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Equity Research Report: Axis Bank-Q4FY23

Axis Bank may report a +20% CAGR in core operating EPS for FY: 24-26 amid robust credit demand, NIM, NPA management, and domestic macro stability.

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Company Overview, Business Model & Competitors:

Axis Bank is the 3^rd largest private sector bank in India, having 41M+ customers, and was formerly known as UTI Bank (1993-2007). The Bank offers the entire spectrum of financial services to customer segments covering Large and Mid-Corporates, MSME, Agriculture, and Retail Businesses, having around 6% market share of advances/loans and 5.1% deposits. The Overseas operations of the Axis Bank are spread over eight international offices with branches in Singapore, Dubai (at DIFC), and Gift City-IBU; representative offices in Dhaka, Dubai, Abu Dhabi, and Sharjah and an overseas subsidiary in London, UK. The international offices focus on Corporate Lending, Trade Finance, Syndication, Investment Banking, Liability Businesses, and Private Banking/Wealth Management offerings.

Axis Bank is one of the 1^st new generation private sector banks to have begun operations in 1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India (SUUTI) (then known as Unit Trust of India), Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd., and United India Insurance Company Ltd. The shareholding of Unit Trust of India was subsequently transferred to SUUTI, an entity established in 2003.

At a glance, for Axis Bank, almost 48% of revenue comes from retail banking, 24% from Treasury operations, 25% from corporate/wholesale banking, and 3% from others, while 99% of revenue comes from India (in INR). The main competitors of Axis Bank are other private bank giants like HDFC Bank, ICICI Bank, Kotak Bank, IndusInd Bank, Yes Bank, and also some PSBS (SBI, PNB), etc.

Network:

As of 31^st March 2023, the Bank had a network of 4,903 domestic branches and extension counters situated in 2,741 centers compared to 4,758 domestic branches and extension counters situated in 2,702 centers as of 31^st March 2022. As of 31^st March 2023, the Bank had 15,953 ATMs and cash recyclers spread across the country

Key management: Key person: Amitabh Chaudhry (MD & CEO)

Board Members:

Key Shareholders: FIIs (50.70%), DIIs (31.30%), LICI (7.96%); OTHERS (7.62%), and GDRs (2.42%)

 

Summary of latest report card: Q4FY23 and FY23 (Consolidated: INR 100 Cr. =1B)

·         NII Rs.120.49B vs. 117.49B sequentially (+2.56%) and 90.46B yearly (+33.20%)

·         Other non-interest operating income (including fees, trading, and misc. income) Rs.54.96B vs. 52.41B sequentially (+4.86%) and 47.92B (+14.68%)  

·         Total operating income Rs.175.45B vs. 169.90B sequentially (+3.27%) and 138.38B yearly (+26.79%)

·         Total operating expenses Rs.74.51B vs. 67.76B sequentially (+9.97%) and 65.50B yearly (+13.76%)

·         PPOP Rs.100.94B vs. 102.14B sequentially (-1.17%) and 72.89B yearly (+38.49%)

·         Net bad loan (W/O-Recovery) Rs.16.06B vs. 10.44B sequentially (+53.83%) and 9.78B yearly (+64.21%)

·         EBTDA (Core Operating Profit: PPOP-Net Bad Loan) Rs.84.88B vs. 91.70B (-7.44%) and 63.05B (+55.22%)

·         NPA/SR provisions Rs.3.08B vs. 14.46B sequentially (-78.67%) and Rs.9.84B yearly (-68.67%)

·         EBITDA (Notional profit after NPA provision) Rs.97.86B vs. 87.69B sequentially (+11.60%) and 63.05B yearly (+55.72%)

·         EBTDA/Share (Core operating EPS) Rs.27.59 vs. 29.82 sequentially (-7.49%) and 20.56 yearly (+34.19%)

·         EBITDA margin 55.78% vs. 51.61% sequentially (+4.16%) and 45.56% yearly (+10.22%)

·         EBTDA margin 48.38% vs. 53.98% sequentially (-5.60%) and 45.60% yearly (+2.78%)

·         Adjusted EPS (after adjusting one time/exceptional acquisition cost of Citi Consumer Business) Rs.23.17 vs. 20.12 sequentially (+3.04%) and 14.39 yearly (+6.78%)

·         One time exceptional expense of Rs.124.90B was for acquisition cost for Citi India Consumer business.

·         Axis Bank completed the acquisition of Citibank India's Consumer Business, comprising loans, credit cards, wealth management, and retail banking operations.

·         This strategic acquisition strengthens Axis Bank's position among large private lenders in India and will help accelerate its premium market share growth.

·         The acquisition was carried out in a record time of seven months post-receipt of CCI approval.

