Showing of moratorium book will be key; outlook for earnings in FY21 is weak; ‘Buy’ maintained with TP of Rs 530
For Q4FY20, Axis reported a loss of Rs 14 bn as it built provisions of Rs 30 bn against Covid-linked stress. Performance of moratorium book is key as it forms 25% of loans. Profit in FY21 will be weak due to higher credit costs and weaker topline; key cushion for earnings is in its buffer provisions (at 1% of loans). A strong deposit franchise and well-capitalised balance sheet can help return to growth in FY22. We maintain our Buy call with target price of Rs 530.
NPLs in Q4 manageable; but quality of moratorium book will be key During Q4, fresh NPL formation was manageable with delinquency ratio falling to 3% of past year loans and gross NPLs at 4.9% – adjusted for moratorium it would have been higher just by 10bps. However, in the context of Covid linked lockdowns, 10-11% of borrowers with 25% of loans (mostly SME and retail) have sought moratorium. This reflects potential stress and underlines our views of sharp rise in credit costs in FY21.
Bank took a conservative stance on provisioning to allocate additional Rs 30 bn toward contingent provisions and the stock of such provisions is now at Rs 59 bn or 1% of loans that will cushion earnings against risk in FY21.
Operating profits in line; risk aversion for near-term
Bank reported 20% y-o-y growth in operating profits (ex-treasury gains) reflecting healthy growth in topline and recovery from NPLs that offset for weak fees. However, growth should moderate in the near term as bank takes conservative stance on lending and fee income declines in FY21. Bank’s deposit franchise remains steady with Casa ratio at 41% of deposits and lower funding costs will help grow in high-quality/low-margin segments with manageable impact on NIMs.
We tweak earnings for Q4 results and continue to maintain weak earnings outlook for FY21 with rebound in FY22. We maintain Buy call with target price of Rs 530 based on 1.8x FY22 adjusted PB.
Downside Risks: Higher slippages in the retail/corporate loan segment, NIM compression.