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Axis Bank's Q3FY19 results (Outperformer) - Big beat, strong outlook

Q3FY19 result highlights

• PAT of Rs16.8bn grew 131% yoy and 113% qoq, beating our estimate of Rs12bn by a wide margin. The bank earned total lumpy income of around Rs15bn against which it made a contingency provision of Rs6bn. While the bank earned high one-off income, there was a beat on core PPOP as well. Core PPOP of Rs41bn was higher than our estimate of Rs40bn, but core credit cost ex contingency was also higher than expected due to ageing provisions.
• Reported PBT grew 137% yoy and 112% qoq, while core PBT grew 98% yoy and 36% qoq. Core PPOP of Rs41bn was higher than our estimate of Rs40bn with stronger than expected loan growth, qoq NIM expansion, strong fees and a strong acceleration in retail term deposits While core PPOP was higher than expected so were provisions (ex contingencies) resulting in core PBT being lower than expected Core PBT was Rs13.6bn against reported PBT of Rs24bn and our estimate of Rs14.7bn
• Slippage of Rs38bn was higher than Rs28bn qoq. Of the total slippage Rs19bn was corporate slippage, 98% of which was from the disclosed stress pool. GNPAs remained flat qoq. Size of the BB portfolio including non-fund stands reduced to Rs76bn (1.4% of gross customer assets) from Rs89bn qoq. Downgrades to the BB portfolio were low at Rs6.3bn indicating that stress loan formation has bottomed out. Total stress loans declined to 9.1% from 9.7% qoq. Specific credit cost was stable qoq at 2.46%. In addition the bank made a contingency provision of Rs6bn which is 8% of the BB portfolio. Mgmt explained that there is no lumpy account in the BB portfolio except one power account of Rs 8bn, all others are small with exposures of Rs1-2bn.
• Domestic loans grew 18% yoy and 6% qoq but overseas loans declined 19% yoy, pulling down overall loan growth to 13% yoy and 4% qoq. Retail and SME grew strongly at 20% yoy/ 5% qoq and 13% yoy / 3% qoq and these now account for 62% of total loans versus 59% yoy. Corporate loans remained flat yoy /qoq.
• NIM rose 6 bp yoy and 7 bp qoq to 3.66% largely due to recovery on a steel account of Rs7.1bn. NII grew 18% yoy and 7% qoq.
• Non-interest income grew strongly at 54% yoy and 49% qoq . Core fees grew 16% yoy and 10% qoq with credit card fees growing over 20%. Trading gains rose to Rs3.8bn from Rs1.4bn sequentially as the bank part-sold two strategic investments. Other income jumped sharply to Rs10bn from Rs1.6bn qoq due to recovery income from the steel account.

Valuation and view

We reiterate Outperformer. We maintain TP of Rs755 based on 2.5x PBV FY20. On his first earnings call the new CEO seemed fully in control in a short span. He has set a target of 18% RoE by FY22 based on 1) reduction in credit cost 2) business mix optimization 3) reducing cost to assets to 2%. While 3Q had sizeable one-off income, we find the higher than expected core PPOP a key positive. We believe the new CEO’s RoE target and focus on bringing subsidiaries to rank among the top 5 will lead to a re-rating of the stock. We forecast RoE of 14% in FY20 and 16.8%in FY21.