Axis Bank Rating: Buy- Growth outlook has improved for bank

We hosted Amitabh Chaudhry (MD & CEO), Puneet Sharma (CFO) & Abhijit Majumdar (Head-IR) for investor calls. Mgt. highlighted that overall trends are improving & festive season went better than expectations of Oct. While quality of portfolio is faring in line with leading peers, Axis has higher buffer-provisions. RBI’s actions with DBS-LVB & new banks can raise competition; it may allow simpler transaction with Max and need to merge NBFC subs., but clarity awaited.

Recent RBI’s action indicates more competition: Mgt. highlighted that a combination of allowing DBS to acquire local bank (LVB) & RBI committee’s recommendations to allow more banks (conversion of NBFCs to bank or giving bank-licence to corporates) indicate towards increased competition in the sector. Hence, banks like Axis will need to continue investing in platforms and network.

The committee recommendations allow Axis to hold 20% stake in insurance subsidiary, which could make it simpler to take stake in Max Life — possibly it will keep 3% among subsidiaries & rest at bank level. While committee seeks to merge NBFC subsidiaries with bank, the definition of ‘similar-business’ needs to be clarified. Holdco structure for banks will be explored post tax-neutrality is achieved, but dual listing is better avoided.

Business improving; provisions higher than peers: As per mgmt, consumption trends during festive season were better than a month back expectations. Collections (97% in Q2) have held up well, but sustainability needs to be seen as pent-up demand & higher savings due to moratorium may have boosted it. In SME, slippages should be manageable as Axis had turned cautious ahead of Covid and ECLGS provides a lifeline. In retail, trends should be in line with private peers.

Axis has taken a selective stance towards restructuring and expects limited restructuring; slippages will be elevated in H2 as moratorium/standstill loans are downgraded. Mgmt clarified that even as portfolio trends have been similar to peer banks, Axis has higher provision buffers (1.8%)— it is watchful about additional provisioning needs.

Others: churn at mgmt, portfolio purchases, overseas book—While there was some churn in senior mgmt in recent months, bank has been able to refill those positions and expects this to stabilise. It has also continued investing in branches/ new staff. Mgmt is open to making some portfolio acquisition, but not keen to acquire NBFC/ company as it’s complex. Overseas lending business will stick only to clients which are India linkage or relevant for Indian business.

Maintain BUY: We see earnings recovering from FY22 onwards with improved growth and lower credit costs. We raise TP to Rs 700 based on 2.1x Sep-22 adjusted PB to factor in improving growth/asset quality outlook. Buy rating stays.