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Ticking all the right boxes, almost!

Axis Bank reported a strong quarter with its RoA/RoE reaching 1.8%/17.5% levels (highest since FY16) aided by a) solid core PPOP growth of +19%QoQ, +43% YoY driven by NIMs expansion to 3.96% (+36bps QoQ), b) robust loan growth (+4.2% QoQ, +17.6% YoY) and c) improving asset quality with GNPL/NNPL/restructuring at 2.7%/0.55%/0.4% (-27bps/ - 14bps/ -8bps QoQ). Management exuded confidence of retaining large part of the current NIMs expansion despite potential impact of rise in deposits rates going ahead. Loan growth was well rounded across segments (retail/ SME / wholesale growth at +19%/+28%/+7% QoQ); however, deposit growth was meagre at +10%YoY, +1% QoQ and was possibly the only negative aspect in the result. We believe AXSB’s transformation is in the right direction with sequential improvement in NIMs and expansion in return profile. While deposit growth still remains elusive (though it is lower for industry as a whole), strong NIMs (will be further augmented by Citi acquisition) give AXSB adequate headroom to increase deposit rates to drive liabilities growth. Management indicated that Citi acquisition is on right track and should be completed by end FY23E/ early FY24E. Current core valuations of 1.6x FY24E BVPS are inexpensive and we expect the discount to larger private sector peers to narrow as AXSB starts reporting strong operating performance on a more sustainable basis. We raise our earnings estimates for FY23/24E by 13%/10% to arrive at our revised SoTP based TP of INR 1,000 valuing the core bank at 1.9x FY24E BVPS.

*Strong operating quarter: Loan growth was well rounded across segments (retail/ SME / wholesale growth at +19%/+28%/+7% QoQ) and management remains confident of sustaining the current run-rate fuelled by the festive season demand. Retail, SME and mid corporate will remain the focus growth segments. Deposit growth was meagre at +10%YoY, +1% QoQ and was possibly the only negative aspect in the result. However, granularity profile of the liabilities is on an improving trajectory and quarterly avg. CASA ratio inched up to 44% (+100bps QoQ). NIMs witnessed a sharp improvement to 3.96% (+36bps QoQ) and provide adequate headroom for AXSB to increase deposit rates to drive deposit growth. Management expects to retain large part of the current NIMs expansion. Opex growth was at +14% YoY as investments in tech and future growth continue; though management continues to guide for a cost-to-asset ratio of 2.0% in the medium term.

* Asset quality remains in fine fettle: Asset quality for Axis remains robust with GNPL/NNPL/restructuring at 2.7%/0.55%/0.4% (-27bps/ -14bps/ -8bps QoQ). Slippages remain under control at INR 34bn (2% of loans annualised) which led to lower credit costs of 44bps (annualised). We expect the credit costs to remain low (c.50bps over FY23/24E) driven by controlled asset quality aided by high quality incremental underwriting and robust quantum of provision buffers (1.6% of loans incl. standard asset provisions).

* Valuation: We believe AXSB’s transformation is in the right direction with sequential improvement in NIMs and expansion in return profile. Current core valuations of 1.6x FY24E BVPS are inexpensive and we expect the discount to larger private sector peers as AXSB starts reporting strong operating performance on a more sustainable basis. Maintain BUY with SoTP based TP of INR 1,000 valuing the core bank at 1.9x FY24E BVPS.

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