Axis Bank's Q1FY20 results (Outperformer) - A mixed quarter. Prefer ICICI Bank

Q1FY20 result highlights

• PAT of Rs13.7bn grew 95% yoy and declined 9% qoq. PAT was below our estimate of Rs17bn due to higher provisions. We view this as a mixed quarter. On the positive side:1) Domestic loan and fee growth remained strong 2) NIMs remained stable qoq. 3) Bank has made a contingency provision of Rs4.6bn. On the negative side 1) CD ratio continues to be high at 92% while CASA continues to decline 2) Slippage rose qoq with contribution of outside BB slippage increasing to 44% 3) BB book remained flat versus decline for ICICI as Rs22bn got added to BB. 4) Specific credit cost rose sharply qoq
• Loans grew 13% yoy and 1% qoq. Domestic loans grew 19% yoy while overseas loans declined 39% yoy. Within domestic, retail grew 22% yoy, SME grew 8% while corporate grew 16% yoy.
• Slippage rose from Rs30bn to 48bn qoq. Of the total slippage, Rs21bn was corporate and Rs27bn was retail/SME. Most of the corporate slippage was from the BB pool. GNPAs remained flat qoq despite higher slippage due to an increase in write-offs from Rs17bn to 30bn. Deletions from BB were equal to additions to BB, as such the BB portfolio remained stable qoq at Rs75bn or 1.3% of loans. Additions to BB at Rs22bn were higher than Rs9bn qoq and came mainly from Reliance Power and DHFL in our view
• Specific credit cost rose sharply from 0.85% to 2.05% of avg. customer assets. In addition, the bank made provisions of Rs4.6bn in 1Q20 on non-fund exposures of BB / SMA / non-performing loans. This is lower than total general provisions of Rs7bn in 4Q19. PCR remained stable at 62%.
• NIM declined 4bps qoq to 3.4%. The CASA ratio deteriorated sharply to 41% from 44% qoq. In absolute terms, growth in CASA was subdued at 7% while growth in term deposits was 34%. Retail term + CASA grew 24% yoy. NII grew 13% yoy /2% qoq.
• Core fee growth remained strong at 26% yoy  (declined  12% qoq) but was lower than our estimate. Retail fees grew strongly at 28% yoy led by fees on cards that grew 28% .Trading gains rose sharply from 3.5bn to 8.3bn qoq. Opex growth was contained at a low 3% yoy.
• Mgmt guided that of the 8 groups that have been recently downgraded, the two large exposures that are still outside BB are 1) 20bn of a media account (Dish TV) and Rs20bn of guarantee to a telecom account (RCOM). These two accounts form 0.75% of loans versus current BB book of 1.3%. Further under construction residential finance is small at Rs15bn.
• The CEO highlighted that sustainability is going to be their key focus and the bank will not grow at the cost of quality

Valuation

We maintain Outperformer as the bank maintains its guidance of credit cost falling to below 100bps (long term average) by FY22. However given a mixed set of numbers, negative impact of rate transmission on margins and a likely dilution of USD1.8bn, RoE of 18% by FY22 looks difficult to achieve. As such we marginally cut TP to Rs840 and prefer ICICI to AXIS.