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Moderate growth, but margin sparkles

* Axis Bank continued to report strong core profitability (up 53% YoY), supported by robust margin expansion (+30bps QoQ/70bps YoY) and healthy core fees. This, coupled with reversal of MTM losses, led to a 9% beat on PAT at Rs58.5bn (up 62% YoY). Overall LLP was higher than expected, as the bank made prudent provision of Rs3.4bn on a specific account, showing early signs of weakness.

* Overall Credit growth was moderate at 15% YoY/4% QoQ vs peers’ (>20% YoY), mainly due to sluggish growth in the retail book at 17% YoY/1% QoQ, in turn dragged by mortgage and card book. However, NIM expanded 30bps QoQ to 4.3%, due to better portfolio mix, asset re-pricing and interest recognition in a restructured account. Bank expects NIM to remain structurally healthy, as the full benefit of portfolio mix and RIDF run-down is yet to reflect.

* As per Management, the Citi retail portfolio acquisition deal is well on track and should be consummated within the guided timeline. Bank’s internal RoE generation remains stronger than consumption (due to moderate growth), with CET 1 at 15.6%; thus, it may not need to raise capital in the near term.

* We revise our earnings estimate upward for FY23/FY24/FY25 by 7%/4%/2%, and expect the bank to deliver 1.7-1.8%/17% RoA/RoE by FY25E. Given the improving coreprofitability, RoE profile and Management stability, we revise our TP multiple to 2.1x Dec24E ABV (from 1.8x) and, thus, our TP to Rs1,300/share (vs Rs1,110 earlier); retain BUY.

* Moderate growth, but NIM at all-time high:

Overall credit growth was relatively moderate vs peers at 15% YoY/4% QoQ, largely due to slower growth in mortgages and card book. However, corporate/SME growth paced-up well during 3Q. Deposit/CASA growth remains a struggle area for most banks, as also for Axis Bank, the CASA ratio of which has declined to 44% (vs 46% in Q2). However, Bank continues to consume on-balance sheet liquidity (average LCR fell down to 116%) that, coupled with asset re-pricing, better portfolio mix and interest recognition on an earlier restructured loan, led to a 30bps QoQ jump in NIM to 4.3%, similar to peers like ICICI Bank and Kotak Bank. Management did not provide any guidance on the near-term NIM, but reiterated that NIM should structurally remain healthy due to better portfolio mix (including unsecured retail loans) and run-down of the RIDF book (2.7% of loans)

Pace of NPA deceleration moderates a tad:

Gross slippages were elevated at Rs38bn/2.3% of loans but so were recoveries, leading to only a 12bps QoQ contraction in the GNPA ratio to 2.4%. Bank also made a prudent provision, of Rs3.4bn on a specific corporate account, showing early signs of stress, although remains standard as of now. The RSA pool remains on downward trend, and declined to 0.3% of loans from 0.4% in Q2, while the bank continues to carry 23% PCR on such loans. The BB & Below corporate watch-list has marginally reduced to Rs71bn/0.8% of loans. The bank has not reversed the Covid provision during the quarter which remains at Rs50bn/0.7% of loans, and should keep LLP in check.

Outlook and valuations:

We revise our earnings estimates upward for FY23/FY24/FY25 by 7%/4%/2%, and expect the bank to deliver 1.7-1.8%/17% RoA/RoE by FY25E. Given its improving core-profitability, RoE profile and Management stability, we revise our TP multiple for the bank to 2.1x Dec-24E ABV and, thus, our TP to Rs1,300/share (vs Rs1,110 earlier). We retain BUY on the stock. Key risks: Macro-dislocation leading to slower than expected growth/higher NPA formation, and top-Management attrition.

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