Axis Bank - 1QFY18 Result Update - Asset
quality holds up; Upgrade to BUY
Axis
Bank has started FY18 with positive surprise on asset quality front led
by sequentially lower fresh slippages, moderation in credit cost along
with stable overall asset quality. Fresh slippages declined to Rs35.2bn
in 1QFY18 compared to Rs48.1bn in the previous quarter. Its watch list
has substantially declined to 2.1% of total loan book from the level of
6.7% in Mar’16, which clearly indicates that the Bank is approaching the
end of recognition of stressed loan. This along with PCR (including
technical W/O) at 65% and specific PCR at 56% gives comfort to credit
cost outlook for next 4-6 quarters. Led by strong demand from retail,
SME and corporate working
capital segments, the Bank’s loan book grew by 11.8% YoY and 3% QoQ in
1QFY18. The Bank’s quarterly performance on both revenue and earnings
front exceeded our estimates owing to higher other income (+9.6% YoY to
Rs30bn), and relatively lower opex and provisioning expenses.
Management Commentary & Guidance
- Axis Bank has total exposure to the tune of Rs52.3bn to 8 accounts out of total 12 loans referred to Insolvency & Bankruptcy Code (IBC) by the RBI. Notably, the entire exposure to these accounts has been classified as NPAs and the Bank has provisioning coverage of ~50% towards these accounts.
- Having incorporated higher provisioning requirement for the loans referred to IBC, the Management continues to maintain credit cost guidance of 175-225bps for FY18. Further, it expects credit cost to revert towards the long-term average from next fiscal onwards.
- The Bank has made enhanced standard asset provisioning at 1% for four sectors i.e. Power, Infrastructure Construction, Iron & Steel and Telecom.
- The Bank expects NIMs to compress by ~20bps in FY18 out of which 4bps has already taken place in 1QFY18. Notably, migration to MCLR contributed 30bps decline in NIMs, which offset 27bps positive contribution from decline in CoF in 1QFY18. Further, management expects operating expense to moderate to mid-teens level in 2HFY18 from the current level of 20%.
- The Bank expects loan book to grow ~5% faster than the overall banking system in FY18, driven by Retail and SME segments.
Outlook & Valuation
Analysis
of stressed assets of the Bank clearly suggests that the Bank is
approaching the end of recognition of stressed loan cycle, which along
with higher PCR clearly indicates sharp moderation in credit cost from
FY19 onwards. We have upwardly revised our loan growth estimate to
14-15% from 11% earlier led by pick-up in loan growth from retail SME
and corporate working capital segments. Further, we have also upwardly
revised our PAT estimates by 23% and 27% for FY18E and 19E,
respectively. We upgrade our recommendation on the stock to BUY from
HOLD with a revised Target Price of Rs600 (from Rs502 earlier) based on
2.3x FY19 Adjusted book
value.
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