Axis Bank's Q1FY19 results (Neutral) - Peaking of stress is a major relief

Q1FY19 result highlights

• AXIS Bank’s PAT of Rs7bn was higher than our estimate of Rs5bn driven by recovery in written off accounts. PAT declined 46% yoy. In 4Q8 the bank had posted a big loss. We believe NPLs have peaked because 1) slippages moderated in 1Q  2) while gross additions of Rs46bn to the BB pool / watch list were much higher than the guidance of Rs25bn, there was up fronting and mgmt. is confident that we are close to the end of the rating downgrade cycle.
• We view the results as above average with higher NIMs due to the Bhushan Steel recovery, good income from recovery of written off assets and lower credit cost. Moderation of slippages and peaking out of BB additions are the key positives.
• Slippage moderated to Rs43bn versus a high base of Rs165bn qoq. Only 51% of slippage was corporate the rest was retail. Retail slippages over the last 3 quarters are more than double of the previous quarters because of a change in the bank’s internal NPL recognition policy to 91 dpd. The early recognition has resulted in higher slippage and higher recoveries. While gross slippage in SME/retail is Rs21bn, net slippage is lower at Rs8.9bn. 88% of corporate slippage was from the watch list. GNPAs declined 5% qoq to 6.5%. Credit cost moderated to 2.8% from 7.6% qoq. Mgmt guided that credit cost would moderate further in 2H.
• Total stress loans now stand at 9. 8% versus 9.5% qoq. Size of the watch list including non-fund has increased by 24% qoq from Rs145bn to Rs180bn (~3.3% of total exposure). While the stress pool has increased, the probability of default has reduced going by mgmt. commentary. As such we are reducing our full year slippage to Rs168bn from Rs210bn earlier.
• Loans grew 14% yoy. Retail loans grew 21% yoy and 3% qoq while corporate loan growth moderated to 6% yoy. Mgmt commented that there are enough growth opportunities in corporate and retail but given their high CD ratio of over 90% they are currently focussed on maximising returns. They are considering various options to reduce the CD ratio.
• Bhushan Steel added 17bps to NIMs which was partly offset by higher cost of funds and lower overseas NIMs. Overall NIMs improved 13bps qoq. NII grew 12% yoy and 9% qoq.
• Non-interest income declined 2% yoy but grew 5% qoq. Recovery in written off accounts was high at Rs4bn in 1Q and Rs7bn over the last4 quarters. Core fees grew 6% yoy. Core PPOP grew 23% yoy and 24% qoq.

Valuation and view:  We are cutting FY19 earnings (lower other income and fees) and increasing FY20 earnings (lower provisions). We expect RoE of 13.4% in FY20. With peaking of NPLs we are revising our target multiple to 1.9x (1.5x earlier) and revising TP to Rs605. At the current CMP, we retain our Neutral rating but we believe risks have lowered. Key monitorables 1) New CEO 2) trend in CD ratio 3) haircuts on power NPLs.