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Navigating through vulnerabilities

Axis Bank’s (AXSB IN) Q3FY25 show was characterized by weak performance on most counts, partially reflective of sectoral limitations that are posing challenges. PAT at INR 63bn was broadly in line given lower opex, even as credit cost were higher. Q3 was characterized by: a) softer loan growth – up mere 1.5% QoQ/sub-9% YoY and weaker deposit growth at 0.8% QoQ/9% YoY, indicating that much needs to be addressed as both are running below industry now and b) higher slippages, essentially in the retail segment with limited confidence on near-term improvement. The discussion hereon will be centered on: a) AXSB’s ability to retrace growth, b) its ability to balance NIM, growth, CD ratio and LCR outcome, which could brew near-term dislocations and c) asset quality outcomes, which have taken center stage. Volatile performance has undermined valuations and near-term concerns will feed into a delayed rerating, but higher discount to peers and recent underperformance render risk-reward favorable. Retain BUY with TP pared to INR 1,386 (from INR 1,456).

Balancing growth, NIM, LDR and LCR will have certain dislocations: Q3 growth outcomes have been far from comforting – loan growth running at sub-9% (below system growth) and deposit growth (0.8% QoQ, also below system), a pain point. While we agree that partially these are reflective of system concerns, but it is these times which reflect the franchise strength. Given liquidity position and regulator stance, near-term challenges on deposit will persist, leading to sustained aggression on deposits. So, AXSB will have to balance NIM, growth, LDR (already at >92%) and LCR (at 119%), which could be onerous on earnings and may brew near-term dislocations.

Asset quality takes center stage: Slippages rose to INR 54.3bn (2%), with larger contribution from retail (forming > 90% of slippages). Retail slippages have risen closer to 3.1-3.2% and certain adjustments suggest that unsecured slippages are already running at 5% levels. While the bank highlighted that it has taken certain measures, industry-wide weakness (especially, given slowing growth outcomes), past experiences and volatile outcomes will keep investors on guard as the scope to maneuver seems limited. The bank however has reasonable buffer (~INR 119bn, 1.2% of loans) plus >75% coverage, thus rendering comfort.

Recommend BUY; TP pared to INR 1,386: AXSB, in the past few years, has hinged on its strategy to strengthen fundamentals. That said, volatile performance has taken the sheen off of fundamental changes, undermining valuations. Factoring in slower growth, we prune FY26E/FY27E EPS by 4-5% each, feeding into a reduced TP of INR 1,386 (from INR 1,456) on 2x FY26E P/BV. The stock trades at 1.4x FY26E P/BV (>30% discount to frontline peer) for RoA/RoE of 1.7%/14-15% in the medium term, thus cushioning downside. We thus maintain BUY. Sectoral challenges though mean that near-term rerating triggers are rather elusive at this point.

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