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NIMs inch up though growth falls short of expectations

AXSB reported a strong operating quarter with core PPOP at INR 65.5bn (+16% YoY, +5% QoQ) driven by strong inch-up in NIMs (+11bps QoQ), despite slower pace of loan growth (+14% YoY, -1% QoQ) – which in turn was a result of sequential degrowth in corporate loan book. Management attributed the corporate loan degrowth to increased price competition and expect the growth to improve going ahead. Asset quality remains in fine fettle with moderation in slippages to INR 37bn (2.3% of loans annualised) and low level of GNPL/NNPL/restructuring at 2.9%/0.7%/0.5% (-8bps/-10bps/-8bps QoQ). We believe AXSB’s robust non-specific provision buffer (standard + additional non NPL) of INR 118bn (1.7% of loans) and conservative incremental underwriting should aid in credit cost moderation (0.6- 07% for FY23-24E). AXSB’s transformation is in the right direction with sequential improvement in NIMs and it is on track to achieve guided NIMs of 3.7-3.8%. Opex growth was elevated at +32% YoY and we build cost-to-assets of 2.28-2.31% over FY23-24E. While the loan growth was lower compared to peers, we believe AXSB remains on a strong footing to drive loan growth going ahead which should lead to gradual RoA/RoE expansion to 1.5%/15.8% by FY24E. Further, Citi acquisition is likely to be NIM/ROA accretive. Current valuations of 1.8x NTM BVPS are at a discount to long term average of 2.0x and we will be buyers of the name on any correction. Maintain BUY with SoTP based TP of INR 930 valuing the core bank at 1.9x FY24E BVPS.

* NIMs drive earning beat, despite soft loan growth: Loan growth was soft at +14% YoY / - 1% QoQ primarily on account of degrowth in corporate loan book (-5% YoY / -7% QoQ). However, retail growth continues to be strong at +22% YoY / +3% QoQ driven by strong growth in mortgages, unsecured retail and small business banking. Quarterly average deposits grew +14% YoY (+2% QoQ) while CASA stood at 43% (+53bps YoY). Retail deposits (CASA + retail TD) ratio continues to be strong at c.79% of deposits. NIMs improved +11bps QoQ to 3.6% possibly driven by degrowth in lower yielding corporate segments. NII and core fee income growth was strong at +21% and +31% YoY resp. Opex growth remained elevated at +32%YoY driven by future growth and technology expense, pick up in origination volumes and collections and statutory expense. Management expects the cost-to-assets ratio to stabilise at 2.0% by FY23E end. Core PPOP growth was strong at +16% YoY, +5% QoQ. AXSB reported a trading loss of INR 6.7bn during the quarter.

* Asset quality remains in fine fettle: Gross slippages moderated to INR 37bn (2.3% annualised vs 2.4% 4Q22); higher recoveries and slippages led to improvement in GNPLs/NNPLs to 2.9%/0.7% (-8bps/-10bps QoQ) with PCR at 77%. Restructuring pool declined to 0.5% of loans. Total BB and below book (fund based, non-fund based and investments) stood at 1.2% of loans (-16bps QoQ) and 100% of wholesale restructuring is classified as BB and below. We believe AXSB’s robust non-specific provision buffer (standard + additional non NPL) of INR 118bn (1.7% of loans) and conservative incremental underwriting should aid in credit cost moderation (0.6-0.7% for FY23-24E).

* Valuations and view: We believe AXSB’s transformation is in the right direction with NIMs improvement seen in this quarter. Revival in growth should alleviate some of the concerns going ahead. Valuations are undemanding for a potential 1.5%/15.8% ROA/ROE by FY24E, in our view and thus we maintain BUY with a SoTP based TP of INR 930.

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