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Growth slips but core profitability improves after a long gap

* Despite subdued credit growth, Axis Bank reported healthy growth in NII/fees, and core profitability grew by 17% yoy after a long gap. This, coupled with lower LLP, led to a 14% beat on PAT at Rs41.2bn (up 91% yoy) despite elevated opex (CI ratio: 52%; cost-asset: 2.4%). The bank had withdrawn near-term cost guidance in Q4 citing volatility, but has now guided for a medium-term cost-to-asset ratio of 2%, driven by better productivity.

*  Credit growth was slow at 14% yoy/down 1% qoq vs. much higher growth for peers (ICICI/HDFCB: 22%), mainly due to declines in corporate/overseas/SME books. However, retail growth remained healthy at 25% yoy/3% qoq, with strong growth in unsecured loans, but mortgage growth was surprisingly slower than peers. Better portfolio mix/asset repricing led to a 11bps qoq improvement in NIMs to 3.6%. Axis has retained NIM guidance at 3.7-3.8% for the next 8-10 quarters on better portfolio mix and run-down in RIDF bonds.

* Despite lower slippages at Rs37bn/2.4% of loans, the GNPA ratio was largely flat at 2.8% due to slow growth. The bank carries a healthy specific PCR of 77%/Covid provisions at 0.7% of loans, which should keep LLP under check. We expect the bank’s RoA/RoE to improve to 1.6%/16% by FY25E - up from 1.2%/12% in FY22. That said, Citi portfolio acquisition calls for shoring up capital levels and could lead to a dilution in RoEs.

* We maintain our long-term Buy rating on the stock with a TP of Rs1,020 (value standalone bank at 1.8x Jun’24E ABV and subs valuation at Rs80), given steady improvement in RoEs and reasonable valuations. That said, the bank will have to consistently deliver on growth/core profitability and maintain management stability for a re-rating.

* Growth slips but NIM rises on better portfolio mix: Overall credit growth was slower than expected at 14% yoy/-1% qoq, mainly due to the decline in corporate, overseas and SME books. However, retail growth remained healthy at 25% yoy/3% qoq, with strong growth in unsecured loans (cards/PL). Mortgage growth was surprisingly slower than peers at 18% yoy/1% qoq. The CASA ratio slipped a bit to 44%, a phenomenon seen across banks, leading to an increase in CoF. However, better portfolio mix (retail including unsecured loans, lower share of overseas loans) and some benefits from asset re-pricing led to a 11bps qoq improvement in NIMs to 3.6%. The bank expects margins to improve structurally in the long run, driven by a higher retail/SME/mid-corporate mix and reduced drag from RIDF bonds (now at 5.9% of loans).

Stable GNPA ratio but higher provision cover to drive LLP down: Gross slippages were lower at Rs37bn (2.3% of loans), but lower credit growth led to a nearly flat GNPA ratio, breaking a multi-quarter decline trend. However, the restructuring pool fell to 0.45% of loans from 0.6% in Q4, while the bank continues to carry a 24% PCR on these loans. The BB & Below corporate watch list has also been reduced to Rs81.7bn/1.1% of loans, mainly due to upgrades. Due to macro-uncertainties, the bank did not reverse its Covid provision buffer, which remains at Rs50bn/0.7% of loans vs. 0.8-0.9% for peers. As per management, improving asset quality and a healthy PCR should drive credit costs down, supporting profitability

Outlook and valuations: We retain our long-term Buy rating on the stock with a TP of Rs1,020 (value standalone bank at 1.8x Jun’24E ABV and subs valuation at Rs80), given steady improvement in RoEs and reasonable valuations. Key risks: 1) Higher-thanexpected NPA formation and expenses; and 2) any signs of management instability, which has moderated a bit recently.

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