Axis Bank’s Q2 FY21 PAT of Rs 16.8 bn is above analysts’ estimates, Strong profit was led by healthy NII growth and sharp improvement in other income. NII grew 20% YoY (+5% QoQ) to Rs 73.3b, led by improvement in NIMs by 18 bps QoQ to 3.58%. This was aided by sharp improvement in cost of funds (33 bps QoQ decline).

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CLSA maintains buy rating on Axis Bank, raising price target to Rs 700 from Rs 600. Non-NPA provisions stood at 1.8% of loans, it should cover the majority of expected stress. CLSA cuts FY21 and FY22CL credit cost expectations to 450 basis points from 513 basis points. CLSA increased core PPoP estimates by 6% for FY21-23CL, except RoE of 15% by FY23CL.

Morgan Stanley reiterates overweight rating, raises estimates and price target to Rs 650. MS says Axis Bank posted a strong 22% core PPoP beat, helped by better than expected margins and fees, continued strengthening of balance sheet, non-specific provisions are now 2% of loans. Capital and liquidity position of Axis Bank improved further. The bank is aggressively improving its coverage on stressed loans and has potential to drive strong revenue growth, led by market share gains as the economy stabilizes.

JPMorgan upgrades Axis Bank to overweight from neutral, raises their price target to Rs 600 from Rs 500. They say restructuring outlook is positive for Axis Bank, provisioning remains conservative, capital levels are high post equity raise and balance sheet looks well protected. Also, the asset quality picture is better than feared and standard assets cover provides a large buffer. Growth indicators are improving, so they raise operating profit estimates by 8% and 8.5% for FY22/23E

Macquarie maintains an outperform rating with a target price of Rs 624. Banks like Axis are well capitalised and have strong PPoP (pre-provision operating profits) to provide for bad assets.

Key points to understand:

1) Collection efficiency at 95% level for Sep 2020, in line with peer banks.
2) Total stressed assets (probable restructuring and watchlist) stands at 3.9%
3) Bank holds 2.2% against these loans  so, well covered

Out of the total 3.9% stressed pool, roughly 1.6% could be in the form of restructured assets, including retail assets. Against this, the bank holds 1.8% provisions excluding standard assets and 2.2% including standard assets. The disclosed stress book is reasonably covered, and thus there could be an upside risk to our credit cost estimates in case there is no further stress. The average credit cost for the first half of FY21 was 3.1%, whereas Macquarie has built in 2.7% for FY21E and 2.3% for FY22E. Note that this 3.1% credit cost already includes 1.8% COVID-related provisions that can always be dipped into.

Jefferies reiterate their Buy call and roll forward their target price to Rs 610. The key positive surprises in results were the buoyancy in NII growth (up 20% YoY) and better than expected fees (up 4%). NII growth was led by margin expansion with better spreads and new capital raising and added on to 12% growth in assets. CASA growth was also healthy at 17% YoY, which form 44% of total deposits; this along with aggressive cut in deposit rates has helped bring down funding costs by 100 bps YoY which aided margins. Jefferies believe that margin buoyancy and a potential uptick in retail loan growth will support buoyancy in topline (NII & fees) that will offer the scope to absorb credit costs.

Motilal Oswal Maintains Buy rating on Axis Bank, with revised Target Price of Rs 650. Motilal Oswal says Axis Bank reported a steady quarter, led by strong NII growth, healthy retail fee traction, and controlled opex. On the business front, loan growth picked up, led by higher disbursements in the SME portfolio. Retail growth also showed signs of improvement. . The bank adopted conservative accounting policies and further strengthened the balance sheet by making additional provisions, which gives comfort on the asset quality front.

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Sharekhan maintains their Buy rating on the stock with a revised price target of Rs 595. Q2 numbers were strong with operating results beating expectations and asset quality improving with better NIMs QoQ. Improving business traction across segments, near normal collection efficiency and business strengths indicate an improving outlook. Axis Bank trades at 1.4x / 1.3x FY2022E / FY2023E book value per share.
The bank has adequate provisions buffers owing to its conservative policies. The management indicated that the COVID-19 impact is still creating uncertainty over the medium term outlook and hence it refrained from offering guidance. The bank has built significant digital capabilities, which will not only provide growth momentum, but also readiness for the future.

Key positives

Strong traction in fee income, which grew 67% QoQ and 4% YoY, Retail fee income grew by 82% QoQ and 0.5% YoY while corporate & commercial banking fee grew 46% QoQ and 10% YoY.
There is potential for rerating once earnings and the economic scenario normalizes. A conservative provisioning policy, comfortable capitalisation, the overall franchise value and a high provision coverage ratio (PCR) are positives for Axis Bank, which will help it ride over medium-term challenges and provide support to growth and valuations. The deal with Max Financial Services and other bancassurance partnerships augur well for fee income sustainability and growth and is a long-term positive.