Ideas for Profit | Axis Bank: Strong outlook and well-articulated roadmap make it a compelling long term pick

- The bank boasts of a solid granular deposit base with retail term deposits along with low-cost CASA constituting close to 80 percent of total deposits

- Q3 witnessed a significant jump in non-interest income. Driven by retail fees, while core fees grew by over 16 percent, the sharp spurt came from recovery in written-off accounts (Rs 998 crore as against Rs 40 crore in the year-ago quarter) and monetisation of stake in two strategic investments, resulting in gains of Rs 342 crore

- The recovery in one of the large steel account (cash recovery of Rs 714 crore) resulted in a five basis points (100 bps=1 percentage point) positive impact on interest margin. Net interest margin improved 11 bps sequentially and 9 bps year-on-year to 3.47 percent. The benefit of MCLR (marginal cost based lending rate) repricing is also starting to contribute. The management is quite confident of maintaining its improved margin trajectory

- While overall advances grew 13 percent, there was de-growth in the international book. Domestic advances grew 18 percent, supported largely by retail, which is now close to 49 percent of total advances

- Quality of lending is improving with 86 percent of SME exposure rated SME3 and above and 82 percent of corporate exposure rated A or better. The decline in the ratio of risk weighted assets to total assets stands testimony to the same

- The improvement in quality of the book has resulted in capital conservation with the bank adding nine bps to its core capital. Its overall capital position is extremely healthy (Tier I: 13.07 percent) to take care of future growth acceleration

- Asset quality is stable with gross and net non-performing assets (NPA) declining to 5.75 percent and 2.36 percent, down from 5.96 percent and 2.54 percent reported in the previous quarter, respectively

- Most of the slippage in Q3 were from below BB rated accounts and this pool has declined by 14 percent sequentially to Rs 7,645 crore. The management after a careful scrutiny of the books feels that the BB and below rated book can only improve from hereon and that the rating downgrade exercise is complete

- The bank has created an ad-hoc provision of Rs 600 crore towards non-performing assets. Excluding this, the provision coverage ratio (provision held against NPA) has improved to 75 percent. Q3 also saw a provision write-back on investment

- The management is planning to focus on its subsidiaries and targets to take them to a meaningful size in the coming years through the organic as well as inorganic route

Key negatives - RBI audit for FY18 pointed to minor divergence. Accounts worth Rs 225 crore wasn’t recognised as NPA. However, the same had turned into a bad loan in Q1 FY19. The regulator wanted the bank to provide an additional Rs 99.7 crore, which has also been complied with

- CASA ratio has decelerated to 46 percent

- Although recovery was encouraging, the total quantum of gross slippage at Rs 3,746 crore was a tad higher

Outlook The bank under the new leadership and a revamped senior management is eyeing strong risk adjusted growth, with a thrust on garnering market share, improving cost matrix and leveraging technology. With the worst of corporate NPA cycle behind, a moderation in credit cost would also be a key earning kicker.  At 2.6 times FY20 estimated adjusted book, we do see scope for re-rating should the bank successfully complete its journey of reaching high-teen RoE in the future. Axis Bank is an ideal candidate for any long term portfolio.

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here