India Equity Research Banks July 26, 2021

AXIS BANK

RESULT UPDATE

KEY DATA Rating BUY Right moves in rough times Sector relative Outperformer Price (INR) 756 12 month price target (INR) 870 Axis Bank’s (Axis) Q1FY22 PAT of INR21.6bn surpassed our estimate on Market cap (INR bn/USD bn) 2,318/31.2 higher revenue traction and controlled credit cost. As anticipated, Free float/Foreign ownership (%) 85.5/48.2 What’s Changed covid impacted asset quality with slippages running high at 4.2%,

Target Price  >80% from retail (akin to peers). The bank continues to follow Rating/Risk Rating ⚊ tightened provisioning policy and did not utilise covid buffer. QUICK TAKE Recurrent covid wave has caused uncertainties, but we see buffers (>80bps of loans) to contain fallout. Business momentum is on track. Above In line Below  Profit   With crucial comfort on equity sanctity, franchise strength and likely  Margins  medium-term credit cost unwind, Axis remains amongst our top Revenue Growth    banking picks representing ‘smart beta’. Maintain ‘BUY’ with revised Overall   TP of INR870 (earlier INR805; roll by a quarter; multiple unchanged).

FINANCIALS (INR mn) Covid impacts asset quality; provisions buffer comforting Year to March FY20A FY21E FY22E FY23E Slippages came in higher at INR65bn (4.2%), largely from retail segment contributing Revenue 407428 440773 510012 580634 >80% to slippages (a trend akin to peers). Meanwhile, higher write-offs (system PPoP 234381 257022 313242 363098 Adjusted profit 16272 65884 139330 177997 driven) restricted headline GNPLs rise to 3.85% (3.7% in FY21). In the interim, the Diluted EPS (INR) 5.8 21.5 45.5 58.1 bank continued to follow prudent provisioning norms and didn’t utilise buffer EPS growth (%) (68.3) 272.9 111.5 27.8 created earlier. Restructured book is mere 0.4% of loans, way lower than RoAE (%) 2.1 7.1 12.9 14.4 anticipated, and the bank carries 23% provision on this (regulatory requirement of P/E (x) 131.1 35.2 16.6 13.0 10%). We believe the bank’s high provisioning buffer and lower incremental stress P/ABV (x) 2.7 2.4 2.1 1.8 Dividend yield (%) 0 0 0.3 0.4 will seed the possibility of material write-backs. This renders Axis one of the likely earnings growth leaders as unwind of excess provisioning starts.

PRICE PERFORMANCE Business momentum on track

800 54,000 Axis posted steady growth momentum with 12% YoY loan growth coming across 720 50,400 segments–retail 14% YoY, SME 18% YoY and corporate 8% YoY. Management 640 46,800 highlighted that retail (secured) disbursements have seen steady improvement in 560 43,200 exit month and expects the momentum to sustain. In FY22, we expect reported NIM 480 39,600 400 36,000 to improve as unwind of interest income reversal plays through. Rising momentum Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 in deposit franchise combines with this tactical buffer of conservative interest AXSB IN Equity Sensex recognition to improve NIM outlook.

Outlook and valuations: Increased equity sanctity; maintain ‘BUY’ Explore: Axis’s performance has been volatile on the asset front despite significant liability gains. Overdue retail/SME accounts and performance of corporate assets will, therefore, be keenly monitored. However, excess provisioning and strong capital base goes a long way in increasing perceived equity sanctity. We maintain ‘BUY/SO’.

Financial model Podcast Financials Year to March Q1FY22 Q1FY21 % Change Q4FY21 % Change Net Revenue 1,13,484 95,720 18.6 122,233 7.2 Pre-provisioning Profits 64,160 58,444 9.8 68,647 6.5 Reported Profits 21,602 11,122 94.2 26,771 (19.3) Video Corporate access EPS 7.0 3.9 79.5 8.7 (19.5)

Santanu Chakrabarti Prakhar Agarwal Parth Sanghvi +91 (22) 4342 8680 +91 (22) 6620 3076 [email protected] [email protected] [email protected]

