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MOSL: AXIS BANK (Buy)-Muted quarter; asset quality pressures drive cut in estimates

AXIS BANK: Muted quarter; asset quality pressures drive cut in estimates

(AXSB IN, Mkt Cap USD26.9b, CMP INR707, TP INR825, 17% Upside, Buy)

 

• AXSB reported 1QFY20 PAT of INR13.7b (est of INR16.5b) vs INR7b in 1QFY19. The miss in the quarter was led by higher provisions, including one-off provisions toward non-fund facilities and stressed accounts outside NPA (INR9.9b).
• NII increased 13% YoY (in-line), NIMs fell 5bps QoQ to 3.4%. Other income grew 32% YoY to INR38.6b, led by treasury gains of INR8.3b and strong traction in retail fee (+28% YoY). Corporate fees declined 1% YoY to INR2.7b.
• Loan growth stood at 13% YoY to INR4.9t. Domestic loans grew at 19% YoY, led by 22% YoY growth in retail loans. Overseas book declined 34% YoY and formed 7.2% of total loans. Deposits grew at 21% YoY (-1% QoQ), led by 34% YoY growth in TD deposits. Daily average CASA was stable sequentially at 41%, though period-end CASA declined 300bp QoQ.
• Fresh slippages increased to INR48b, while upgrade/recoveries (INR21.8b) and write-offs (INR30b) facilitated a 1% QoQ decline in GNPA. Calculated PCR improved 30bp QoQ to 62.5% (78% including TWO). AXSB downgraded INR22.4b of stressed assets into the BB & below pool, resulting in a flattish trend in BB and below assets at INR75b.
• Additional disclosure on asset quality: AXSB disclosed total (fund + non-fund) exposure to eight stressed accounts of INR122b, of which INR51b is already part of BB & below or NPA.
• Other highlights: (a) Non-funded exposure to NPA/BB is INR28b/INR25b. (b) CET-1 improved to 11.7%, aided by warrant conversion. (c) The bank holds total contingent provisions of INR23.6b.
• Valuation and view: AXSB has delivered a modest quarter in a challenging economic environment. We cut our FY20/21 earnings estimates by 7%/6% to factor in the slight increase in our credit cost. Post a strong performance of last couple of quarters, Q1 earnings and outlook reflect the deterioration in the underlying lending environment, which can further risks our estimates. Core operating profitability is getting good, helping to mitigate some credit cost pressures. Improvement in RoA / RoE matrix will be a key to sustain the stock’s performance. Buy with a target price of INR825 (2.5x FY21E ABV).