October 19, 2024
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Axis Bank by Emkay Global Financial Services
Analysis dated 18 October 2024
Sector: Bank – Private
Price on Analysis date: Rs. 1131.9
Target Rs. 1400
(23.7% upside potential)
Target Period: 12 Months
Axis Bank Stock Research Report
Axis Bank reported another soft quarter with credit growth slipping to 11% YoY, while higher slippages/w offs led to elevated provisions (including contingent provisions). However, higher treasury gains and favorable tax judgement led to 10% PAT beat at Rs69bn. Credit growth moderation was mainly driven by contraction in low-yielding corporate book and retail book (housing/ VF/ PL). On the asset quality front, the bank indicates that stress in unsecured loans remain elevated, but is hopeful of some relief in 2H. On recent draft guidelines on overlapping business between bank and NBFC subsidiaries, the bank plans to seek clarification from RBI. Given lower CET 1 at ~14%, Axis Bank shall raise capital at an opportune time. Factoring in slower credit growth and higher LLP, we trim our earnings estimates by 1-4% over FY25-27E. However, we retain BUY with unchanged TP at Rs1,400, valuing standalone bank at 1.8x Sep-26E ABV and subsidiaries at Rs100. The long awaited MD & CEO term extension by the RBI will be keenly watched in the near term.
Credit growth slows down further:
The bank reported sluggish credit growth at 11% YoY/2% QoQ owing to contraction in low-yielding corporate book and subdued growth in retail book (including mortgages, VF, and PL). Deposits also grew at a moderate pace of ~14% YoY/2% QoQ, with CASA falling by 125bps QoQ to 41%; LDR remains elevated at ~92%. This, coupled with absence of one-off gains as seen in Q1 (int. on IT refund), led to 6bps QoQ decline in NIMs to 4%. Separately, higher retail outflows caused LCR to decline by ~500bps to 115%; the bank increased its SLR investments (HQLA) to manage the LCR. Axis Bank believes FY25 credit growth will be anchored by deposit growth/LDR, which still remains a challenge. However, medium-long term credit growth will be 300-400bps higher than the system. We cut our FY25 credit growth estimates to 12% from the earlier 14%.
Unsecured retail loan stress remains elevated:
Despite elevated gross slippages at Rs44bn/2% of loans, the GNPA ratio declined by 10bps QoQ to 1.4%, owing to higher w-offs given the bank’s aggressive policy. Corporate/Retail net slippages stood at Rs21.6bn/(Rs8bn) in Q2 vs Rs24.6bn/Rs2.3bn in Q1, respectively. Bank indicates that stress in unsecured loans remain elevated, but is hopeful of some relief in 2H. The BB & Below corporate watch-list saw a downgrade of Rs2.7bn during the quarter. In addition to the existing contingent provision of Rs50bn, the bank further made additional contingent provision of Rs5.2bn in 2Q.
We retain BUY, with a TP of Rs1,400:
Factoring in slower credit growth and higher LLP, we trim our earnings estimates by 1-4% over FY25-27. However, we retain BUY with an unchanged TP of Rs1,400, valuing standalone bank at 1.8x Sep-26E ABV and subsidiaries at Rs100. Key risks: Macro dislocation and rising stress in unsecured loans leading to slower-than-expected growth/higher NPAs; KMP attrition; and MD term extension (expiring in Dec-24).
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