·         The Bank made prudent accounting choices about one-time non-recurring items aggregating to Rs.124.90B comprising (i) full amortization of Intangibles and Goodwill, which is equal to the value of purchase consideration paid/payable on the acquisition of Citibank India Consumer Business; (ii) charged completely to the Profit & Loss account, the impact of policy harmonization on operating expenses (Rs.1.29B) and provisions; and (iii) one-time stamp duty on the acquisition (Rs.1.80B)

·         Will incur Citi integration expenses for around Rs.15B over the next 18-month period

Amitabh Chaudhry, MD & CEO of Axis Bank, said:

"With the acquisition of Citibank India Consumer Business, we welcomed over 2.4 million new customers and ~3200 employees to the Axis family. The deal bolsters our market presence, especially in the growth of our premium market share across wealth and cards. We are working on the synergies, some of which are already yielding favorable outcomes. During the quarter, we also made significant progress on Bharat Banking and Digital, two of our priority areas. Overall, we closed the year with a strong sense of purpose and meaningful strides towards building a strong, sustainable franchise.”

·         Axis Bank has further built on its digital agenda. It launched the "MicroPay" solution for accepting digital payments in partnership with Ezetap by Razorpay and MyPinpad. This 'PIN on Mobile' solution allows merchants to convert their smartphones into a Point-of-Sale (POS) terminal, simplifying digital payments and enhancing customer experience.

·         The Bank now facilitates real-time cross-border transactions through the UPI Network in collaboration with the Reserve Bank of India (RBI) and the Monetary Authority of Singapore (MAS). The joint initiative aims to

provide fast and cost-effective cross-border remittance transfers by linking India's Unified Payments Interface (UPI) with Singapore's PayNow. The Bank also launched UPI LITE for seamless small-ticket transactions.

 

·         Reported NIM 4.22% vs. 4.26% sequentially and 3.49% yearly

·         Reported cost of funds 4.75% vs. 4.34% sequentially and 3.83% yearly

·         Gross advance Rs.8.45T vs. 7.62T sequentially (+10.92%) and 7.08T yearly (+19.40%)

·         Healthy loan growths across all segments, along with steady growth in deposits (+15.20% yearly)

·         Almost 47% is CASA deposits, up +2.15% y/y and +2.61% q/q

·         Retail loans grew +22% yearly and +14% sequentially to Rs.4.88T, almost 58% of net advances; SME loan book Rs.0.93T (11%) and corporate loan book Rs.2.65T (31%)

·         The secured loan was around 80% of the net advance led by home loans (32% of the retail book)

·         Almost 89% of corporate loan book belongs to A- and above rated

·         GNPA Rs.186.04B vs. 199.61B sequentially (-6.80%) and 218.22B yearly (-14.75%)

·         PCR 80.87% vs. 80.81% sequentially and 74.74% yearly

·         Provision and contingencies (NPA) for Q4FY23 stood at Rs.3.06B

·         Specific loan loss provisions for Q4FY23 stood at Rs.2.70B

·         The Bank has not utilized COVID provisions during the quarter

·         The Bank holds cumulative provisions (standard + additional other than NPA) of Rs.119.28B at the end of Q4FY23. It is pertinent to note that this is over and above the NPA provisioning included in the PCR calculations. These cumulative provisions translate to standard asset coverage of 1.42% as of 31^st March 2023

·         On an aggregated basis, the provision coverage ratio (including specific + standard + additional + Covid provisions) stands at 145% of GNPA as of 31^st March 2023

·         Credit costs/Gross Advance 1.75% vs. 2.06% sequentially and 2.01% yearly

·         Credit costs/share Rs.0.88 vs. 1.42 sequentially (-38.11%) and 6.73 yearly (-86.96%)

·         Recoveries from written-off accounts for the quarter were Rs.8.23B

·         FY23 core operating EPS Rs.99.40 vs. 66.88 in FY22 (+48.63%)

·         Well-capitalized with a self-sustaining capital structure; adequate liquidity buffers.

·         Overall capital adequacy ratio (CAR) stood at 17.64%, with a CET 1 ratio of 14.02%

·         Retaining a strong position in Payments, Digital Banking, and also credit cards (after Citi Bank India consumer business acquisition)

·         Declining NPA and slippages trend

·         Bank’s domestic subsidiaries6 continue to deliver steady performance; FY23 profit at around Rs.1,304 crores, with a return on investment of 50%

·         Axis Finance FY23 PAT grew 30% YOY to Rs.4.75B; asset quality remains stable, and CAR is healthy at 20.5%

·         Axis AMC FY23 PAT grew 16% YOY to Rs.4.15B

·         Axis Capital FY23 PAT stood at Rs.1.42B

·         Axis Securities FY23 PAT at Rs.2.03B; broking revenue grew by +9% to Rs.7.24B in FY23; +28% growth in new clients addition

·         The book value of the Bank’s Investments portfolio as on 31^st March 2023 was Rs.2.89T, of which Rs.2.28T was in government securities, while Rs. 0.55T was invested in corporate bonds and Rs.0.06T in other securities such as equities, mutual funds, etc. Out of these, 73% are in Held till Maturity (HTM) category, while 24% of investments are Available for Sale (AFS), and 3% are in Held for Trading (HFT) category.