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AXIS BANK

Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Net interest income 2,52,062 2,92,391 3,36,645 3,82,685 Equity capital 5,643 6,128 6,128 6,128 Non interest income 1,55,366 1,48,382 1,73,366 1,97,948 Reserves 8,43,835 10,09,903 11,42,480 13,08,998 Fee and forex income 1,14,222 1,09,357 1,25,067 1,43,244 Net worth 8,49,479 10,16,030 11,48,607 13,15,125 Misc. income 16,944 13,555 18,299 24,704 Sub bonds/pref cap 5,000 5,000 5,000 5,000 Investment profits 24,200 25,470 30,000 30,000 Deposits 64,01,049 70,73,061 80,91,582 92,16,311 Net revenues 4,07,428 4,40,773 5,10,012 5,80,634 Borrowings 14,74,541 14,23,732 14,16,354 14,25,566 Operating expense 1,73,046 1,83,752 1,96,770 2,17,536 Other liabilities 4,21,579 4,43,362 4,99,225 5,82,097 Employee exp 53,210 61,640 67,471 75,719 Total 91,51,648 99,61,184 1,11,60,768 1,25,44,099 Other opex 1,19,836 1,22,111 1,29,299 1,41,817 Assets Preprovision profit 2,34,381 2,57,022 3,13,242 3,63,098 Loans 57,14,242 62,37,202 70,23,089 81,88,922 Provisions 1,85,339 1,68,963 1,27,046 1,25,133 Investments 15,67,343 22,61,196 21,68,842 22,91,074 PBT 49,042 88,058 1,86,196 2,37,965 Cash & equi 9,72,683 6,17,298 9,56,373 9,80,072 Taxes 32,770 22,174 46,866 59,968 Fixed assets 43,129 42,450 40,140 37,651 PAT 16,272 65,884 1,39,330 1,77,997 Other assets 8,54,252 8,03,038 9,72,323 10,46,380 Extraordinaries 0 0 0 0 Total 91,51,648 99,61,184 1,11,60,768 1,25,44,099 Reported PAT 16,272 65,884 1,39,330 1,77,997 BV/share (INR) 301.1 331.6 374.9 429.3 Diluted EPS (INR) 5.8 21.5 45.5 58.1 ABV/share (INR) 277.8 315.6 358.8 415.5 DPS (INR) 0 0 2.0 3.4 Capital adequacy (%) 17.5 19.1 18.3 17.5

Important Ratios (%) Balance Sheet Ratios (%) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Yield on advances 9.1 8.0 8.5 8.5 Credit growth 15.5 9.2 12.6 16.6 Yield on investments 6.8 6.6 6.6 6.6 Deposit growth 16.7 10.5 14.4 13.9 Yield on assets 8.0 7.3 7.6 7.6 EA growth 12.0 10.4 11.3 12.9 Cost of funds 4.8 4.0 4.1 4.1 SLR ratio 17.1 22.0 18.5 17.5 Cost of deposits 4.7 3.8 4.0 4.0 C-D ratio 91.5 90.3 88.7 90.6 Net interest margins 3.2 3.4 3.5 3.5 Low-cost deposits 41.2 44.9 43.2 43.5 Spread 3.2 3.3 3.4 3.5 Gross NPA ratio 5.0 3.9 3.5 2.1 Cost-income 42.5 41.7 38.6 37.5 Net NPA ratio 1.6 1.1 1.0 0.7 Tax rate (66.8) (25.2) (25.2) (25.2) Provision coverage 69.0 72.4 72.7 66.8

Assumptions (%) ROA Decomposition (%) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY) 4.8 (6.0) 7.0 6.0 NII/Assets 3.2 3.4 3.5 3.5 Inflation (Avg) 4.3 5.0 3.5 4.0 Fees/Assets 1.5 1.3 1.3 1.3 USD/INR (average) 70.7 75.0 73.0 72.0 Inv profits/Assets 0.3 0.3 0.3 0.3 Repo rate (exit rate) 4.4 3.5 3.5 4.0 Net revenues/assets 4.9 4.8 5.0 5.1 Credit growth 11.0 13.0 15.0 15.0 Opex/Assets (2.2) (2.1) (2.0) (2.0) Deposit growth 12.0 14.0 15.0 15.0 Provisions/Assets (2.4) (1.9) (1.3) (1.2) Inc yield on advances 9.1 8.0 8.5 8.5 Taxes/Assets (0.4) (0.3) (0.5) (0.6) Inc cost of deposits 4.7 3.8 4.0 4.0 Total costs/Assets (5.0) (4.3) (3.8) (3.7) Tax rate (66.8) (25.2) (25.2) (25.2) RoA 0.2 0.8 1.4 1.6 Low-cost deposits 41.2 44.9 43.2 43.5 Equity/Assets 9.7 10.7 11.2 11.4 Incremental slippages 3.6 2.9 2.9 2.2 RoAE 2.1 7.1 12.9 14.4

Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted PE (x) 131.1 35.2 16.6 13.0 EPS growth (%) (68.3) 272.9 111.5 27.8 Price/BV (x) 2.5 2.3 2.0 1.8 RoAE (%) 2.1 7.1 12.9 14.4 Price/ABV (x) 2.7 2.4 2.1 1.8 Net NPA ratio (%) 1.6 1.1 1.0 0.7 Dividend yield (%) 0 0 0.3 0.4 Payout ratio (%) 0 0 4.4 5.9

Source: Company and Edelweiss estimates

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AXIS BANK

Financial snapshot

Year to March Q1FY22 Q1FY21 Growth (%) Q4FY21 Growth (%) FY21A FY22E FY23E Interest on advances 1,18,815 1,24,940 (4.9) 1,15,475 2.9 4,79,189 5,60,525 6,43,350 Interest expenses 82,432 94,602 (12.9) 79,395 3.8 3,44,062 3,93,156 4,34,128 Net interest income 77,603 69,853 11.1 75,550 2.7 2,92,391 3,36,645 3,82,685 Other income 35,882 25,867 38.7 46,683 (23.1) 1,48,382 1,73,366 1,97,948 Fee income 30,892 19,647 57.2 46,683 (33.8) 1,22,912 1,43,366 1,67,948 Operating expenses 49,324 37,276 32.3 53,586 (8.0) 1,83,752 1,96,770 2,17,536 Staff expense 18,519 14,061 31.7 16,676 11.1 61,640 67,471 75,719 Other opex 30,805 23,215 32.7 36,910 (16.5) 1,22,111 1,29,299 1,41,817 Pre prov Op profit (PPoP) 64,160 58,444 9.8 68,647 (6.5) 2,57,022 3,13,242 3,63,098 Investment gains 4,990 6,220 (19.8) 0 25,470 30,000 30,000 Provisions 35,320 44,164 (20.0) 32,950 7.2 1,68,963 1,27,046 1,25,133 Profit before tax 28,840 14,280 102.0 35,697 (19.2) 88,058 1,86,196 2,37,965 Provision for tax 7,239 3,158 129.2 8,926 (18.9) 22,174 46,866 59,968 Profit after tax 21,602 11,122 94.2 26,771 (19.3) 65,884 1,39,330 1,77,997 Diluted EPS (INR) 7.0 3.9 78.4 8.7 (19.4) 21.5 45.5 58.1

Ratios 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 NII / GII 48.5 42.5 48.8 45.9 46.1 46.9 Cost - income 43.5 38.9 43.8 41.7 38.6 37.5 Provisions / PPOP 55.0 75.6 48.0 65.7 40.6 34.5 Tax rate 25.1 22.1 25.0 25.2 25.2 25.2

Balance sheet data 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Advances (INR bn) 6,149 5,488 12.0 6,144 0.1 6,237 7,023 8,189 Deposits (INR bn) 7,139 6,157 16.0 6,980 2.3 7,073 8,092 9,216 Investments (INR bn) 2,399 1,873 28.1 2,261 6.1 2,261 2,169 2,291

Ratios CASA Ratio (%) 43.0 41.0 42.0 44.9 43.2 43.5 Capital adequacy (%) 18.7 17.3 19.1 17.5 19.1 18.3 NIM(%) 3.5 3.4 3.6 3.4 3.5 3.5 CD ratio (%) 86.1 89.1 88.0 90.3 88.7 90.6

Asset Quality Gross NPA (INR mn) 2,59,498 2,95,602 (12.2) 2,53,148 2.5 2,53,168 2,58,004 1,81,960 Net NPA (INR mn) 78,465 74,480 5.4 69,935 12.2 69,940 70,480 60,402 Net NPA(%) 1.2 1.2 1.1 1.1 1.0 0.7 Gross NPA(%) 3.9 4.7 3.7 3.9 3.5 2.1 Provisioning coverage (%) 69.8 74.8 72.4 72.4 72.7 66.8 Source: Company, Edelweiss Research

