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Placed as the top pick in May, AXSB demonstrates model

Result Highlights

*Asset quality: Gross slippages amounted to Rs 33.8bn (annualized slippage ratio of 1.9%) and recoveries and upgrades were healthy at Rs 28.3bn

* Margin picture: NIM at 3.96% was up 36 bps QoQ due to re-pricing of floating rate loan book and rise in loan-to-deposit ratio

* Asset growth: Advances grew 4.2%/17.6% QoQ/YoY driven sequentially by Corporate loans, SME loans, Credit cards and SBB loans

* Opex control: Total opex rose 1.4%/14.1% QoQ/YoY, Employee Expense fell/rose -1%/12% QoQ/YoY and other expenses rose 2.5%/15% QoQ/YoY

* Fee income: Fees income grew 8%/20% QoQ/YoY, where retail banking fees grew 10%/28% QoQ/YoY

Our view – Placed as the top pick in May, AXSB demonstrates model

We had detailed, in our report dated June 2022, the underpinnings of margin evolution, which are now starting to fructify: In terms of balance sheet composition, the share of loans and investments in total assets rose from 83% to 86% on YoY basis, whereas the share of INR loans rose from 89% to 93% and the share of retail and CBG loans in loan book rose from 65% to 69%. The share of RIDF book declined from 4.28% to 3.09% of total assets on YoY basis. We had predicted positive loan mix changes and RIDF decline for AXSB in our sector report dated 11th June 2022.

While the gross slippage number was middling, it was partly the result of conservative recognition, and final net slippage was negative: 39% of the gross slippages are (a) exposures that are standard but of borrowers whose other accounts slipped or (b) were upgraded during the quarter itself. Net of recoveries from written off accounts, net slippages were negative at Rs 1.52bn. Annualised credit cost for the quarter amounted to a benign 38 bps. All provisions taken together provide a cover of 138% on GNPA. Restructured book is well contained at 38 bps of gross customer assets

As flagged by management, corporate loans have made a comeback whereas retail loan growth slowed somewhat: Large and mid-corporate loans grew 6.0% QoQ and SME loans jumped 8.7% QoQ. Retail loans slowed to a sequential growth of 2.6%. However, as anticipated, high-margin businesses viz. credit cards and SBB tracked higher at 14.4% and 11.7% QoQ, respectively.

We reiterate BUY rating on AXSB with a revised price target of Rs 1135: We had placed AXSB as the top pick for the first time in our report dated May 2022. We value the standalone bank at 2.1x FY24 P/BV for an FY23E/24E/25E RoE profile of 14.8/16.5%/16.8%. We assign a value of Rs 120 per share to the subsidiaries, on SOTP.

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