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Loan growth muted; lower provisions drive earnings beat

Asset quality outlook robust

* AXSB reported a PAT of INR41.2b (up 91% YoY, 20% beat), driven largely by lower provisions, which fell 89% YoY, while NII/PPOP stood in line. OPEX remains elevated as the bank is investing in the business and technology.

* Business growth was muted, with loans and deposits down sequentially. The Corporate and SME book saw a QoQ decline, while the Retail segment saw a growth of 3% QoQ.

* Fresh slippages fell to INR36.8b, which, coupled with healthy recoveries and upgrades, enabled an improvement in asset quality ratios. The restructuring book remains controlled at 0.45%, which, along with an additional provision buffer, should rein in credit cost. We expect AXSB to deliver a RoA/RoE of 1.6%/16.7% in FY24E. We maintain our Buy rating.

NII and PPOP in line; margin expands by 11bp QoQ

* PAT grew 91% YoY to INR41.3b in 1QFY23 (20% beat), driven largely by lower provisions, which fell 89% QoQ. PPOP declined by 5% YoY (in line), while core PPOP rose 16% YoY.

* NIM expands by 11bp QoQ to 3.6%, resulting in a NII growth of 21% YoY and 6% QoQ (in line). Other income declined 11% YoY (in line), impacted by treasury losses of INR6.7b v/s a gain of INR5.6b in 1QFY22. Fee income grew 34% YoY, within which Retail fee grew 43% YoY.

* OPEX grew 32% YoY due to an increase in business volumes (40%), investment in future growth and technology (25%), collections and statutory-related (15%), and the balance 20% is due to a general increase. As a result, C/I and cost-to-assets ratio remains elevated at 52.5% and 2.4%, respectively.

* Total provisions fell sharply by 89% YoY, aided by higher recoveries and a decline in slippages. Annualized credit cost stood at 41bp (net of recoveries on written-off accounts). The bank did not utilize any COVID-related provisions and holds an additional provision buffer (including standard asset provisions) of INR118.3b (1.7% of loans).

* Loan book grew 14% YoY, but fell 1% QoQ. Retail/SME loans rose 25%/27% YoY, while the Corporate book declined by 5% YoY and 7% QoQ. The midCorporate book grew 54% YoY. On the liability front, deposits grew 13% YoY. CASA ratio moderated to 44% (quarterly average CASA stood at 43%).

*On the asset quality front, fresh slippages fell to INR36.8b (v/s INR39.8b in 4QFY22). Healthy recoveries and upgrades at INR29.6b and write-offs of INR15.1b led to a 6bp/9bp QoQ decline in the GNPA/NNPA ratio. The net NPA ratio fell to 0.64%, while PCR improved by 250bp QoQ to 77.3%. Restructured loans fell to 0.45% (v/s 0.52% in 4QFY22), while provisioning stood at 24%. BB and below pool, including non-fund, fell to 1.17% (v/s 1.33% in 4QFY22).

Valuation and view

AXSB delivered strong earnings, driven by a significant decline in provisions and margin expansion, even as OPEX continues to remain elevated. Business growth was muted, with a QoQ decline. Asset quality continues to improve, aided by a moderation in slippages and healthy recoveries and upgrades. Restructured book moderated further, while a higher provisioning buffer provides comfort. We expect slippages to remain in control, enabling a sustained improvement in credit costs, though improvement in margin and cost ratios will be key to watch out for. We expect AXSB to deliver a FY24 RoA/RoE of 1.6%/16.7%. We maintain our Buy rating with a TP of INR875 per share (1.8x FY24E ABV and INR95 from its subsidiaries).

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