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AXIS BANK

GNPA's come in at 3.9%

Q419 Q120 Q220 Q320 Q420 Q121 Q221 Q321 Q421 Q122 Gross NPA (INR bn) 297.9 294.0 290.7 300.7 302.3 295.6 268.3 220.0 253.1 259.5 Growth Q-o-Q (%) (3.5) (1.3) (1.1) 3.4 0.5 (2.2) (9.2) (18.0) 15.1 2.5 Gross NPA (%) 5.3 5.3 5.0 5.0 4.9 4.7 4.2 3.4 3.7 3.9 Net NPA (INR bn) 112.8 110.4 111.4 121.6 93.6 74.5 61.1 46.1 69.9 78.5 Growth Q-o-Q (%) (7.8) (2.1) 0.9 9.2 (23.0) (20.4) (18.0) (24.5) 51.7 12.2 Net NPA (%) 2.1 2.0 2.0 2.1 1.6 1.2 1.0 0.7 1.1 1.2 Provision coverage (%) 62.1 62.5 61.7 59.6 69.0 74.8 77.2 79.0 72.4 69.8 Source: Company, Edelweiss Research

Slippages spike due to second wave

(INR mn) Q419 Q120 Q220 Q320 Q420 Q121 Q221 Q321 Q421 Q122 Incremental slippage 30,120 47,980 49,830 62,140 39,200 22,180 9,310 290 52,850 65,180 Incremental slippage (%) 2.5 3.9 3.9 4.8 2.9 1.6 1.3 5.5 3.6 4.2 Recoveries and upgrades 23,760 21,770 22,130 24,220 24,890 6,080 20,260 21,620 34,630 25,430 Writeoffs 17,010 30,050 31,040 27,900 12,700 22,840 18,120 42,570 55,530 33,410 Source: Company, Edelweiss Research

Advances grow at 12% yoy and deposits grow at 16% yoy

Q419 Q120 Q220 Q320 Q420 Q121 Q221 Q321 Q421 Q122 Advances (INR bn) 4,948 4,973 5,216 5,501 5,714 5,488 5,764 5,828 6,144 6,149 Advances growth Q-o-Q (%) 4.1 0.5 4.9 5.5 3.9 (4.0) 5.0 1.1 5.4 0.1 Advances growth Y-o-Y (%) 12.5 12.7 14.4 15.8 15.5 10.4 10.5 5.9 7.5 12.0 Deposits (INR bn) 5,485 5,407 5,840 5,917 6,401 6,157 6,355 6,541 6,980 7,139 Deposit growth Q-o-Q (%) 6.7 (1.4) 8.0 1.3 8.2 (3.8) 3.2 2.9 6.7 2.3 Deposit growth Y-o-Y (%) 20.9 20.9 21.7 15.1 16.7 13.9 8.8 10.6 9.0 16.0 CD ratio (%) 90.2 92.0 89.3 93.0 89.3 89.1 90.7 89.1 88.0 86.1 Source: Company, Edelweiss Research

CASA ratio at 42%

Q419 Q120 Q220 Q320 Q420 Q121 Q221 Q321 Q421 Q122 CASA (%) 44.0 41.0 41.0 41.0 41.0 41.0 44.0 44.0 42.0 42.0 Retail dep. / branch (INR mn) 872 887 904 887 943 979 1,046 1,027 1,057 1,074 Retail bus. / branch (INR mn) 1,479 1,518 1,542 1,548 1,618 1,620 1,759 1,720 1,785 1,794 Source: Company, Edelweiss Research

NIMs stable at 3.5%

(%) Q419 Q120 Q220 Q320 Q420 Q121 Q221 Q321 Q421 Q122 Cost of funds 5.7 5.7 5.6 5.4 5.2 4.9 4.6 4.3 4.1 4.0 NIM 3.4 3.4 3.5 3.6 3.6 3.4 3.6 3.6 3.6 3.5 Source: Company, Edelweiss Research

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AXIS BANK

Conference call takeaways

Q1FY22 earnings call: With respect to asset quality  Gross slippages during the quarter were INR65bn (> 4%), with larger chunk coming from retail segment. While retail slippages were high this quarter, but bank expect things to be transitory and significant improvement to play through in ensuing quarters. Given the current scheme of things bank expects the slippages to show early improvement in H2FY22 ( assuming things doesn’t deteriorate materially following covid wave 3)

o Gross slippages in retail is INR54bn - 84% of the overall slippages. Of the net slippages - retail slippages are INR37.4bn forming 93-95% of net slippages during the quarter.

o 22% of Q1FY22 slippages downgraded and upgraded in same quarter. 55% of net slippages comes from secured segment.

o 7.5% of slippages represent linked accounts which continued to remain standard asset

o The retail assets are written-off in the next quarter when retail assets is 100% provided for. There is no discretion on write-offs, the current quarter is impacted by CBG write-offs, which was following the policy change in last quarter.

