1. Jefferies puts ‘Buy’ rating on Axis Bank

Jefferies puts ‘Buy’ rating on Axis Bank

While core PPOP grew in line with estimates, Q2 profit was down 83% y-o-y owing to provisioning

By: | Published: October 29, 2016 6:39 AM
Slippages elevated: The total stressed assets (5.46% as a % of net customer assets) rose sharply on a sequential basis (4.21% in Q1FY17). (Reuters Image) Slippages elevated: The total stressed assets (5.46% as a % of net customer assets) rose sharply on a sequential basis (4.21% in Q1FY17). (Reuters Image)

New slippage of Rs 88 bn v/s Rs 30 bn JEFe was close to the total slippage in previous four quarters. FY17 credit-cost guidance (125-150bps) was increased significantly to 300 bps. We expect the stock to react negatively but we maintain our buy into the weakness for an eventual recovery in FY18. Retain Buy, lower price target to Rs 615.

Slippages elevated: The total stressed assets (5.46% as a % of net customer assets) rose sharply on a sequential basis (4.21% in Q1FY17). The gross and net NPA ratios rose considerably q-o-q— 4.17% vs. 2.54%, and 2.02% vs. 1.08% respectively. The provision coverage ratio including technically written-off accounts fell significantly q-o-q to 60% from 69%. However, the management guided for this ratio to be around 70% in the medium term. The slippages were R87.7 bn, close to the total slippage in previous four quarters. Rs 81.89 bn slipped from the corporate book (90% of total slippages). Out of this, slippages from the bank’s funded watch-list (Rs 203 bn as of Q1FY17) were Rs 72.9 bn (83% of total slippages, 35.9% of Q1FY17 outstanding watch-list).

Core PPOP in-line; net profit down 83% y-o-y owing to provisioning: Core PPOP grew 3.0% y-o-y, in line with our estimates (absolute 1% below JEFe), with the higher than estimated NII (on account of better than anticipated loan growth) offset by higher expenses. Provisioning was 4.1x of Q2FY16 provisioning, with annualised credit cost (provision for NPA/net customer assets) for the quarter being 386 bps. Management increased full year credit cost guidance to 300bps from the earlier guidance of 125-150bps. Consequently, the net profit for the quarter (R3.2 bn) fell 83% y-o-y.

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Change in estimates: We keep credit cost estimates (as % of average loans) largely intact at 91 bps and 77 bps for FY18-19. For FY17, we have pushed up credit cost to 317 bp. We forecast R80 bn in additional slippage in H2FY17 and as was our practice continue to factor 50% haircut across 5:25, restructured and SRs while calculating the adjusted book value—we believe profitability will be weaker over next two quarters. We have broadly modeled NIM around 3.5% with expense ratio around 43% implying FY16-19e EPS CAGR of 8.9%.

Valuation/Risks: We value Axis Bank at 3.0x trailing adj. BV (Sep 17E) and 15.9x EPS (12 m to Sep 18E). Trades at 2.9x trailing adj. BV (Sep 16) and 22.6x EPS (12 m to Sep 17E) — 5 year/10 year average of 2.3x/3.0x and 11.1x/13.5x. Downside risk: Higher than expected NPA, larger NIM compression, weak retail loan growth.

Key takeaways from AXSB Q2FY17 conference call: (i) FCNR linked loans are R68 bn. Retail ex FCNR linked loans are 40% of the total loans. (ii) FY17 Guidance: NIM: 3.6%, Credit costs: 300 bp. Watch list devolutions: Guidance scrapped vs 60% slippage over 2 years. (iii) Bank carries 5% provision on the watchlist. (iv) Bank has used R3.2 bn from its contingent provision buffer in Q2. Balance outstanding buffer is Rs 1.6 bn. (v) Average CA and Average SA growth continues to be robust at 18% and 21%. (vi) Management clarified that the watchlist currently includes 100% of SDR, 10% of 5:25 refinancing and about 50% of restructured assets. We believe a large part of SDR assets are already classified under restructured. Going by current data, we estimate 28% of watchlist is made up of existing 5:25 and restructured assets.

Stressed assets flat; elevated slippages, even from SME & retail: The total stressed assets (5.46% as a % of net customer assets) rose sharply on a sequential basis (4.21% in Q1FY17). Impaired asset formation spiked this quarter (13.1% of 12 month prior customer assets). SME and retail slippages were elevated—gross slippages were Rs 5.8 bn vs. R7.3 bn q-o-q. Out of the total slippages, R6.6 bn came from the restructured book, vs Rs 8.9 bn in Q1FY17 and R4.0 bn in Q4FY16. There was no fresh restructuring in the quarter. The outstanding 5/25 and SDR exposures were R50.7 bn and Rs 10.6 bn (the latter mainly from the restructured book). Security receipts were Rs 14.3 bn. The total restructured assets outstanding were Rs 67 bn.

Watch-list – Non-funded exposures could add to stress: The outstanding funded watch-list as of Q2FY17 stands at R137.9 bn. Key points to note: (i) Non-funded exposure for the outstanding funded watch-list figures was down to R19 bn versus R25.6 bn in the prior quarter. The ratio of the non-funded exposure to funded exposure within the watch-list has increased to 13.8% from 12.6% sequentially. (ii) Rs1.5 bn devolved from non-funded to funded exposure within the watch-list. (iii) The bank had earlier disclosed that operating projects constitute 13% of the watchlist exposures. We feel that this could be a source of additional stress for the bank in the form of defaults on non-funded credit lines and consequent conversion to funded credit. (iv) However, the management stated that it has factored in potential devolvement from the non-funded watch-list exposure while giving its credit cost guidance. (v) The top 10 industries account for 93% of the watch-list exposure (88% as of Q1FY17). Exposure to Iron & Steel, Shipping, CRE and Textile are now classified as NPL, with power as the largest share of watchlist asset at 41% vs. 27% in the prior quarter.

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