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Axis Bank Rating ‘Buy’; Firm’s initiatives yielded gains in Q3

Equity sanctity has increased; ‘Buy’ retained with TP of Rs 1,000; a quality banking pick

With crucial comfort on equity sanctity, franchise strength and likely medium-term credit cost unwind, Axis remains amongst our top banking picks representing ‘smart beta’. Maintain ‘Buy’ with TP of Rs 1,000 (unchanged).
With crucial comfort on equity sanctity, franchise strength and likely medium-term credit cost unwind, Axis remains amongst our top banking picks representing ‘smart beta’. Maintain ‘Buy’ with TP of Rs 1,000 (unchanged).

Axis Bank’s (Axis) Q3FY22 PAT of Rs 36 bn surpassed estimates on lower credit cost and better revenue traction. That said, higher opex (sustained investments) restricted core-profitability. However, asset quality held up, reflected in relatively lower slippages, controlled restructuring (63bps) while maintaining a provision pool (75bps) should contain any fallouts. Impressively, business momentum picked up with secular growth, but sustainability is key.

With crucial comfort on equity sanctity, franchise strength and likely medium-term credit cost unwind, Axis remains amongst our top banking picks representing ‘smart beta’. Maintain ‘Buy’ with TP of Rs 1,000 (unchanged).

Asset quality improving
Slippages came in lower at Rs 41.5 bn (2.7%), pushing GNPLs down to 3.17% (3.53% in Q2FY22). In the interim, the bank continued to follow prudent provisioning norms and did not utilise the buffer created earlier. Restructured book is mere 0.63% of loans, and the bank carries 24% provision on this. We believe the bank’s high provisioning buffer and lower incremental stress will seed the possibility of material write-backs. This renders Axis as one of the likely earnings growth leaders as unwind of excess provisioning starts.

Core impacted by higher costs
Axis posted strong growth momentum with 17% y-o-y loan growth, largely secular with almost all chosen areas seeing better growth – retail 18% y-o-y , SME 20% y-o-y and mid-corporate 44% y-o-y. In FY22, we expect reported NIM to improve as unwind of interest income reversal plays through; a part was visible in this quarter with NIMs rising 14bps q-o-q to 3.53%. Rising momentum in deposit franchise combines with this tactical buffer of conservative interest recognition to improve NIM outlook. Meanwhile, higher cost, given sustained investments and partially one-off in nature lead to lower core-profitability; a trend which has sustained over the last few quarters.

Outlook: Increased equity sanctity
Axis’s performance has been volatile on the asset front, despite significant liability gains. Overdue retail/SME accounts and performance of corporate assets has been keenly monitored, and has surprised positively. Excess provisioning and strong capital base goes a long way in increasing perceived equity sanctity. Maintain ‘BUY/SO.

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