Axis Bank surprised us with a mere `10 billion of new NPAs under RBI’s scrutiny – resets two views: RBI thinks 5/25 and SDR are legitimate tools under current scenario, asset quality bumps are postponed to future and spread over a longer time frame PPOP should be enough to cover provisions with no capital calls stock should head higher. We retain Buy, but lower the book value and PT.
Asset quality issues largely postponed to future. The much-anticipated impact of RBI’s review list of accounts came in the form of `10 billion fresh slippages to NPA. In addition, provisions need to increase by 10% for about `25 billion of restructured accounts in FY17. Essentially, problems get postponed to a far future date (18 months for SDR assets and 3-5 years for 5/25 assets) between which the banks will build up all provisions required. We are adjusting our book value estimates to account for net NPAs, 50% haircut in restructured, 5/25 refinanced and SDR accounts, leading to a 14% haircut in book value.
We have lowered loan growth by 4-6% and lowered NIMs by 2%(7bps) resulting in 7-11% lower EPS estimates for FY17E and FY18E. We have left credit costs largely unchanged. We forecast FY15-18E EPS CAGR of ~16%.
We value AXSB at 2.6 BV (Dec 16E) and 11.9x EPS (12m to Dec 17E). Trades at 2.1x BV (Dec15) and 9.8x EPS (12m to Dec 16E) – 5yr/10yr avg. of 2.6x/3.2x and 11.7x/13.5x. We adjust the book value for `105 billion of 5/25 & SDR along with `79 billion of restructured assets at 50% haircut. Downside risks are higher NPA, NIM compression, weak retail loan growth.
The much-anticipated impact of RBI’s review list of accounts came in the form of `10 billion fresh slippages to NPA.