffirms our view that besides strengthening the balance sheet (through prudent and conservative buffers), it is equally focusing on building granularity to drive sustainable growth and deliver superior RoE.

Key positives: 1) Growth momentum after failing to cheer in Q3FY21, caught up pace with peers growing at 8% QoQ (9% YoY) and was broad-based across retail, SME and corporate; 2) slippages of Rs52.9bn (<4% run rate for Q4FY21 and <3% for FY21) with restructuring restricted to a mere 0.32%; 100% provisioning on unsecured retail and SRs; 3) credit cost contained at 2.2% - much lower than 3% plus for 9MFY21; and 4) fee income gained traction to 15% YoY growth and Rs7.9bn of treasury profits.

What encourages: i) Not utilising or creating any further contingency buffer (unlike peers) and carrying additional provisioning of Rs120bn (~2% of advances); ii) BB' & below declining to <2% (down >35bps QoQ).

What failed to cheer: 1) Despite 20bps QoQ/110bps YoY benefit of funding cost, NIMs were stable; incremental business written at lower yields; 2) retail slippages are running higher at ~4% in FY21.

We expect earnings CAGR of >65% over FY21-FY23E and RoE of >15% by FY23E. Maintain BUY with a target price of Rs942. Key risks: 1) Covid resurgence unfolding further stress; 2) lower-than-anticipated growth can cap RoE improvement.

- Gross slippages settle at <3% for FY21, lowest in 3 years: In Q4, gross slippages came in exactly in-line with expectations at Rs52.85bn (<4% run-rate). This quarter as well it was primarily dominated by retail segment (65%) and downgrades from BB & below. Consequently, gross slippages in FY21 were contained at <3% (Rs172bn), lower than in 3 years. Retail stress - a mix of secured as well as unsecured lending (primarily cards) - ran higher at ~4% (similar to peers). Lower set of retail restructuring at 0.1% could be the rationale for elevated retail slippages. However, these are adequately provided for and written-off to the extent required. BB & below pool, after remaining sticky for few quarters, showed downward trajectory to <2% (from 2.3-2.4% in past few quarters). More so, 38% of this pool is rated better by at least one credit rating agency.

- Credit cost settles lower at 2.2%; cumulative provisions at ~2% of advances: One of the key drivers of earnings beat was credit cost being contained at 2.2% - much lower than 3% plus in 9MFY21. This is despite the bank making additional provision aggregating Rs8.0bn on accounting change in provisioning rates on loans to commercial banking segment. Plus, it has completely marked down security receipts from Rs16.8bn to zero (100% provided by FY21). Specific loan loss provisions in Q4 were Rs70.4bn (including provision of Rs42.7bn on pro forma slippages provided earlier).

Positively, the bank has neither utilised nor created any further contingency buffer (unlike peers). Overall, it holds cumulative provisions (standard + additional other than NPA) of Rs120bn (~2% of standard asset coverage or 120% of GNPA), including covid buffer of Rs50bn. We, therefore, estimate credit cost of 1.4%/1.2% for FY22E/FY23E.

- Restructuring settles at 0.3% of GCA, much lower than 1.5% anticipated in Q2: Restructuring for the overall portfolio settled at 0.3% of gross customer assets, much lower than anticipated at 1.7% in Q2FY21 by the company. Furthermore, 100% of corporate restructuring is from BB & below pool, 74% of Rs18.5bn restructuring overlaps with BB & below. In terms of provisioning, bank has provided 26% towards the restructured portfolio and 100% on unsecured retail under restructuring.

- Buffers created to strengthen balance sheet and be future-ready: Management has highlighted that the buffer at ~2% of balance sheet is to strengthen it and make the bank well prepared for future uncertainties, if any, and doesn't imply any expectation of higher stress. Axis Bank sticks to its prudent and conservative approach, which is demonstrated through the strategic choice made on the balance sheet. We are of the view that bank is providing higher than required, thereby, leaving no backlog of provisions for FY22. Overall, as per the current approach, the bank is moving towards a clean slate and hence, its goal of 15-18% RoE looks achievable in medium term.

