MOSL: AXIS BANK (Buy)-Asset quality makes a strong comeback-return ratios set to improve

Axis Bank: Asset quality makes a strong comeback; return ratios set to improve

(AXSB IN, Mkt Cap USD22.7b, CMP INR611, TP INR710, 16% Upside, Buy)

• AXSB reported a sharp improvement in asset quality, while net profit grew 25% YoY/68% QoQ to INR7.26b. NII stood at INR47.3b (~2.5% ahead of our estimates), representing 9% YoY growth. This occurred despite margin compression of 7bp QoQ (19bp contraction over FY17).
• Other income declined 24% YoY to INR25.93b due to weak treasury gains, even as core fees grew 24% YoY. This, coupled with a moderate rise in opex, led to a 17% YoY decline in PPoP.
• Loan growth stood healthy at 21% YoY (+29% YoY in retail; +27% YoY in SME). Deposit base, however, declined by 2% QoQ, led by a fall in demand deposits. Reported CASA mix, thus, declined 140bp QoQ to 49% (46% on average basis).
• Fresh slippages declined sharply to INR44.28b (INR89.36b in 2QFY18), while strong upgrade/recoveries and healthy write-offs enabled a sharp reduction in NPL ratios. AXSB, thus, reported a 9%/16% QoQ decline in GNPL/NNPL, while the coverage ratio improved 600bp QoQ to 66% (420bp improvement in pure coverage at 53%). 93% of corporate slippages came from BB and below pool, the size of which stood at INR161.2b – Power/Metals/Engineering & Electronics sectors accounted for ~60% of total slippages. AXSB further made provisions of INR2.37b toward NCLT accounts, taking the total PCR here at 68%, while exposure related to two lists from the RBI declined to INR60.74b. The bank maintained its FY18E credit cost guidance of 220-260bp and it looks to maintain PCR of 60-65%.