Source: Company, Angel Research
For Q1FY2020, Axis Bank reported loss of `106Cr primarily driven by one time
impact of deferred tax asset of `2,140Cr and higher provision of `3,512Cr
(Against Estimation of `2,063Cr). The key positives for the quarter were, increase
in pre-provision profit by 45% yoy and domestic loan growth by 19% yoy coupled
with an improvement in NIM.
Provision and slippages remained elevated: Higher slippages (3.8%) and credit
cost (2.7%) coupled with no clarity on watch list outside the BB & Below book
declared in Q1FY2020 (`6,700Cr) marred the performance of Q2. Out of the
total slippages of `4,983Cr, `2,862Cr slipped from corporate book and 97% is
from BB & Below book (`1,920Cr pertains to loan and `940Cr to investment
book). Notably, in Q1FY20, the management had given a new list of potential
stressed loans in 8 stressed corporate groups. Total exposure to above corporate
was `12,200Cr, of which exposure worth `6,700Cr is not part of BB & below
book, however no clarity has been in Q2FY2020. Nevertheless, the bank has
taken additional contingent provision worth `2,600Cr. We expect banks credit
cost to remain on higher side till overall stressed asset (BB&B book & Stressed
asset declared in Q1FY20) recognise as NPA.
Jump in other income, contained Opex aids pre-provision profit: During the
quarter, other income jumped by 45% yoy led by treasury gain worth `809Cr. The
key driver of core fee income growth was Retail fees, which grew 16% yoy and
constituted 64% of the Bank’s total fee income. Card fees grew strongly by 21%
yoy. Opex grew at 6% yoy aided by rationalisation of outsourced services, digital
initiatives and lower promotion spends. Management expects Opex to remain
contained for FY2020.
Retail loans drive momentum; NIM improves: During Q2FY2020, the bank’s
advances grew by 14% yoy, led by retail, up 23% yoy. However, overseas book
de-grew 25% yoy. Domestic NIMs improved by 11bps yoy to 3.51%.
Management guided NIM for FY2020 in the range on 3.5-3.8%. Deposit grew at
a healthy rate of 22% yoy; however, CASA grew 5% yoy. CASA ratio plunged by
660bps/22bps yoy/qoq to 41.1%, however other banks are also witnessing
decline in CASA ratio.
Outlook & Valuation: Axis Bank currently trades at 2x its FY2021E price to book
value (after adjusting value of subsidiaries). We expect the stock to get re-rated
owing to (1) new leadership, (2) receding stressed loan pool, and (3)
improvement in return ratios (ROA/ROE – 1.5%/15% by FY2021E). We
recommend Buy on the stock with a Target Price of `860.