After lagging behind its peers in the last couple of quarters, Axis Bank reported better than expected numbers in Q3FY22. The numbers surpassed expectations of most brokerages like Motilal Oswal, Morgan Stanley, ICICI Direct, among others. The management had a sharp focus on certain segments like farm loans, microfinance, credit cards, and this focused growth has driven Axis Bank’s robust numbers for this quarter.

Axis Bank’s net profit rose 224% YoY to Rs 3,614 crore in Q3FY22. This is because the bank worked hard to restructure its asset books. With this, the loan loss provisions reduced to Rs 790 crore in Q3FY22 from Rs 927 crore in Q2FY22. Lowering provisions is also one of the major reasons for growth in net profit. Provisions fell 64% YoY to Rs 1,335 crore.

A rise in net interest income (NII) is another major reason for Axis Bank’s net profit rising during Q3. NII grew 17% YoY to Rs 8,653 crore and NIM improved to 3.53% in Q3FY22. Growth in loan assets under management (AUM) led by mortgage loans, small business banking (SBB), and rural loans also led to rise in NII. NIMs still have a scope of improvement as Q3FY21 numbers were higher than the current quarter. The bank’s improvement in NIM from Q2FY22 indicates it will build on in FY22-23.

The management gives two major reasons citing NIM growth. One, they believe a change in the loan mix caused advances to increase, recalibrating the growth of interest income. Second, the fall in cost of deposits to 3.60% in Q3FY22 from 4.09% in Q3FY21 also led to an expansion in NIMs.

Fee income also contributed to the growth in profit and interest. Fee income grew 15% YoY to Rs 3,344 crore in Q3FY22. A major contribution came in by growth in retail fees by 19% YoY. Retail fees constituted 63% of total fee income in Q3FY22. The management said fee income was subdued in Q3 as the bank reduced fees on retail liability products like credit cards, debit cards, etc. impacting its overall fee income. This is however a one-time impact and the next quarter is probably going to see higher growth in fee income.

Operating profit sees muted growth on both YoY and QoQ basis. The bank saw a 1% YoY rise and a 4% QoQ increase of operating profit, at Rs 6,162 crore. This muted growth is because of a rise in operating expenses, specifically, employee costs, by 10% QoQ to Rs 19.4 crore in Q3FY22. This rounded up for a muted total income growth of 15% YoY to Rs 21 crore.

Operating expenses might continue to rise in FY23 as well, as the management has well-rounded plans for future expenses. The management plans to spend 41% on digital and technological innovations. 21% is for improving collection expenses so that the bank can further reduce credit costs.

Loan segmental growth was focused, retail loans contributed the maximum

Axis Bank’s total AUM grew 17% YoY to Rs 6,649 crore in Q3FY22. The bank is focused on growing its SME segment AUM as it believes that as the Indian economic growth picks up, this segment will also grow, and demand for the loans will increase. Right now, the SME segment’s AUM is small at Rs 670 crore, but it grew at a fair clip at 20% YoY. Growth in corporate disbursements by 13% YoY to Rs 2,295 crore led to AUM growth. This was because the bank was focused on lending to better-rated corporates with 93% of the increase in sanctions of corporate loans to those rated A- and above.

The bank’s advances and deposits rose because of the rise in credit in retail and SME segments by 18% and 20% YoY. Total advances for Q3FY22 increased by 14% YoY to Rs 6.6 lakh crore and deposits increased by 18% YoY to Rs 7.7 lakh crore. The share of secured retail loans advances was nearly 80%. The management is now focused on growing the unsecured retail loans segment to generate better yields in FY22.

Out of the total AUM, retail loans dominate the mix being the highest contributor along with the highest growth. Retail loans grew by 18% YoY to Rs 3,675 crore. Home loans, loans against property, small business banking (SBB), and rural loans have seen good growth in Q3FY22.

The bank’s management said that rural loans growth was driven by an increase in demand in farmer finance, gold loans, farm equipment finance, rural enterprise, and rural MSME lending in Q3FY22. Rural opportunity is large and the bank’s rural loan segment’s AUM currently stands at 13% of its retail AUM. Rural loans grew 6% YoY to Rs 46,728 crore. This number is higher than the Q3FY21 number of Rs 44,099 crore. 

Axis Bank saw a rise in demand for home loans in Q3FY22 as demand for quality infrastructure projects rose in the real estate sector. With increased spending on buying new houses, demand for home loans is likely to increase. In the earnings call with the management, they said home loans disbursements went up 86% YoY. The bank plans on leveraging this opportunity in the coming quarters. Loan against property (LAP) grew by 18% YoY to Rs 39,080 crore.

Credit card AUM fell 16% YoY to Rs 15,483 crore. However, the management says that credit card disbursements increased by 40% QoQ in Q3FY22. In Q3FY22 credit cards, AUM stands at Rs 15,483 crore compared to Rs 14,086 crore in Q2FY22. The bank is trying to gain market share in this segment by entering into various partnerships to tap unreached markets.

Falling NPAs stabilize the asset quality of the bank in FY22

Axis Bank started FY22  with a higher NPA of 3.85% (gross NPA) and 1.2% (net NPA) because of a rise in slippages. Over the next few quarters, the bank worked hard to shore up its asset quality as gross and net NPAs fell moderately. Gross NPAs declined 27 bps YoY to 3.17% and net NPAs declined 17 bps YoY. Analysts from Geojit Paribas, LKP Securities, HDFC Securities, understand that this is because of higher recoveries and lower slippages. Gross slippages reduced to Rs 4,100 crore in Q3FY22. Total slippages were reduced to Rs 812 crore, a fall of 2.6% YoY. Reducing slippages and upgrade of loans from NPAs to bounce back (BB) category helped in reduction of NPAs for the bank. 

The write-offs were reduced to Rs 1,700 crore in Q3FY22 from Rs 4,257 crore in Q3FY21. The restructured pool was sequentially higher at Rs 4,640 crore from Rs 4,342 crore in Q2FY22. 

The bank has come a long way in its growth in terms of asset quality and credit aspects. Analysts are positive on future growth parameters, given the asset quality of the bank remains stabilized. The path for the bank is clear according to management as they are focusing on not only operating metrics but also planning segmental loan growth in a sequenced manner. The management says they are keen to grow their retail loans and business banking loan segment to improve their NIM and also reduce credit costs in FY22-23. 

Edelweiss expects a strong push in digitization will lead to a lowering of operational expenses in FY23. This is in line with the management’s plans of infusing 41% into digital and technological spending.

The bank’s improving margins and strong asset quality are because of reduced slippages and NPAs. This gives an overall positive outlook on the performance. This reflects well on the RoE (return on equity) as this has improved 9 bps YoY to 14.2% and RoA (return on assets) with 82 bps YoY growth to 1.3%. The bank’s long-term RoE is targeted at 18%. With committed and well-planned strategies in place, the bank currently has a competitive edge with respect to its peers.