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Laying the foundation for sustainable growth

FY23 consol RoE improves to 18.8%

* Axis Bank’s (AXSB) annual report highlights the bank’s focus on strengthening its retail franchise and investing in its distribution network and technological capabilities. The bank has laid special emphasis on increasing the mix of retail deposits. In FY23, it reported 21% growth in CASA deposits, surpassing its peers. This facilitated a 100bp improvement in the daily average CASA mix, reaching 44%.

* The bank continues to invest in digital initiatives to ensure sustainable long-term growth. In FY23, the bank sourced 55% of personal loans digitally vs. 22% in FY18. About 24% of credit cards were also issued through a fully digital end-to-end process. Also, the bank’s market share in credit card has improved to 14.7%, strengthening its position as the fourth largest credit card issuer in the country.

* The concentration of top 20 advances/deposits improved 105bp/110bp YoY to 8.1%/9.0% in FY23 (11.8% in FY21). The bank has shifted its deposit strategy to ‘CASA + retail term deposits’ and has consciously pruned bulk deposits.

* AXSB has a strong management team and a well-articulated strategy aimed at delivering 18% sustainable RoE. Asset quality has improved significantly and we estimate RoA to recover further aided by steady loan growth and moderation in opex ratios.

* We thus estimate RoA/RoE to be ~1.8%/~15.9% by FY25 and we reiterate our BUY rating with a TP of INR1,175 (1.8x FY25E ABV + INR100 for subs).

Retail franchise strengthens; deposit strategy focused on ‘CASA + retail TD’

AXSB has reported steady traction in retail business with the mix increasing to 58% in 1QFY24 from 50% in FY19. This occurred even as the bank consciously lowered the share of mortgage in its retail mix to 43% from 47% in FY22. The proportion of higher-yielding retail loans – comprising mainly personal loans, rural loans, credit cards, and small business banking (SBB) – has increased to 28%. The rural and semi-urban market remains a key focus area, which we believe should enable sustainable loan growth over the medium term. AXSB is focusing on building a granular liability franchise, with ‘CASA + retail term deposits’ forming 79% of total deposits. The liability duration stands longer than that of assets, as bank does not want to raise short-term liability at a high cost and. the bank believes that maintaining a healthy ALM is far more important. An improving liability franchise has, thus, helped AXSB maintain strong control on its funding cost.

Business productivity improving; estimate C/I ratio to moderate to ~44% by FY25

Business per branch of AXSB has improved to INR3.7b in FY23 from INR3.2b in FY22, while business per employee has also improved to INR195m in FY23 from INR178m in FY22. AXSB’s management has guided to add up to 500 branches in FY24, as it expects branches to play an important role in deposit mobilization from new customers. AXSB has been continuously investing in business and building digital capabilities to support growth. As a result, ~60% of incremental opex incurred in the past one year has been allocated toward technology and business enhancements. While the bank will continue to make investments, it expects revenues to grow faster than opex, which, coupled with improving efficiency, should reduce opex ratios. We thus estimate C/I ratio to decline to ~44% by FY25.

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