Axis Bank's Q4FY18 results (Neutral) - Accelerated recognition leads to a loss, FY19 to remain weak

Q4FY18 result highlights

• AXIS Bank did an accelerated NPL recognition from its existing stress pool in 4Q18 that led to a big loss of Rs22bn in 4Q as credit cost rose sharply.
• Slippage was high at Rs165bn or 18% of lagged loans against Rs44bn qoq.  Rs140bn of slippage was corporate of which 41% was power and 14% was infrastructure. 90% of the total corporate slippage was from the BB pool. Retail slippage also rose from Rs17bn to Rs26bn qoq at the gross level but the net retail slippage remained low at Rs5.6bn. GNPAs rose from 5.3% to 6.8% qoq. Calculated provisioning cover of 52% remained stable qoq.
• With the accelerated recognition, the fund-based stress pool including SDR/S4A/restructured/BB has declined sharply from Rs175bn / 3.6% to Rs91bn / 1.8%. Power accounts for 24% of the residual BB portfolio. Management believes that Rs25bn will slip to BB in each of the next two quarters.
• Loans grew 18% yoy and 4% qoq with retail growing 23% yoy and 7% qoq. NIM declined 5 bps qoq. NII remained flat yoy and qoq. Savings deposits rose 18% yoy and 13% qoq. The bank had hiked rate on high ticket savings in 4Q. CASA grew 14% yoy and 21% qoq. CASA ratio improved from 49% to 54% qoq.
• Non-interest income declined 7% yoy but grew 8% qoq. Core fees grew 1% yoy and 9% qoq while trading gains declined.
• Operating profit declined 16% yoy and 5% qoq. Credit cost (on end loans) rose sharply to 7.4% from 2.6% qoq. CET1 was 11.7%.
• Even after the accelerated NPL recognition, we expect gross slippage to remain high at 4.8% of loans for FY19 (see figure 1). Total corporate stress pool including non-fund based now stands at Rs124bn of which 60% would slip in FY19, in our view. We expect total slippage of Rs210bn and recoveries including from IBC (1+2) at 183bn. Contribution of IBC to recoveries is high at ~Rs62bn. We are not certain that the IBC 2 cases will be resolved by FY19E, some may get extended, but we have currently assumed that all get resolved in FY19 itself.
• While the head of corporate banking, Mr Rath has resigned, the DMD, V Srinivasan continues to be with the bank, contrary to news reports.

Valuation and view

While earnings growth will appear large on a low base, profitability will remain weak. We expect RoE to remain low at 8.8% in FY19 and move up to 12.7% in FY20. Change of CEO in the next 7 months is a risk as the new CEO may want a larger clean-up and may also want to re-calibrate growth.  We cut our target price to Rs475 from Rs605 earlier. Our new target multiple of 1.5x is lower than our earlier multiple of 1.9x. With profitability under pressure even in FY19E, we believe the stock will likely trade at lower multiples. We do not see any near term positive triggers. Management has guided that credit cost will normalize to 1.1% in 2HFY19E.