Axis Bank - 1QFY18 Result Update - Asset quality holds up; BUY

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.