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Despite lower margins yet again and rigidly-higher opex (incl. Citi integration cost of Rs3.9bn), Axis Bank is back in the black, given in-line PAT at Rs58bn/1.8% RoA, mainly on higher treasury gains. Similar to 4Q, Bank logged better than expected credit growth, at ~18% YoY (incl. Citi)/22% YoY (ex-Citi in 1QFY23), but margin slipped again (12bps QoQ), with cumulative contraction of 16bps to 4.1% in the past 2Qs. Fresh slippages were higher at Rs40bn/2.2% of loans, but GNPA ratio improved QoQ to 1.9% due to higher recoveries/woffs. Also, Bank retains the contingent provision buffer, at 0.6% of loans. Bank’s CET 1 ratio too improved, by 36bps QoQ to 14.4% (lower vs peers’ at >15%). We expect Axis Bank to clock 1.8% RoA/18% RoE (inflated due to Citi acquisition goodwill w-off) on merged basis (without factoring-in any equity dilution) over FY24-26E. We retain BUY, with revised TP of Rs1,260/sh, valuing the core bank at 2x Jun-25E ABV + subs/investment value at Rs80/sh.

Better growth, but margin slips again

Overall credit growth was better than expected at 22% YoY (ex-Citi in 1QFY23); including Citi, it was at 18% YoY (calc). Retail credit growth remains healthy at 21% YoY (ex-Citi), but mortgages growth continues to decelerate. The SME book declined 6% QoQ due to seasonal factors. Deposit growth was relatively moderate at 17% YoY/-1% QoQ, while CASA ratio slipped to 45.5%. This led to relatively higher increase of 30bps in CoF, weighing on margins — down 12bps QoQ to 4.1% (cumulatively down by 16bps from 3Q). Management did not provide any guidance on near-term NIM, but retains its previous stance of structurally-healthy margins in the long run due to better portfolio mix (including unsecured retail loans) and run-down of the RIDF book (2.3% of loans).

Higher slippages, but headline NPAs continue to trend down

Gross slippages were higher than expected at Rs40bn/2.2% of loans, mainly to due higher stress in the retail book (Rs20bn; 50% of gross slippages), including the Citi portfolio, but higher recoveries and w-offs led to a 9bps QoQ reduction in GNPA ratio to 1.9%. Bank retains healthy specific PCR at 80%, while also maintain its contingent buffer at 0.6% of loans, unlike some peers like Kotak and IIB. The RSA pool declined to 0.2% of loans. The BB & Below corporate watch-list has marginally increased to Rs58bn/0.6% of loans.

Outlook & Valuations

After a sharp dip in RoA to a low of 0.8% due to hit on Citi portfolio acquisition in FY23, we expect Bank to clock 1.8% RoA/18% RoE (inflated due to Citi acquisition goodwill woff) on merged basis (without factoring-in any equity dilution) over FY24-26E, on the back of better growth/fees and contained provisions. We retain BUY on the stock, with revised TP of Rs1,260/share, valuing the bank at 2x its Jun-25E core-bank ABV + subs/investment value at Rs80/share.

Key risks: Macro-dislocation leading to slower than expected growth/higher NPAs and KMP attrition.

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