Axis Bank Share price: In line Q3; prudent provisioning a positive II Sharekhan raises price target to Rs 800

Axis Bank operational performance was largely in line with expectations, but PAT slipped, owing to elevated provisions and slower advances growth. However, asset quality improved qoq. The front-loading of provisions on a proforma basis augurs well for the long term. Axis Bank's Net interest income (NII) grew 14% yoy to Rs 7373 cr and was in-line with estimates.

Axis Bank's NII (pre-interest reversals) grew 19% yoy to Rs 7987 cr. Axis Bank's Operating profit grew 6% yoy to Rs 6096 cr, down 11% qoq and was in line with estimates. However, PAT was hit by elevated provisions of Rs 1050 cr on account of prudent expenses and provisioning charges and therefore fell by 12% yoy to Rs 1117 cr, lagging expectations. Sharekhan maintains a Buy rating on Axis Bank with a revised price target of Rs 800.

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Axis Bank's Net interest margin stood at 3.59% as against 3.57% for Q3 FY20. NIM before interest reversals stood at 3.89%. Advances growth is improving, but still at sub-par levels, and the Loan book (including TLTRO investments) grew by 9% yoy, of which retail loans grew by 9% yoy and 4% qoq. Axis Bank's Retail disbursements rose to all-time highs. Disbursements in secured segments like home loans, loans against property (LAP) & car loans grew 23% yoy, 11% yoy and 10% yoy respectively. Corporate loans (including TLTRO investments) grew 11% yoy, SME loan book grew 6% qoq. Conservative policies have ensured adequate provisions.

While cumulative provisions (standard + additional other than NPAs) translate to 2.08% of standard loans, aggregate provision coverage ratio (specific standard+ additional + COVID-19 provisions) stood at a healthy 116% of GNPA. Around 81% of Axi Bank Retail book is secured. Also, reasonable Restructuring (PCR on overall restructured book is 26%), and the bank has 100% provisions for the unsecured retail restructured book, though those loans classified as standard are positive for asset quality.

Axis Bank's management commentary was positive and indicated that the FY2022E is likely to be a strong year for growth and profitability, and most of the residual asset quality recognition is likely to be completed in FY2021 itself with minimal impact on provisions. Axis Bank is well-capitalised with a strong CRAR (Tier1 at 15.6%) helped by the recent fund-raising. Its digital prowess, improving business traction across segments, near normal collection efficiency, and business strengths indicate an improving outlook. Sharekhan have accordingly fine-tuned their earnings estimates.

Axis Bank’s Key positives:

On a QAB basis, CASA and Retail Term Deposits (RTD) grew 16% yoy. CASA ratio at 42%, improved 232 bps yoy and 158 bps qoq
Decline in ‘BB & below’ rated pool across all three categories i.e. fund based, non-fund based and investments

Axis Bank’s Key negatives:

Slow growth of 5% yoy and 6% qoq in fee income (over Q2 FY21). Retail fee contributed 64% of overall fee income

Axis Bank Key Risks:

Prolonged uncertainty due to intermittent lockdowns may impact growth, and rise in NPAs in unsecured and other retail segments can pose a risk to profitability