Axis Bank’s Q1FY20 NII was up by 13% yoy to Rs5,844cr against Rs5,167cr. Net profit for the quarter came in at Rs1,370cr (which is below the consensus expectation) and against Rs701cr yoy. AXSB’s reported profits were below expectation driven by higher provisioning on stressed exposures (non-funded BB & below exposures, SMA-2, NPAs) of Rs459cr.Its GNPA for Q1FY20 stood at 5.25% against 5.26% qoq. NNPA for the quarter came in at 2.04% against 2.06% qoq.
Margins expanded 11bps excluding the impact of an NCLT recovery in 1QFY19 (17bps). This was due to a higher yoy increase in yield on advances, driven by re-pricing of MCLR linked loans. This offset the higher cost of funds (up 50bps yoy) due to a decline in the CASA ratio. Excluding the impact of the NCLT recovery in 1QFY19 (Rs249cr), NII growth would be 19% yoy
Domestic loan growth remained strong at 19% yoy, while overseas loans declined 34% yoy, leading to the moderate overall loan growth. Domestic loan growth was driven by retail loans (+23 yoy), particularly unsecured retail loans (+48% yoy) and domestic corporate loans (+19% yoy). SME and agriculture loans grew 8% yoy and 13% yoy respectively..
Fee income for Q1FY20 grew at 26% yoy, led by Retail Fees, which grew 28% yoy.
Provisions included Rs.994cr on account of: i) incremental provisions towards stressed exposures (non-funded BB & below exposures, SMA2, NPAs) of Rs459cr, ii) provisions towards land held as a non-banking asset of Rs535cr. AXSB holds Rs2,358crof provisions, over and above the specific provisions; including this, PCR would be 70.5%.
NIM for the quarter stood at 3.40%.
Operating profit for Q1FY20 grew 35% yoy and stood at Rs5,893cr.
Provision Coverage Ratio of the bank improved sequentially to 78% from 77%.
Additional provisions of Rs994cr created over and above required NPA provisioning.
The bank now holds Rs2,358cr of provisions for various contingencies.
Gross slippages for the quarter stood at Rs4,798cr.
Downgraded Rs2,242cr into BB during the quarter, largely from groups that have shown new signs of stress in recent months.
Outstanding BB & Below corporate loans were stable at 1.3% of customer assets.
There was a beat at the PPoP level due to stronger non-interest income growth and very strong control on operating expenses. The high slippages of Rs4,800cr (4.5% of opening loans), high loan loss provisions (246bps of average loans) and addition of Rs2,240cr to the BB and below portfolio were key negatives. However, these additions were widely known and the potential for slippages/provisions from these are also largely priced into the recent correction.
Key takeaways from the earnings call
The management stated that domestic growth conditions were soft, with weak demand for autos and consumer goods. However, weakness in the NBFC sector was aiding market share gains for banks.
The bank made certain key hires in the quarter, including Head Liability Sales and Head Treasury. With this, the management team is now fully in place.
Retail loans: AXSB primarily targets existing bank customers. Of the total retail loan origination in the quarter, ~83% was from existing customers (~98% for credit cards and ~93% for personal loans).
SA deposits: Management attributed the low growth in SA deposits to: i) decrease in household savings, ii) competition from small savings and iii) movement from SA to TDs due to higher rates.
Operating expenses: AXSB was able to rein-in operating expenses growth, owing to i) rationalisation of outsourced manpower and security expenses, ii) digital initiatives in sourcing, leading to lower back-office and mid-office costs, and iii) lower advertising costs. Management expects cost-to-assets to consolidate at current levels, before moving towards 2.0% by FY22; however, it will continue to invest, where necessary, specifically digital initiatives.
Capital: CET-1 increased 41bps qoq to 11.68%. This included the positive impact of ~45bps of warrant conversion and the negative impact of: i) higher risk weights on unrated exposures >Rs200cr and on CC/OD limits >Rs150cr (31bps) and ii) operational risk (9bps).
Capital raising: The Board of Directors has approved an enabling resolution to raise ~Rs18,000cr of capital. This would be valid for one year (post receiving shareholder approval).
Contingent provisions: AXSB holds Rs2,358cr of contingent provisions (outside PCR). This includes Rs510cr for BB & below and SMA-2 exposures, Rs459cr for non-fund based exposures and Rs13.89bn for stressed sectors. This amount excludes the provisioning for land held as a non-banking asset.
Provisioning policies: To further strengthen its provisioning policy, i) AXSB undertakes daily stamping of NPLs across the portfolio and ii) 100% provisioning for unsecured retail loans at 90dpd.
Retail unsecured loans: The bank is not seeing signs of stress in the portfolio, however, it acknowledged that external factors including rising individual leverage could suggest stress. AXSB is better placed against peers due to i) high proportion of loans to existing customers (80-90%), ii) strong analytics at the pre- & post-underwriting stages and iii) relatively smaller contribution of ~9% to the bank’s total loan book. The bank is however raising the bar with respect to underwriting in this portfolio.
Real estate portfolio: Of the portfolio of ~Rs12,950cr, a majority is LRD and loans to top-tier developers. Under-construction residential project finance accounted for ~Rs1,500cr.
Corporate bond portfolio: The portfolio declined 27% qoq to Rs29,300cr, as the bank looks to cut back on its exposure to corporate bonds. This portfolio is expected to decline going forward.
Provisions for land held as a non-banking asset: In line with the RBI directive, AXSB moved towards 100% provisioning (in 4QFY19) on land received in lieu of loan repayments. As of 1QFY20, Rs10,70cr has been charged to the P&L and the balance Rs10,700cr would be charged to the P&L in the next 2 quarters (BV neutral).
Axis Bank Ltd ended at Rs. 706.55, down by 13.1 points or 1.82% from its previous closing of Rs. 719.65 on the BSE.
The scrip opened at Rs. 725.05 and touched a high and low of Rs. 727.70 and Rs. 701.10 respectively. A total of 1,44,85,031 (NSE+BSE) shares were traded on the counter. The stock traded above its 50 DMA.
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