Axis Bank's Q2FY20 results (Outperformer) - A mixed quarter

Q2FY20 result highlights

• AXIS reported a loss of Rs1bn in 2Q due to a mark-down of DTA (deferred tax assets). Ex DTA, PAT would have been higher at 20bn versus 13bn qoq. Higher NIMs and strong retail growth were the key positive highlights while elevated slippage, change in classification of the stress pool and elevated credit cost were the key negatives. 
• Loans grew 14% yoy and 5% qoq. Domestic loans grew 19% yoy while overseas loans declined 32% yoy. Within domestic, retail grew 23% yoy, SME grew 2% while corporate grew 18% yoy.
• Slippage remained elevated at 49bn (48bn in 1Q). Of the total slippage, Rs29bn was corporate and Rs20bn was retail/SME. 67% of corporate slippage came from loans and non-fund classified as BB while 30% was from investments (that were part of eight stress groups in 1Q). GNPAs declined 6% qoq to 5.03% despite higher slippage due to recoveries of Rs22bn and high write-offs of 31bn. Net NPA in retail continues to be benign at 0.6%. Management has stopped making disclosures on exposure to eight stress groups. The total stress pool disclosed in 2Q is Rs123bn or 2.1% of customer assets but this is not comparable to Rs189bn of 1Q because the figure in 1Q included exposure to 8 stressed groups.
• Specific credit cost remained elevated at 1.9% of avg. customer assets though lower than 2.05% qoq. PCR ex-technical write-offs remained stable qoq at 61%
• NIM improved 11bp qoq to 3.51% due to change in loan mix and repayment of high cost borrowings.  In absolute terms, growth in QAB CASA was subdued at 8.5% while growth in term deposits was high at 36%. Retail term + CASA grew 21% yoy. NII grew 17% yoy /4% qoq.
• Core fees grew 11% yoy (declined 1% qoq) led by retail fees that grew 16% yoy. Trading gains remained high at Rs8bn versus Rs1.4bn yoy and Rs8.3bn qoq.
• Opex growth remained low at 6% yoy / 6% qoq
• Core PPOP grew 30% yoy and 2% qoq.
• Management guided to 1) NIMs in FY20 higher than FY19 levels. 2) Normalisation of credit cost in FY22. 3) Loan growth at 5-7% above the sector’s 4) Medium term cost to average assets of 2%. 5) Continued focus on improving CASA
• CET-1 improved to 14.04% from 11.27% due to the recent capital raise and lower risk weights on retail loans.

Valuation

We cut earnings to factor in higher credit cost and the DTA adjustment that will be partly offset by higher NIMs. While 2Q was mixed, we reiterate Outperformer. We do not see significant additions to the BB pool. Our assessment is that in the worst case, AXIS Bank’s BB pool will rise by an additional 1.5%. 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 2.1x PBV FY21E.