Axis Bank Q1 Review: Analysts Bet On Higher Recoveries By December

Analysts expect Axis Bank Ltd.’s asset quality to improve in the second half of the ongoing fiscal after the restrictions to curb the severe second Covid-19 wave caused slippages to jump.

The stress is transitory and the bank has adequate provisioning buffers in place, they said in research reports after the lender’s first-quarter results.

The private lender reported gross slippages worth Rs 6,518 crore, up 23% sequentially, in the three months to June. It said 22% of the gross slippages were upgraded to standard category in the reported period. Most of the net slippages, or Rs 3,741 crore, came from the bank’s retail loan book. It expects slippages to lower by the third quarter of this fiscal.

But the impact of higher slippages and a deteriorating asset quality was offset by a jump in retail fee income, leading to a surge in profit over the preceding quarter.

Anand Dama, Neelam Bhatia and Mayank Agarwal of Emkay Global said higher retail slippages were largely coming from the mortgage book for Axis Bank, as customers sought to delay payments to protect cash flow amid Covid-19 uncertainty.

According to Motilal Oswal, “though slippages could remain elevated in the near term, healthy provision coverage ratio of 70%, coupled with additional provisions buffer of 2%, would likely protect the balance sheet against any potential stress.” The brokerage retained its previous estimates and a target price of Rs 925 apiece.

But CLSA cut Axis Bank’s net profit estimates by 11% for the current financial year. That’s because the bank is not dipping into buffer provisions it made last year for Covid-19 stress and partly because of a 2% reduction in the pre-provisioning operating profit.

“Relatively ICICI Bank’s performance was superior on core metrics and that is reflected in our target multiple gap of 20%,” CLSA analysts said in their report. The research firm, however, maintained its ‘buy’ rating on Axis Bank and raised target price to Rs 1,050 from Rs 1,025 apiece.

Bernstein Research highlighted Axis Bank’s focus on a granular business. The 12% year-on-year growth in its outstanding loan book was driven by a 14% growth in retail and 18% growth in small and medium enterprise loans. Even within the corporate portfolio, exposures to mid-market companies and business banking customers improved.

Axis Bank is also pushing new and some revamped digital initiatives that will help it attract more granular asset and liabilities base, Bernstein analysts said. The research house raised its target price to Rs 810 from Rs 530 apiece.

According to Emkay Global, Axis Bank’s management said it’s ready for accelerated growth, driven by retail and SME customers, which are margin accretive. On the corporate front, too, the focus will be on building granular working capital and mid-corporate book, which should accelerate transactional fees, the Emkay analysts said.

Shares of Axis Bank were trading 1.75% lower as of 11:40 a.m. on Tuesday compared with a 0.04% gain in the Nifty 50.

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