Analyst Corner: Retain ‘buy’ on Axis Bank on better operating profit

Axis Bank’s Q2FY21 earnings reflect strong core performance. NIM expanded 18bps to 3.58% q-o-q, core fee income grew 4% and operating costs were contained at 5%, thereby supporting 16% growth in operating profit. However, the bank continued with its conservative stance of creating further provisioning buffer of Rs 31.4 billion taking cumulative additional provisions to 1.9% of advances. Rightly so, when it proactively downgraded accounts whereby BB & below exposure has risen 40bps to 2.6% of advances, coupled with estimated probable restructuring of non-BB corporate pool of 0.56% (Rs 32 billion) and retail/SME loans of 0.43% (Rs 25 billion) – an indicative stress pool of 3.6%.

If these largely overlap 30-dpd pool of 2.3% or where moratorium was extended, then the contingency buffer seems sufficient. Else, it might call for elevated credit costs in the coming quarters. We are building-in slippages of 4.1%/2.4% and credit cost of 2.7%/1.8% over FY21E/FY22E, which is nullified by superior operating profit of 2.7% to assets, thereby potentially generating RoEs of 11.4% in FY22E. Maintain ‘buy’.

Indicative stress pool at ~3.6% for now. The bank’s BB and below exposure has risen by 40bps to 2.6% (Rs 148 billion from Rs 108 billion) – 75% of increase (30bps) is on account of probable restructuring and 25% (10bps) due to internal reviews on moratorium pool. Besides, the bank has indicated probable restructuring in non-BB corporate pool at Rs 32 billion (0.56% of advances) and in retail/SME at Rs 25 billion. During Q2FY21, it has created Rs 12.8 billion provision towards loans under moratorium and Rs 18.6 billion towards probable restructuring, taking the cumulative contingency buffer to Rs 108 billion (1.9%). If the incremental stress pool is restricted to this, the provision seems adequate. We are building-in 2.7%/1.8% credit cost for FY21/FY22E.