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Growing franchise through technological capabilities

Cost-to-assets ratio to moderate at ~2% by end-FY25; aspires 18% RoE

We attended AXSB analyst day, where the management demonstrated its investments toward building its digital capabilities. The company continues to focus on providing an end-to-end digital journey with a seamless and improved customer experience. Various digital capabilities along with partnerships in the ecosystem are driving strong growth and helping the bank emerge as a robust customer acquisition engine. AXSB has been reporting strong growth in Retail and Mid-corporate segment, which along with MSME, would remain the key growth drivers. While estimating margins to remain healthy, AXSB expects cost-to-assets ratio to moderate at ~2% by the end of FY25. This coupled with a benign credit cost would aid RoE expansion. We estimate AXSB to deliver FY24E RoA/RoE of 1.8%/18.1%. We reiterate our Buy rating on the stock with a TP of INR1,050 (2.0x FY24E ABV + INR95 for subs).

Focused on the GPS strategy

AXSB remains focused on its GPS strategy with an aspiration to reach 18% consol. RoE on a sustainable basis. New customer acquisitions continues to be strong, yielding higher retail disbursements, aided by improved productivity and digitization. The company’s key focus remains on a) best in class digital, technology, and data analytics capabilities, b) integrated play by leveraging on partnerships and ecosystems, and c) higher RAROC business of Bharat Banking, MSME, and Mid-Corporates. “Siddhi” and “Sparsh” are key apps and modules developed to empower employees and delight customers to improve the NPS score. The company continues to strengthen its capability to deliver more efficient and sustainable outcomes, while the digital capabilities and “Connect & Grow” philosophy are likely to have a multiplier effect on growth.

Axis 2.0 to be a key acquisition engine; aids to improve cross-sell and TAT

AXSB is focused on ramping up Axis 2.0 – a fully digital bank with complete end-toend digital solutions. The aim is to acquire customers at a faster pace and become a powerhouse of digital consumer lending. With 11m+ monthly active users, AXSB’s app has 160m+ logins per month. Axis 2.0 is witnessing a healthy traction with CASA deposits up 200% and Personal loans up 40%. Auto and other retail loans have more than doubled over the past one year. Axis 2.0 provides superior proposition with higher yields (up to 100bp) and higher fee income (up to 15bp). AXSB uses its super app “Siddhi” and a customer obsession journey “Sparsh” for providing a seamless experience for its customers.

Increased focus on Bharat Banking & MSME

Rural and Semi urban markets are offering a strong growth opportunity with the government focused on improving the income profile. Thus, Micro, Small & Medium Enterprises (MSME) and Business banking segment remain a key growth driver for the bank. The bank has adopted Bharat banking, a customer-centric framework, to provide best in class products, services, and advisories to its customers. AXSB has ~2,065 Bharat banking branches across 659 districts. It is witnessing a strong 85% YoY growth in disbursals, 44% in gross book of rural centric products, 43% in retail assets and 15% in liabilities with an aim to double the balance sheet in the next three to four years.

Wholesale Banking - Mid corporate segment to be the key growth enabler

AXSB is aspiring to be the banker of choice for corporates by providing the best and comprehensive solutions with a focus on building a strong relationship-led franchise rather than being an asset-focused model. It has strengthened its position as a transaction bank. With improved coverage and risk underwriting standards over the past three years, AXSB is well poised to deliver a pick-up in loan growth. Among segments, mid corporates have grown by 43% over the past three years and would continue to be the key growth driver. Transaction banking fees forms 80% of the wholesale fees, which is RoA accretive, while the mix of A-and above rated corporates have improved by 700bp, though the same could moderate going ahead.

Retail lending and payments - Strong data analytics to keep traction healthy

Strong technological and digital capabilities along with data analytics contribute significantly toward business mix optimization with a healthy growth in chosen segments. Disbursement volumes were up ~2x, while the mix of unsecured disbursements/retail fees was up 690bp/600bp, respectively, since FY19. 74%/70%/55%/80%/60% of credit cards/home/personal/ unsecured business/new car loans are processed digitally. Further, AXSB is witnessing a robust traction in credit card business with 31% of incremental card issuances from Known to bank (KTB) customers. The bank has a strong presence in UPI and merchant payments and ranked second in POS terminals with a market share of 18.1% as on Sep’22. AXSB remains focused on cross sell, which will continue to drive growth.

Building a granular and premium liability franchise

The bank is making a strong progress toward building a granular and premium liability franchise. New liability relationships grew 43% with 31% increase in the number of districts having a market share of >5%. The mix of premium segment in retail SA has seen an increase of 220bp and witnessed a 60% increase in acquisition of priority accounts since Apr’22. The focus remains on top 50 districts, which comprise 61% of total deposits for the industry. Lendable deposits (as per LCR) have grown by 10%, suggesting improving quality of liability franchise. The mix of QAB vs period-end balances too saw an improvement, suggesting lower volatility. Post the completion of Citi deal, the quality of customers and talent pool of Citi would further add value to the liability franchise of the bank.

Cost-to-assets to ratio to moderate at ~2% by end-FY25; aspires 18% RoE

AXSB remains focused on building a stronger, consistent, and sustainable franchise. The capital position remains self-sufficient to fund the growth prospects and the bank will assess the capital raise post the completion of Citi deal. Asset quality issues are behind, which will keep the slippages and credit cost under control. NIMs have improved significantly and the bank believes that it has sufficient levers in place to offset the rise in deposit cost. While the bank will continue to make investments, it expects core operating revenue to grow faster than opex, and thus, the bank is committed to bring down the cost-to-assets ratio to ~2% by the end of FY25. Loan growth is likely to remain 4-6% higher than the industry growth over the medium term with an aspiration to reach 18% consol RoE. We estimate AXSB to deliver FY24E RoA/RoE of 1.8%/18.1%, respectively. We reiterate our Buy rating with a TP of INR1,050 (2.0x FY24E ABV + INR95 for subs).

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