Axis Bank's Q4FY19 results (Outperformer) - Asset quality improves but cost of funds moves up sharply

Q4FY19 result highlights

• AXIS reported PAT of Rs15bn against loss yoy. PAT was in line with expectations but the earnings quality was mixed. On the positive side, provisioning cover rose, additions to BB were limited to Rs9bn, slippages declined qoq and core fee income rose sharply. On the negative side, cost of funds rose sharply by 25bps sequentially, CASA growth lagged overall deposit growth, CET1declined by 50bps qoq and CI ratio rose 3% qoq though growth in opex moderated.
• Loans grew 13% yoy and 4% qoq. While domestic loans grew 18% yoy, overseas loans declined sharply by 29%. Within domestic loans, retail grew 19% yoy / 6% qoq while large corporate grew 5% yoy / 2% qoq and SME grew 12% yoy / 5 qoq. Within retail, unsecured loans continue to grow strongly at 43% yoy and 15% qoq. Mgmt is comfortable with high growth rates in this segment because 1) the credit experience in terms of 30 dpd and 90 dpd is better than peers 2) the proportion of existing customer base tapped for these  loans is single digit 3) over 90% of these loans are to existing customers
• Slippage fell to Rs30bn from Rs38bn qoq. Of the total slippage, Rs14bn was corporate of which 72% was from the BB portfolio against 98% in 3Q. Total corporate slippage outside the watch list was Rs4bn which on account of one engineering account. GNPAs fell 3% qoq to 5.26% from 5.75% in 3Q. PCR improved to 62% from 60%.
• BB portfolio now stands at 1.3% of loans. Total stress loans account for 8.1% of loans lower than 8.9% qoq. Rs9bn of loans were added to the BB portfolio from the infra and power sectors most likely from the Essel and ADAG group. Of the Rs9bn, Rs5bn was power.
• The bank has an exposure of Rs8bn to IL&FS of which Rs2.5bn is NPL and around Rs5bn is classified as BB. Mgmt indicated that the maximum addition to BB in any quarter would be restricted to Rs10bn.
• Specific credit cost fell from 2.6% to 0.92% qoq. However with a change in standard asset provisioning and RBI mandated provisions on conversion of debt to land in JPA, the bank made huge additional gross provisions of Rs13bn broken down into 1) provision for two stressed sectors – NBFCS and CRE (Rs1.6bn) 2) provisions on security receipts (Rs2.2bn) 3) provision on BB and specific standard assets (Rs3.8bn)  and 4) provisions against land parcels taken from JPA in lieu of debt of Rs5.4bn.With a new standard provisioning policy, provisions of Rs6bn under the old policy were reversed. As such the net additional general provisions were Rs7bn for 4Q19.
• NIM declined 5bps qoq. Cost of funds rose 25bps qoq on the back of strong growth in retail term deposits that grew 44% yoy. CASA growth lagged term deposit growth with averge CASA growing 13% yoy. NII grew 21% yoy and 2% qoq.
• Core fees grew 23% yoy and 15% qoq while overall non-interest income grew 26% yoy. Core PPOP grew 35% yoy but declined 9% qoq.

Valuation

We reiterate Outperformer as the bank maintains its target of achieving 18% RoE over the next 3 years through a well-articulated strategy of normalizing credit cost, improving operating efficiency, adding new loan segments such as mid-corporate, enhancing the digital offering and improving NIMs.  However we believe after the sharp outperformance, the stock may take a breather as we believe margin improvement will likely be back ended given the sector wide slowdown in deposits.