Higher-than-expected slippages drove Axis Bank PAT decline of 21% YoY to Rs15.6bn (16% below estimates). However, residual stress loans (net NPAs + watchlist) declined to 7.3% vs 7.7% a year ago, providing comfort that credit cost should not exceed guidance. Retail diversification continued with 24% growth in retail loan book, CASA plus retail deposits increasing to 80% of deposits, and retail fee income growing 19% YoY. Higher slippages in legacy bad loans and investment in branches and people along with focus on higher rated corporates mean profitability would remain under pressure in FY17. However, continued high focus on retail diversification, incremental growth in corporate book in a smarter manner, and investment in building the franchise mean profitability should improve from FY18 as credit costs normalise.
Target Price
Analysts have cut FY17E EPS by 9.1% factoring in higher credit costs and operating expenses; hence our TP reduces by 2% to Rs600 (2.1x FY18E P/B).
