Axis Bank reported a positive set of numbers on the operating front for
3QFY2016 with PAT growing by 14.5% yoy to Rs2,175.3cr surpassing street as
well as our expectations. Asset quality deteriorated with surge in gross and net
NPA ratios to 1.68% and 0.75% from 1.38% and 0.48% sequentially.
Slippages at elevated levels; Advances growth remains healthy
During 3QFY2016, the bank reported an advance growth of 21.0% yoy, while
deposits grew by 16.2% yoy. The retail book grew by 26.8% yoy and accounted
for 40% of the advances. Overall, for the current financial year, the bank expects
credit growth to be of around 20%.
The CASA ratio came in at 43.2%, declining by 100bp qoq, while it improved by
12bp on a yoy basis. The NIM declined by 6bp qoq and stood at 3.79% in spite
of the cost of funds falling by 13bp qoq to 5.86%. The sequential decline of
13bp in the bank’s cost of funds is primarily driven by moderation in the cost of
term deposits and further aided by the bank’s continued focus on CASA.
Asset quality deteriorated with surge in Gross and Net NPA ratios to 1.68% and
0.75% from 1.38% and 0.48% in the sequential previous quarter. Slippages
came in higher at Rs2,082cr, whereas the bank transferred 4 accounts worth
Rs1,600cr under 5/25 scheme and conducted strategic debt restructuring in 1
account (which is a construction company) worth Rs500cr. The bank has stated
that it has taken into account the full impact of asset quality review conducted by the
RBI, which accounted for ~50% of the total slippages for the quarter. The Management
has guided for incremental slippages to the extent of Rs1,300cr for 4QFY2016.
Outlook and valuation: Healthy pace of branch expansion and a strong
distribution network continue to be the driving force for the bank’s retail
business. On the asset quality, the bank has fully recognized the necessary
impairment and the resultant provisioning impact of the asset reclassification as
per the RBI’s assessment in 3QFY2016 which provides comfort with respect to
the asset quality. However, the management remains cautious on its asset quality
outlook in the near term. The bank is positioned strongly to benefit once the
macros revive. The stock currently trades at 1.7x P/ABV FY2017E. We maintain
our Buy rating on the stock with a revised target price of Rs531.

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