·         The Bank issued 1.13M new credit cards in Q4FY23. The Bank has been one of the highest credit card issuers in the country over the last three quarters and has gained an incremental CIF market share of 17% in the last six months (as per RBI report)

·         Wealth Management Business – Burgundy: The Bank’s wealth management business is among the largest in India, with assets under management (AUM) of Rs.3.57T at the end of 31^st March 2023.

·         Burgundy Private, the Bank’s proposition for high and ultra-high-net-worth clients, covers 11,009 families, up from 3,490 families in the last year. The AUM for Burgundy Private increased 58% YOY to Rs.1.37T

·         Strong momentum in Retail Banks across all businesses with an emphasis on digital banking

·         Improving NIM amid higher interest rate regime as 68% of loans belong to floating interest

·         The bank continues to stay on course in three core areas of execution of the GPS strategy, namely:

A. Embedding a performance-driven culture

B. Strengthening the core

C. Building for the future

·         Lower employee expenses sequentially (-5%) are due to higher variable payments (incentives) made in the last quarter (one tome-exceptional-no longer applicable in current quarter)

·         Lower core operating margin sequentially is due to lower trading income (range bound market) and integration expenses for Citi Bank India consumer business acquisition.

·         Citi's business acquisition is ROE positive, although various cost ratios may remain sticky unless the Citi integration phase is over.

·         Adequate regulatory capital buffer (above minimum threshold)

·         The bank is well placed in the current macro environment while continuing to closely monitor the geopolitical environment, inflation both domestic and international, liquidity risks and their impact on the cost of funds, resultant policy action, and its impact on the bank’s business and also clients businesses

·         Overall, the bank is comfortable and cautiously optimistic about macro headwinds and the Russia-Ukraine war

·         Q4FY23 report card includes Citi P/L for Mar’23

·         Expecting 12-13% credit growths in FY24 against +19.50% in FY23, while deposit growth remains unchanged at around +15%

·         The bank may open around 500 more branches in FY24 in a calibrated way in conjunction with a digital banking strategy to mop up more deposits.

·         Slightly lower NIM sequentially (4.22% vs. 4.26%) is due to a +13% higher average LCR maintained throughout the quarter (despite higher loan spreads by around +4 bps)

·         Excess LCR (129% vs. 116-121%) and SLR margin are due to the requirement of higher regulatory capital for Citi Bank India consumer business acquisition; it will be normalized by the next two quarters (Q3FY24)

·         Being just a 1-month old (with Axis Bank), there was no impact of NPA/write-off amount for the Citi business.

·         Remains committed to adhering to earlier guidance of 2% credit costs/asset by FY25, although there may be some impact in FY24 for Citi India consumer business acquisition; short/medium term guidance of credit costs 2.25-2.40%

·         NIM for FY23 was at 4.02% and 4.22% for Q4FY23, largely in line with guidance despite the rising cost of deposit

·         Consolidated ROE of around 18.84% for FY23 is also in line with earlier guidance.

·         Aiming for a healthy margin (NIM), which is sustainable in the long term without going into intense competition with rivals; Beliefs in a granular model of business with consistent trend sequentially over the next five years.

·         Housing/mortgage loan is now a crowded area where NIM is low

·         Axis Finance is functioning as an NBFC quite well

·         Focus on maintaining lower credit costs by ensuring quality asset standards rather than chasing blindly behind higher NIM; i.e.; the bank is providing credit to only good quality/prime borrowers rather than subprime.

·         The senior management team is taking care of the synergy between the newly acquired Citi India Consumer business with Axis Bank.

·         The total asset/loan book of Citi India acquired is around Rs.0.29T, which is around 3.5% of the total loan book at Axis Bank; out of this, around Rs.0.09T belongs to Citi Bank credit cards (largely unsecured), and the rest of mortgage, CV and auto loans (secured)

·         Bank will ensure no internal competition with newly acquired Citi customers and also the quality of their credit card business.

·         Overall, the bank remains cautiously optimistic about global macro-headwinds, higher bond yields, and consequent lower bond prices/huge MTM losses in the HTM bond portfolio (like in the U.S. regional banking crisis recently)

·         But the bank is quite confident about India’s stable micro/policy, which is ensuring the orderly movement of bond yield/prices in a predictable range, ensuring a manageable HTM bond portfolio.

·         Bank sees consistent growth in Indian credit demand along with equivalent/moderate deposit growth.

