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AXSB makes clear capital allocation choices

Result Highlights

* Asset quality: Gross slippages amounted to Rs 36.84bn (annualized slippage ratio of 2.05%) and recoveries and upgrades were healthy at Rs 29.57bn 

* Margin picture: NIM at 3.60% was up 11 bps QoQ due to changes in balance sheet mix, re-pricing of floating rate loan book and rise in loan-to-deposit ratio

* Asset growth: Advances de-grew/grew -0.9%/14% QoQ/YoY driven lower sequentially by Corporate and SME loans

* Opex control: Total opex fell/rose -1.2%/31.7% QoQ/YoY, Employee Exp. rose 15.9%/18% QoQ/YoY and other exp. fell/rose -8.1%/39.9% QoQ/YoY

* Fee income: Fees income fell/rose -4.9%/34% QoQ/YoY, where retail banking fees fell/rose -3.6%/43% QoQ/YoY

Our view – AXSB makes clear capital allocation choices

Management guidance for NIM reaching 3.7-3.8% seems eminently achievable: In terms of changes in balance sheet composition for the quarter, share of loans and investments in assets rose 300 bps QoQ to 87%, share of INR denominated loans in loan book grew 200 bps QoQ to 93%, share of retail and CBG loans in loan book rose 200 bps QoQ to 69% and RIDF book declined Rs 4.02bn QoQ. In terms of breakup of loan book by rate category, floating rate loans are 69% of loan book, of which 39% are Repo rate linked loans. We had predicted positive loan mix changes and RIDF decline for AXSB in our sector report dated 11th June 2022, placing it as our top pick in the banking sector.

With a gross slippage ratio of 2.05%, AXSB outperformed ICICI for the quarter: Recoveries from written off accounts amounted to Rs 7.44bn, implying net slippages including these are negative, amounting to – Rs 0.17bn for the quarter. Provisions were Rs 3.59bn, down by -63.6% QoQ and -89.1% YoY and this translates to an annualised credit cost of 41 bps. The all-inclusive provision coverage ratio was 134% of GNPA. The restructured book stood at Rs 34.02bn or just 0.45% of the gross customer assets.

Corporate loans have de-grown as part of a deliberate approach adopted by management: The bank brought down exposure to low-yielding offshore book and, as such, has not pursued low-yielding corporate loans (on the domestic side as well) as the pricing does not make sense. However, management expects the pricing environment to improve in the next couple of quarters if not earlier. Corporate and SME loans have degrown -6.2% and -6.6% QoQ, respectively. Retail loans grew 3.2% QoQ, driven by credit cards, SBB and personal loans, which grew 13.9%, 10.6% and 4.0% QoQ, respectively

We reiterate BUY rating on AXSB with a revised price target of Rs 1105: We value the standalone bank at 2.1x FY24 P/BV for an FY23E/24E/25E RoE profile of 13.8/15.6%/16.2%. We assign a value of Rs 105 per share to the subsidiaries, on SOTP.

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