NEW DELHI: Lower-than-expected provisions, ease in moratorium book, shift towards more conservative policies and strong operating performance in the June quarter made analysts retain their positive stance on Axis Bank stock, even as concerns over falling fee income and asset quality remain.

Post the private lender’s quarter earnings, Macquarie maintained its outperform rating on the stock with a target of Rs 487, citing cheap valuations. CLSA has a bigger target of Rs 600 on the stock as it says the pre-provisioning operating profit was better than its estimates, expecting the bank to clock a return on equity of 13.8 per cent by FY23.

Motilal Oswal Securities too finds the stock a Rs 600 level worthy. The targets suggest up to 38 per cent potential upside for the stock.

Axis Bank reported an 18.82 per cent fall in year-on-year (YoY) net profit at Rs 1,112.17 compared with Rs 1,370.08 crore in the year-ago quarter. Adjusted for accounting policy changes and reserves created during the quarter, the profit would have been Rs 1,626 crore, up 19 per cent YoY, the bank said.

This followed a loss of Rs 1,387.78 crore the lender reported in the March quarter.

Following the results, the stock rose 8.21 per cent to hit a high of Rs 482.85 on BSE.

The private lender said its funded BB & below pool declined to Rs 6,420 crore from Rs 6,528 crore in March quarter. Non-funded exposure to BB & below pool also declined to Rs 3,721 crore from Rs 3,906 crore sequentially. The moratorium book, Axis Bank said dipped to 9.7 per cent of total loans. Ninety per cent of customers under moratorium 2 were from moratorium 1.

It is to be noted that the bank went for selective offerings in moratorium 2 compared with an opt out basis offering in moratorium 1. This helped loans under moratorium ease from the first round when they accounted for 26-28 per cent of overall loans.

“Of the residual moratorium 1 – it seems that 5-6 per cent of overall loans are neither part of moratorium 2 nor have they paid June EMI. Hence, asset quality challenges stay,” said Antique Stock Broking.

“We are building a net credit cost of 4.1 per cent spread over FY21E/22 to factor potential stress emanating from our estimated net slippage of 6 per cent of overall loans. We expect ROEs of 9/12 per cent in FY21/22 and maintain buy with a target of Rs 525,” Antique Stock Broking said.

Axis Bank said it made some conservative changes in accounting policy which impacted its earnings to the tune of Rs 510 crore. Fresh slippages for the quarter came in at Rs 2,218 crore, which were lower than Rs 3,920 crore in March quarter and Rs 4,798 crore in the year-ago quarter.

“Axis Bank has tightened risk management, built a strong buffer of provisions, and strengthened the digital offering. A decline in moratorium caps upside risks to credit cost and is positive,” said Elara Capital.

Lower provisioning

For the quarter, specific loan loss provisions stood at Rs 3,512 crore, which were lower than March quarter’s Rs 4,204 crore but higher than year-ago quarter’s Rs 2,886 crore. The bank made incremental provisions aggregating Rs 733 crore in June quarter towards Covid-19.

Overall, the bank held Rs 6,898 crore in aggregate provisions, with its provision coverage ratio, including specific, standard, additional and Covid provisions, rising to 104 per cent of gross non-performing assets (GNPA) as of June 30.

“The bank now carries a high specific PCR at 75 per cent, at par with HDFC Bank and ICICI Bank, while

contingent provisioning buffer is far higher at 1.2 per cent of loans. Its CET 1 stands at 13.5 per cent, and has approval in place to raise Rs 15,000 crore to shore up the capital buffer,” said Emkay Global.

The brokerage likes Axis’ increasingly prudent stance but believes that the bank needs to keep the frequent management rejig in check.

Q1 show

Net interest income (NII) grew 20 per cent YoY to Rs 6,985 crore from Rs 5,844 crore YoY. Non-interest income tanked 33 per cent to Rs 2,587 crore, with fee income declining 38 per cent YoY to Rs 1,651 crore. level. Fee income was muted due to regulatory fee waiver, decline in card spends and loan processing fee.

The bank’s advances including TLTRO investments grew 17 per cent YoY to Rs 5,79,444 crore as on June 30. TLTRO stands for targeted long term repo operations.

Loan mix

Retail loans for the quarter rose 16 per cent YoY to Rs 2,98,636 crore and accounted for 53 per cent of the net advances of the Bank. Out of this, the share of secured loans was 81 per cent, with home loans comprising 36 per cent of the retail book.

SME loan book stood at Rs 57,148 crore, with 88 per cen it being secured with working capital financing. Corporate loan book including TLTRO investments advanced 26 per cent YoY, out of which 82 per cent was rated A- and above.

“Incrementally, the bank has been focusing on granularising its corporate exposures. SME segment advances declined by 7 per cent YoY, reflecting the management’s cautious stance on the segment,” said Nirmal Bang Institutional Equities. This brokerage has a target of Rs 513 on teh stock.

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