·          Excluding the Citi portfolio, overall loan book growth was muted (in line with the industry instead of +5% guidance/aspiration) because of intense competition in wholesale banking/corporate loans and mortgages, where the bank didn’t cut rates to get loan accounts (as per internal policy); but the bank manages to recover in Q4 due to the strength of its platform, product portfolio, and digital drive.

·          Around 42% of fixed-rate loan books will mature by FY24, which will ensure proper pricing of the book afterward.

·         SME loan book is growing very well despite higher borrowing costs (as the impact of higher RBI repo rate has been fully passed on), but the bank is taking adequate precautions with appropriate precaution

·         Corporate loan demand is quite robust across multiple sectors (iron & steel, commercial real estate, various infra & road projects, and NBFCs; but corporates are now also using their own surplus/free cash flows (after recent deleveraging) to fund CAPEX rather than too much dependency on loans.

Fair Valuation: Average of EPS+BVPS+OCFS

Axis Bank: Rs.937-1020-1177-1360-1574 for FY: 23-24-25-26

Axis Bank reported a core operating EPS (PPOP-Bad Loan) of around Rs.99.40 against 66.88 in FY222, which surged by +48.63%. During the COVID disruption times (2020-22), the bank primarily focused on NPA management rather than business/credit growth. Overall average growth in core operating EPS between FY18-23 is around 42%.

Now in FY23-22, after COVID, Axis Bank reported above pre-COVID trend (18-20%) in core operating EPS growth to around +48.63% due to the normalization of the COVID situation- the full reopening of the economy; huge infra and targeted rural/agri stimulus by the government; increasing secured lending rather than unsecured lending, relatively lower base, robust NIM (yield curve steepening amid rate hikes) and increasing recovery for prior write off accounts.

Previously, Axis Bank indicated credit growth of around 20% in FY23-26, along with a core operating margin of around 60%. Now considering FY23 growth, Citi India's consumer business/loan portfolio, even after synchronized global stagflation/slowing economic growths and some spillover effect of that in India, RBI tightening, higher borrowing costs, higher inflation/lower discretionary spending, and possible higher NPA, 15-20% CAGR of core operating EPS may be appropriate (on the conservative side) rather than 40-50%.

Axis Bank is cautiously optimistic about overall business growth amid global/local economic slowdown, higher inflation/macro headwinds, higher borrowing costs, and lower discretionary spending, but Indian macro is also exceptional. Also, Indian corporates are now almost deleveraged, thus expecting healthy loan growth, not only in the business segment but also households amid a thrust on branch expansions and digitalization.

Thus considering 20% average growth (CAGR) between FY24-26 in EPS (average PE 10), 10% CAGR in BVPS (average PB 2), and 15% CAGR in OFCS (average multiple 10), the average fair value (EPS+BVPS+OCFS) may be around Rs 1020-1177-1360 for FY: 24-26; current fair value is around Rs.808/-. As the financial market generally discounts 1Y earnings/EPS in advance, Axis Bank may scale 1020/- by Dec’23, 1177/- by Mar’24, and 1360/- by Mar’25.

Treatment of bad loans in bank’s P/L:

NPA provision is only an accounting entry/provision (like depreciation); it’s not a cash outflow. Banks generally write off a chronic NPA/defaulting loan account from its book but try to recover the same directly or indirectly through some compromise settlement, equivalent to at least the full principal amount, sacrificing full or part unpaid accumulated interest. This process is called bank recovery (by some agency or direct bank) and may take even 5-10 years for a full and final settlement of a large write-off NPA account (bad loan).

Every year/quarter, the bank shows NPA write-off + NPA sold and also NPA cash recovery; the difference is bad loans. In the case of Axis Bank or most other banks, this is generally EPS positive nowadays (write back). In the case of Axis Bank, it was 0.88/per share in Q4FY23 against 1.42 sequentially and 6.73 annually. In reality, write-off and waive-off are two different accounting entries as the former is provisional, while the latter is a permanent loss in nature (after a bad loan turned non-recoverable loan). Banks generally do not waive off any bad loan account until it is sold to any ARC with a discount or becomes fully unrecoverable.

Technical view: Axis Bank (LTP: 958 as of 23/06/2023-EOD)

For short/medium-term trading purposes:

Looking ahead, whatever may be the narrative, technically, Axis Bank has to sustain above 1005 for the next leg of rally to 1050/1075-1095/1115* and further 1145-1180* in the coming days (bull case scenario); on the slip side, sustaining below 990-970, Axis Bank may further slip to 945*/920-900/880-835/815* and 770/710*-615/555* levels in the coming days (bear case scenario). Investors may accumulate Axis Bank around 945-815-710 levels.

P&L Analysis (QLY): Axis Bank

 

P&L Analysis (YLY): Axis Bank

B/S Analysis (YLY): Axis Bank

B/S Ratios and BVPS analysis (YLY): Axis Bank

C/F Analysis (YLY): Axis Bank

 

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