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Axis Bank Ltd

Result Highlights

* Asset quality: Gross slippages amounted to Rs 38.07bn (annualized slippage ratio of 2.0%) and recoveries and upgrades were healthy at Rs 20.88bn

* Margin picture: NIM at 4.26% was up 30 bps QoQ due to favourable changes in balance sheet mix and continued asset re-pricing

* Asset growth: Advances grew 4.3%/14.6% QoQ/YoY driven sequentially by Corporate loans, SME loans and SBB loans

* Opex control: Total opex rose 4%/8.1% QoQ/YoY, Employee Expense rose 5.3%/17.7% QoQ/YoY and other expenses rose 3.3%/3.9% QoQ/YoY

* Fee income: Fees income grew 6.2%/22.6% QoQ/YoY, where retail banking fees grew 7.9%/30.4% QoQ/YoY

Our view – Placed as the top pick in May 2022, AXSB’s thesis remains intact

AXSB's conservative approach to asset quality recognition continued even as outcomes remained under control in the absolute sense :

Of the gross slippages during the quarter, Rs 4.10bn were non-recurring or prudent items. Provisions for the quarter were Rs 14.38bn, up by 161% QoQ and 7.7% YoY, which translated to a credit cost of 65 bps on annualised basis. The provisions contained non-recurring provisions worth Rs 3.4bn, which implies that underlying credit costs were 53 bps on annualised basis. The total non-NPA provisions amount to Rs 116.33bn and all provisions taken together provide a 139% coverage on GNPA.

Margin now sits at 4.26% which is a far cry from a subdued 3.53% a year ago and an outcome of capital allocation choices and other factors:

: The share of loans and investment in total assets was 87%, up 300 bps YoY. The RIDF book has declined as a share of assets to 2.7% as of December 2022 from 3.8% a year ago. The share of INRdenominated loans was 93.3% of total advances, up 290 bps YoY. Further, the share of retail and CBG loans was 67% of total advances, up 195 bps YoY. Also, the share of midcorporate loans, SME and small business banking is 20%, which is up about 510 bps in 2 years. We had predicted positive loan mix changes and RIDF decline for AXSB in our sector report dated 11th June 2022.

We reiterate BUY rating on AXSB with a revised price target of Rs 1300

We had placed AXSB as the top pick for the first time in our report dated May 2022. We value the standalone bank at 2.4x FY24 P/BV for an FY23E/24E/25E RoE profile of 16.9/17.0%/17.2%. We assign a value of Rs 110 per share to the subsidiaries, on SOTP

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