- Growth momentum catches up after failing to cheer in Q3FY21: Advance growth momentum after failing to cheer in Q3FY21, caught up pace with peers - loan book surprised positively growing at 8% QoQ that aided the bank to exit FY21 with 9% YoY growth. Domestic retail loans grew up 11% YoY/7% QoQ; 81% of the retail book is secured. Retail disbursements for the quarter were at new all-time highs. Disbursements in consumer segment were up 45% YoY / 44% QoQ, rural disbursements grew 47% YoY/ 47% QoQ. Corporate loans too contributed to the growth with a jump of 13% YoY / 9% QoQ. Within corporate segment, Axis Bank is significantly gaining strides in government sector, MNC and mid-corporate and de-risking from concentration around large corporates. SME loan book, too, grew 13% YoY and 10% QoQ. Also, it is to be noted that such a hefty growth is leveraging its digital capabilities and strengthening leadership team with thorough focus on RaRoc framework to deliver operating profit growth. Overall, blend of right pricing and strong underwriting should result in a better risk-adjusted return portfolio. We expect loan growth of 13%/18% for FY22E/FY23E, respectively.

- Margins stay put - incremental business at lower spreads: Margin was negatively impacted by following factors: 1) Interest income was net of ~Rs1.63bn (~8bps) of interest on interest reversals for loans above Rs20mn; 2) average LCR during the quarter was 111% vs 106% QoQ; 3) reversal of interest on incremental slippages (running at <4% run-rate); 4) Q3FY21 margins have a positive impact of 8bps on account of interest on income tax refund.

Despite 20bps QoQ/110bps YoY benefit of funding cost, NIMs were stable at 3.53%. This suggests negative carry due to PSL and competitive pricing weighed on margins. However, the bank is targeting margins around 370-380bps.

- Robust fee income and higher treasury gains support 'cost to income' ratio: Another lever surprising positively was fee income - up 16% QoQ and 15% YoY. Not only retail that constitutes 64% of the fee income grew 16% YoY / 17% QoQ, but corporate & commercial banking provided further boost with 14% YoY / 15% QoQ growth. Also, treasury gains were strong which doubled QoQ and were up 2x YoY on the back of sale of strategic investments wherein it earned Rs3bn. On the contrary, opex was up 8% YoY and 6% QoQ. Higher opex can be attributed to rise in staff costs (up 22% YoY, one-off item of provision for social security codes amounting to Rs2.2bn, higher IT spend and rise in variable costs linked to disbursements. Overall, 'cost to income' ratio was down 1.5% QoQ and 2.0% YoY as higher share of fee income & treasury gains outweigh rise in opex.

- Subsidiaries doing exceptionally well, PAT up 75% YoY: Axis AMC average AUM was up 42% YoY while PAT doubled YoY to Rs2.42bn. Axis Capital continues to maintain its leadership in ECM segment with 60 deals during FY21, thereby, generating PAT of Rs1.66bn, up 66% YoY. Axis Securities' revenue more than doubled YoY, while PAT grew 10x YoY in FY21 led by strong traction in broking business and acquisition of Karvy Stock Broking clients. Axis Finance has been investing on building strong customer franchise which led to 50% YoY uptick in FY21 disbursements. Retail comprised 17% of the total loan book while wholesale is also doing well with 19% RoE. Asset quality is manageable with net NPA at 2% and overall PAT up 9% YoY.

Shares of AXIS BANK LTD. was last trading in BSE at Rs.699.3 as compared to the previous close of Rs. 700.4. The total number of shares traded during the day was 880968 in over 17119 trades.

The stock hit an intraday high of Rs. 704 and intraday low of 684.25. The net turnover during the day was Rs. 611974590.

Source : Equity Bulls

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