Axis Bank has positively surprised on asset quality and profitability front in 3QFY18 led by sequentially lower fresh slippages, moderation in credit cost and decline in corporate watch list. Fresh slippages declined to Rs44.3bn from Rs89.4bn in 2QFY18. A substantial 12% decline in fund-based watch list to 12% to Rs53.1bn – which currently constitutes mere 1.3% of loan book vs. 6.7% in Mar’16 – clearly indicates that the Bank is approaching the end of recognition of stressed loans. This along with PCR (including technical W/O) at 66% and specific PCR at 53% gives comfort on credit cost outlook for next 4-6 quarters. Led by strong demand from Retail, SME and Corporate working capital segments, its loan book grew by 21.2% YoY and 2.1% QoQ. Notably, its quarterly performance on both revenue and earnings front exceeded our estimates owing
to higher core operating earnings along with relatively lower opex and provisioning expenses.
Outlook & Valuation
We believe that the Bank is approaching the end of recognition of stressed loan cycle, which along with improving PCR clearly indicates sharp moderation in credit cost from FY19E onwards. Further, the Bank raised Rs87bn in equity to support its growth plan over next 2-3 years. Looking ahead, we expect the Bank to sustain further improvement in operating metrics led by dwindling headwinds on asset quality front and improving balance sheet growth especially in Retail segment. Rolling over our estimates to FY20E, we upgrade our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs 726 (from Rs 506 earlier) based on 2.4x FY19 Adjusted book value.
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About Reliance Securities
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