Axis Bank – Q4FY16 Result Update
CMP: INR 469 Target Price: INR 540 Recommendation: HOLD
"Sailing through testing times"
First ever in past 46 quarters Axis Bank reported 1.2% decline in net profit (below estimates at INR 21.5 bn) primarily due to surmounting asset quality pressures leading to elevated provisions (spiked 64% both Y-o-Y and Q-o-Q) and weak non-interest income performance (flat Y-o-Y). While the NII stood strong very much in-line with our expectations growing 20% Y-o-Y, the 21% sturdy loan growth and 3.97% margins aided the healthy top-line show. Asset quality; however; disappointed particularly in the guise of the new corporate loan watch list amounting to INR 226 bn forming 4% of the overall loans and 60% of which should slip into NPAs over the next two years. Not just that; the credit costs guidance at around 125 to 150 bps ahead and the Management's admittance of the challenging operating environment is rather worrisome. While the enhanced disclosures deserve thumbs up, the gloomy outlook ahead in terms of additional stressed building up makes us wary about the earnings trajectory ahead. Downgrade to HOLD; target price maintained.
NII; loan book continue healthy traction: Buoyed by retail loans which grew healthy 24% Y-o-Y, the overall loan book registered sturdy 21% Y-o-Y and 10% Q-o-Q. Healthy traction in personal loans (51% Y-o-Y) and auto loans (39% Y-o-Y growth) drove the retail loan segment. Corporate loans, on the other hand, grew equally strong reporting 22% Y-o-Y and 4% Q-o-Q growth.
Healthy loans and margins expansion triggered NII for the quarter; NII at INR 45.5 bn registered 19.8% Y-o-Y and 9.4% Q-o-Q growth. NIMs surprised us positively this quarter putting up a strong show at 3.97%; up 18 bps Q-o-Q. Lower interest reversals and healthy CASA balances (CASA at 40%) drove the NIMs for the quarter. Going forward, higher interest reversals and elevated slippages should restrict NIM expansion and we believe Axis Bank to report NIMs around 3.6+ over FY17-18E. Against this backdrop, we expect NII to record CAGR growth at 22% between FY16-18E.
Non-interest income moderates: Flattish Y-o-Y, other income disappointed during Q4FY16 but registered 15% sequential rise. Core fee income depicted modest traction growing by mere 6% Y-o-Y primarily due to 47% decline in treasury gains and poor corporate fees. However, this should be a quarterly blip and In our opinion, fee income trajectory will continue to look strong over FY17-FY18E driven by healthy growth in retail and corporate fees and traction in transaction banking; we expect healthy 18% CAGR over FY16-18E.
Asset quality worries intensify; however, restructuring pace reduces: While prima facie the headline asset quality numbers appeared stable, a closer look at the details only signal to a worrisome situation ahead for Axis Bank in terms of asset quality. The gross NPAs at 1.67% and net NPAs at 0.7% stood more or less stable Q-o-Q, the absolute numbers stood higher. Notably, the bank disclosed a corporate watch list of stressed accounts amounting to INR 226 bn that form 6.7% of overall loans and importantly 60% of these should slip into NPAs over next two years translating into slippages of INR 135 bn. While 28% of restructured and SDR loans and 75% of large levered loans stand exclusive of this list, slippages from these accounts cannot be ruled out. Besides, the credit costs that stood at elevated levels of 111 bps for FY16 are expected to spike to as high as 125 bps in FY17 and perhaps another 150 bps in an adverse scenario. Such higher levels of credit costs guidance stand negative and signal towards continued stress in the asset quality of the bank.
The slippages for FY16 stood at INR 53 bn; SME/retail slippages formed ~25% of gross slippages (INR 3.6bn). The bank restructured 4 accounts of INR 2bn under SDR and 1 account amounting to INR 1.7bn under 5:25 scheme; sale of NPAs of INR 3.5bn to ARCs stood INR 1.1bn for a cash consideration of INR 250mn. Besides, the fresh restructured assets stood at INR 9.3bn with loans to the tune of INR 4bn slipping into NPAs. Going forward, the slippages should only stay elevated given the corporate watch list, and any stress emerging from SME, retail and other corporate loans. In light of increased stressed levels, and higher built-up of unsecured retail loans and painful corporate watch list, we incorporate higher NPAs and higher credit costs into our estimates and expect gross NPAs to spike to 2.4% during FY17 and 2.7% in FY18.
Outlook and Recommendation: The bank's consistent core operating earnings with superior retail loan book accretion and enhanced disclosures stands creditable. But operating headwinds in the near to medium term indicate testing items for Axis Bank ahead. Bank's corporate watch list, elevated credit costs guidance and anticipated higher slippages should imply earnings pressure. With the bank expected to front-load much of the pain in asset quality 1HFY17, the full year earnings are expected to remain on the lower side. While the fresh impairments are expected to be substantial over net two years, we trim our earnings estimates, envisaging 11% earnings CAR over FY16-18E and our book value estimates; however, strong NII CAGR of 22% CAGR over FY16-18E. Against this backdrop, we downgrade the stock to HOLD from a BUY revising the target price tad downwards to INR 540 (earlier at INR 550) valuing the bank at 2.0x P/ABV FY18E. The valuations already stand beaten down at 1.7x P/ABV FY18E.
Key Financials
INR in mn | FY14 | FY15 | FY16 | FY17E | FY18E |
Net Interest Income | 119,516 | 142,241 | 168,330 | 206,487 | 250,568 |
Pre-provision profits | 114,561 | 133,854 | 161,036 | 188,848 | 218,816 |
Net Profit | 62,177 | 73,578 | 82,237 | 85,558 | 100,626 |
EPS (₹) | 26.5 | 31.2 | 34.5 | 36.0 | 42.4 |
BVPS (₹) | 162.7 | 188.5 | 223.8 | 247.0 | 280.8 |
ABVPS (₹) | 159.8 | 184.9 | 217.0 | 239.1 | 269.8 |
P/E (x) | 17.7 | 15.0 | 13.6 | 13.0 | 11.1 |
P/ABV (x) | 2.9 | 2.5 | 2.2 | 2.0 | 1.7 |
Source: Company, KRChoksey Research
Link to the complete report:
Regards,
KRChoksey Research
5th Floor, Abhishek Building, Behind Monginis Cake Factory, Off New Link Road, Andheri (W), Mumbai 400 053
Direct: +91-22-66965555 | research.insti@krchoksey.com | www.krchoksey.com
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