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High-octane margin; core-profit delivery

* Despite the relatively-moderate credit growth, Axis Bank reported strong core profit growth at 43% YoY/19% QoQ, on the back of robust margin expansion and contained opex, albeit partly offset by a subdued treasury performance. This, coupled with continued lower LLP, led to the 24% beat on PAT, which came in at Rs53.3bn.

* Credit growth was comparatively modest at 18% YoY/4% QoQ vs peers’ (23% YoY/6% QoQ), due to sluggish growth in the retail book at 23% YoY/3% QoQ despite a lower base. However, NIM expanded 57bps YoY/36bps QoQ to 3.96%, mainly on higher growth in the SME/mid-corporate book, higher LDR & re-pricing benefit. Mgmt aims to sustain margins at current levels, but reckons that cost pressure will increase as deposit growth accelerates.

* Factoring-in the better & faster than expected delivery on margins, coupled with contained opex, we expect the bank to clock healthy core-profitability CAGR at 25% over FY23-25E. This along with continued lower LLP, given higher specific + contingent provision buffer, should drive-up earnings. Thus, we revise our earnings by 15%/11%/6% for FY23E/24E/25E.

* We retain our long-term BUY rating on the stock. We revise our TP to Rs1,110/share (vs Rs1,020 earlier) valuing the standalone bank at 1.8x Sep-24E ABV and subsidiaries at Rs82/share, given the potential steady improvement in FY23-25E RoA/RoE to 1.6- 1.7%/16% (without factoring-in any capital-raise), respectively. That said, the bank will need to consistently deliver on growth/core profitability and maintain management stability for a re-rating.

* Results – What we liked: Sharp uptick in margins (57bps YoY/ 36bps QoQ) to 3.96%, leading to strong core PPoP growth (43% YoY/19% QoQ) and meaningful reduction in GNPA ratio (29bps QoQ) to 2.5%. What we did not like: Slower Retail loan & deposit growth.

* Moderate credit growth, but NIM at multi-quarter high: Overall credit growth was relatively moderate vs peers, at 18% YoY/4% QoQ, largely due to slower growth in the large corporate and secured retail book. Mortgage growth continued to be slower than peers’, at 13% YoY/1% QoQ. However, SME growth was strong at 28% YoY/7% QoQ, leading to better yields. CASA ratio improved to 46% (vs 44% in Q1) mainly owing to slower TD growth and healthy CASA momentum. Thus, increase in CoF was contained at 20bps QoQ. This, coupled with higher LDR (90%), improved portfolio mix and repricing of asset, led to a 57bps YoY/36bps QoQ expansion in NIM to 3.96%. However, the bank will need to accelerate deposit growth in H2, for supporting higher credit growth which it has managed till now, by utilizing excess liquidity on the balance sheet and running down the investment book. Thus, sustaining margins at the current high levels will be slightly testing. That said, Management retains medium-term margin improvement guidance, led by change in portfolio mix and reduction in the RIDF drag (now 3.1% of loans).

* Asset quality trending well: Gross slippages moderated to Rs34bn/2.2% of loans which, coupled with the higher w-offs/recoveries and growth, led to 26bps QoQ reduction in GNPA ratio to 2.5%. The RSA pool continues its downward trend and declined to 0.38% of loans from 0.45% in Q1, while the bank continues to carry 23% PCR on such loans. The BB & Below corporate watch-list has marginally reduced to Rs79.9bn/1.1% 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.