Axis Bank rating: Hold — Core performance was soft in Q1

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Published: July 27, 2020 4:50 AM

While there were lower slippages in quarter, uncertainty persists on asset front; ‘Hold’ retained with TP of Rs 460

Unpredictable future— Axis’s performance has been volatile on the asset front despite significant liability gains.Unpredictable future— Axis’s performance has been volatile on the asset front despite significant liability gains.

Axis Bank (Axis) reported below estimate PAT of Rs 11.1 bn following lower fee income and changed accounting policies. Asset quality held up due to lower slippages. 9.7% of loans in moratorium, down from 25-28% earlier, surprised positively. However, as commentary clarified, this number must be gauged in the context of the conservative and understandable choice to pursue collections on some overdue assets rather than ‘freeze’ them all in moratorium.

The popular interpretation of moratorium accounts as the superset of future problem loans is, therefore, inapplicable. As argued earlier, our prognosis on systemic asset quality remains bleak. Axis is ranked fourth in our coverage in terms of proximity of reported net worth and ‘true residual equity’. We are yet to build in a dilution. If one materialises, we would argue for an expanded post money multiple, pleading higher ‘equity certainty’. Maintain Hold with TP of Rs 460.

Better headlines asset quality, but uncertainty persists: Slippages came in at Rs 20.1 bn (1.6%) driven by prudential recognition and impact of one corporate account. Going forward, we see two key parameters worth tracking: (i) collection efficiency towards accounts which have been denied moratorium, but are nevertheless overdue; and (ii) performance of SME book which has relatively low portion under moratorium. The bank’s high contingent provisions and coverage of >75% would provide cushion to residual equity implications of the crisis.

Core performance softer on lower fee and accounting policy change: Core operating profit (ex-treasury) was low (sub-5% growth) on lower NIM (down 15bps q-o-q—impact of change in accounting policy, higher liquidity and portfolio mix change) and lower fee even as lower opex (down >20% q-o-q) cushioned the impact. We believe changing portfolio mix, rate transmission & higher liquidity will put pressure on NIM and consequent revenue traction.

Outlook: Unpredictable future— Axis’s performance has been volatile on the asset front despite significant liability gains. Uncertainty over non-moratorium retail/SME accounts and performance of corporate assets will be keenly monitored. We maintain ‘HOLD/SP’.

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