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Growth outlook gaining traction

Opex ratios to moderate; Improving granularity to drive sustainable RoE

* AXSB has progressed well over past few years and has strengthened its balance sheet by making it granular, increasing the mix of retail loans and improving its PCR. As a result, its key metrics such as loan growth, margins and profitability have improved.

* Loan growth is witnessing a healthy recovery with 14-18% growth over the past four quarters (vs 13% CAGR over FY19-22), driven by retail loans (18% CAGR). Small business banking (SBB)/rural loans posted a robust CAGR of 49%/23%. The rural and semi-urban market remains a key focus area, which should enable sustainable loan growth over the medium term. We, thus, expect a 17% CAGR in loans over FY22-25.

* AXSB has multiple levers in place to offset the rise in the funding cost as 68% of loans are floating, which, coupled with the rising mix of high-yielding loans and a gradual reduction in low-yielding RIDF bonds (3% of assets), should help margins.

* AXSB remains focused on building a stronger, consistent, and sustainable franchise. Since asset quality issues are behind, slippages and credit cost will be under control. While the bank will continue to make investments, it expects to bring down the costto-assets ratio to ~2% by FY25-end. The bank achieved its target of a consolidated RoE of 18% in 2QFY23 and remains on track to deliver a sustainable RoE of 18% in the medium term. We estimate AXSB to deliver FY25 RoA/RoE of 1.8%/16.9%. AXSB is our top pick for CY23 with a TP of INR1,130 (2.0x Sep’24E ABV + INR94 for subs).

Growth outlook recovering; retail & SBB/rural segments to be key drivers

After reporting a modest growth till 1HFY22, AXSB is witnessing a healthy recovery as loan growth has improved to 14-18% in the past four quarters vs a 13% CAGR over FY19-22. The loan growth was driven by the retail book, which saw an 18% CAGR over FY19-22. SBB/rural loans registered a robust CAGR of 49%/23%. AXSB is focused on improving the product mix, and consequently, the mix of high-yielding retail loans (including personal loans, credit cards, SBB and rural loans) stands at 22.6% in 2QFY23. The rural and semi-urban market remains a key focus area, which we believe should enable sustainable loan growth over the medium term. We, thus, estimate a 17% CAGR in loans over FY22-25.

Building a granular liability franchise; margins to exhibit positive bias

AXSB is focusing on building a granular liability franchise, with ‘CASA + retail term deposits’ forming 82% of total deposits. Further, the mix of retail deposits as per LCR rose to 55% in 1HFY23 from 52% in FY22. An improving liability franchise has, thus, helped AXSB maintain strong control on its funding cost. As a result, CoD/CoF moderated gradually to 3.8%/4.1%, which is comparable vs peers. AXSB has multiple levers in place to offset the rise in the funding cost as 68% of loans are floating-rate loans, which, coupled with the rising mix of high-yielding loans and a gradual reduction in low-yielding RIDF bonds (3% of assets), should help margins.

Improving operating efficiency; cost-to-assets to moderate to ~2% by FY25

AXSB has been continuously investing in business and building digital capabilities to support growth. As a result, ~51% of incremental opex over the past one year has been made toward investment in technology and business.The bank added ~7,500 employees and 164 branches in FY22. The retail loan mix has increased to 58%, which, coupled with the expansion in the credit cards business, has resulted in elevated opex (cost-to-assets at ~2.2% in FY22). 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 gradually. Thus, the bank expects to bring down the cost-to-assets ratio to ~2% by FY25-end.

Fee income getting granular; credit card forms ~30% of total fees

Retail and transaction banking fees now form ~93% of total fees, signifying the granularity of fee income. This was primarily driven by card fees (+53% YoY) and other retail assets related fees (+29% YoY), which together constituted ~68% of total fees. On the other hand, fees from transaction banking too grew at healthy 30% YoY. The gradual revival in corporate banking fees, along with a pickup in the credit cycle, is likely to further boost overall fee intensity. AXSB’s credit card business is reporting a robust performance and we believe that its partnership with Flipkart and its acquisition of Citi cards business will increase traction in the credit cards business, which will further boost the bank’s profitability.

Asset quality outlook robust; credit cost to undershoot long-term average

Asset quality has improved significantly over the past few years, with slippages moderating to 3% in FY22 (2.1% in 1HFY23), which led to a decline in the GNPA ratio to 2.5% in 1HFY23 vs 5.1% in FY20. The net slippage ratio was also low at 0.8%/0.4% in FY22/1HFY23. PCR has improved significantly to ~80% in 2QFY23 (93% incl. TWO), thereby closing the gap with peers. The restructured book remains negligible at 0.38% of loans, which, along with lower BB & below book, will keep the slippages in control. Further, AXSB is carrying a total additional provision of INR116.3b (1.6% of loans; the highest among peers), which will keep the credit cost benign. We, thus, estimate credit costs to undershoot its long-term average at 0.4-0.6% over FY22-25.

GPS strategy in play; consolidated RoE reaches 18% in 2QFY23

AXSB remains focused on its articulated strategy of Growth, Profitability, and, Sustainability with an aim to deliver a consolidated RoE of 18% on a sustainable basis. We believe that AXSB has progressed well over the past few years and has strengthened its balance sheet by making it granular, increasing the mix of retail loans and improving its PCR. The bank achieved its target of a consolidated RoE of 18% in 2QFY23 and we believe that it remains on track to deliver a sustainable RoE of 18% over the medium term.

Valuation and view

AXSB remains focused on building a stronger, consistent, and sustainable franchise. Since asset quality issues are now behind, slippages and credit costs should be under control. NIMs have improved significantly and the bank believes that it has sufficient levers in place to offset the rise in deposit costs. While the bank will continue to make investments, it expects to bring down the cost-to-assets ratio to ~2% by FY25- end. Loan growth is likely to remain 4-6% higher than the industry growth over the medium term, with an aim to reach a consolidated RoE of 18%. We estimate AXSB to deliver FY25 RoA/RoE of 1.8%/16.9%. AXSB is our top pick for CY23 with a TP of INR1,130 (2.0x Sep’24E ABV + INR94 for subs).

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