Axis Bank's Q3FY20 results (Outperformer) - A mixed quarter, asset quality deteriorates

Q3FY20 result highlights

• AXIS reported PAT of Rs17.6bn versus loss of Rs1.1bn in 2Q. PAT grew 5% yoy. Earnings were mixed with strong loan growth and a qoq NIM expansion being the key positives while higher opex, a very high CD ratio of 93% (89% qoq), higher slippage and a high gross addition of Rs36bn to the watch list being the key negatives.
• Slippage rose to Rs62bn qoq on an already elevated base of Rs50bn in 2Q. Slippage ratio rose to 5.2% versus 4.4% qoq. Breakdown of slippage in exhibit 1. 81% of the total corporate slippage (Rs32bn) came from the BB pool (including DHFL bonds) versus 98% qoq. GNPAs rose 3% qoq while NNPAs rose 9%.
• The total stress pool including non-fund declined only marginally to Rs122bn from Rs127bn despite a high slippage of Rs32bn from the pool. The stress pool still accounts for 1.8% of total exposures. The key additions to the stress pool were a broking account (Karvy) that got added to fund based exposure and Voda Idea of Rs13bn that got added to non-fund based exposure. Power, infra and hotels are the major components of the BB funded pool accounting for 57%.
• Specific credit cost remained elevated at 2.1% of avg. customer assets versus 1.96% qoq. PCR ex-technical write-offs marginally declined qoq to 60% from 62%. In addition, the bank has contingency provisions of Rs26bn which is 0.5% of loans.
• Loans grew 16% yoy and 6% qoq driven by growth of 25% in retail loans and 16% in domestic corporate loans while overseas loans declined 21% yoy and SME loans declined 1% yoy.
• NIM remained strong and improved 10bps qoq to 3.57% due to change in loan mix and repayment of high cost borrowings. In absolute terms, growth in QAB CASA was at 10% yoy while growth in term deposits was higher at 25%. Retail term + CASA grew 21% yoy. NII growth remained strong at 15% yoy / 6% qoq.
• Core fee growth slowed to 6% yoy due to slower corporate fees. Retail fees grew strongly at 20% yoy.
• Opex growth was high at 10% yoy and 11% qoq. The sharp sequential increase was on account of Rs1.21bn towards purchasing PSL certificates.
• Core PPOP grew 20% yoy and 2% qoq.
• CET-1 improved to 14.3% from 14% qoq due to the recent capital raise and lower risk weights on retail loans.

Valuation

We cut FY20 earnings to account for higher provisions and higher slippage. While 3Q was weak on asset quality, we maintain Outperformer. Our assessment is that in the worst case, AXIS Bank’s BB pool will rise by an additional 1-1.2%. With most of the asset quality strain behind us, management’s focus to improve retail growth and CASA share, and strong capital adequacy, we expect AXIS Bank to enhance its competitive position in the banking sector. Stock trades at 2x PBV FY21E. Slippage in the next few quarters and movement of the CD ratio are key monitorables. We marginally cut our TP from Rs840 to Rs830.