 The standard restructured loans stood at INR22bn – sub 40bps of loans - bank carries a provision of ~23% on restructured loans. The bank carries INR1.55bn, towards restructured accounts approved but not implemented in Q1FY22. The overall restructured provisions stood at INR7.03bn (versus regulatory requirement of INR2.4bn).

o ~ 100% of restructured corporate book classified as BB & below

o Linked but not restructured non fund based INR9.92bn

 The bank has not utilised any COVID provisions during the quarter – The bank holds COVID provisions of INR50bn – 80bps of loans. The bank will not be in a hurry to utilize this pool.

 Overall ECLGS book at – INR121bn - only granted to existing customer (28k customers availed this)– 99% of them were under ECLGS 1& 2 , in value term 97% was in ECLGS 1& 2 and nothing in ECLGS 4.0.

o Don’t see material impact on ECLGS given the full assessment taking place.

o The true litmus for MSME book & ECLGS scheme will be in Q3FY22 (post completion of 1 year of ECLG 1.0 implementation).

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AXIS BANK

With respect to business momentum  The advances grew 12% YoY with retail loans grew 14% YoY (accounted for 54% of the net loans). The share of secured loans was ~ 80%, with home loans comprising 37% of the retail book. Disbursements in retail segment were up around 3.3x YoY.

 SME loan book grew 18% YoY - 96% of the SME book is secured with predominantly working capital financing, and is well diversified across geographies and sectors.

 Corporate loan book grew by 8% YoY - 85% of corporate book is now rated A- and above with 94% of incremental sanctions in Q1FY22 being to corporates rated A- and above

 Strong deposits growth continued – 11% YoY/ 7% QoQ. On quarterly average basis - savings grew 19% YoY / 7% QoQ, current deposits grew 17% YoY; and retail term deposits grew 11% YoY/2% QoQ.

 Bigger impact on the NIMs is the product mix change, change in CRR (regulatory impact) and interest income reversal.

o Excess SLR for the quarter was INR740bn.

 Employee cost – YoY growth was on account of deferred increment ( Q3 versus Q1), while Q1FY22 carries increments for both this year and last year. Added 5k employees into the system that impacted staff cost. The bank did take social security code provisions which bank has topped up, broadly this has increased on YoY basis.

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AXIS BANK

Company Description Axis is the third-largest private sector bank in India in terms of asset size, with a balance sheet of >INR9tn. It has a network of over 4,500 branches and extension counters across the country. The bank earns substantial fee income from transaction and merchant banking activities. Investment Theme Axis’s performance has been volatile on the asset front despite significant liability gains. Overdue retail/SME accounts and performance of corporate assets will, therefore, be keenly monitored. However, excess provisioning and capital raise will go a long way in increasing perceived equity sanctity. We maintain ‘BUY/SO’. Key Risks Deterioration of macro environment can result in higher slippages and slow down business growth. Softer growth in CASA could increase the cost of funds and impact margins.

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AXIS BANK

Additional Data Management Holdings – Top 10* Chairman Sanjiv Misra % Holding % Holding MD & CEO Amitabh Chaudhry SBI Funds Manag 3.67 ICICI Prudentia 2.38 Blackrock 2.70 Bank Of New Yor 2.36 Executive director Rajiv Anand Vanguard Group 2.54 BC Asia Investm 1.97 Executive Rajesh Dahiya director Dodge & Cox 2.54 HDFC Asset Mana 1.94 Auditor HARIBHAKTI & CO. LLP Capital Group 2.50 Nippon Life Ass 1.78

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Entering FY22 on a steady footing; Still appears best placed; Result 27-Apr-21 699.55 Buy 24-Jul-21 ICICI Bank Result Update Update Building buffers amidst Balancing well; asset quality 27-Jan-21 658.4 Buy 23-Jul-21 Federal Bank uncertainties; Result Update stability ; Result Update Well-guarded in turbulent times; Silver lining still not adequate for 28-Oct-20 508.1 Buy 23-Jul-21 Yes Bank Result Update cla; Result Update

Rating Interpretation Daily Volume TP 100 850 TP 850 761 TP 740 690 80 TP 600

630 60 (INR) TP 520 (Mn) 460 40

410 20 300 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 0 AXSB IN Equity Buy Hold Reduce Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 170 54 19 244 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 214 40 5 259 Reduce: <-5% *1 stocks under review

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AXIS BANK

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Aditya Narain Head of Research [email protected]

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