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Strong performance beating estimates…

About the stock: Axis Bank is the third largest private sector bank in India with a balance sheet size of | 11.8 lakh crore as on September 2022.

* The bank has a large footprint across India with 4760 branches

* Retail and SME comprise ~69% of total loans

Q2FY23 Results: Healthy growth & uptick in NIM boosted earnings.

* Loan growth at 17.6% YoY to | 7.3 lakh crore. Retail book up 22% YoY

* NII up 31% YoY, 10.4% QoQ, NIMs up 36 bps QoQ to 3.96%

* Steady opex led to decline in CI ratio; provisions at 38 bps (annualised)

* GNPA down 26 bps QoQ to 2.5%. R/s book was at 0.38% of GCA

What should investors do? Axis Bank’s stock has given ~1.7x returns over past two years. Focus on risk adjusted business growth and improving margin trajectory to aid return ratios and sustainability of performance to drive valuation ahead. Raise estimates for FY23E, FY24E by 24%, 11.4%, respectively.

* We retain our BUY rating on the stock

Key triggers for future price performance:

* Focus on risk adjusted business & unsecured segment to aid growth

* Improvement in business mix & faster asset repricing to aid yields. However, acceleration in deposit mobilisation to keep margins at current level

* Efforts to keep cost to asset at 2-2.5% and adequate cumulative provisions of 160% of GNPA provide comfort on earnings volatility

* RoA at 1.8% in Q2FY23; sustenance of performance to aid re-rating

Alternate Stock Idea: Apart from Axis, in our coverage we also like Kotak Bank.

* Kotak Mahindra Bank is a powerful banking franchise with strong promoter led management. It has a presence across financial services value chain

* BUY with a target price of | 2200

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