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In 2QFY24, Axis Bank earnings (PAT at INR 58.6bn, +10% YoY) were aided by strong NII growth (+19% YoY, +3% QoQ) and lower provisions (-21% QoQ) as loan growth picked-up across segments (+23%YoY, +5% QoQ). However, the overall deposit growth was mild (+18% YoY, +2% QoQ) led by TD (+22% YoY, +4% QoQ) but the CASA ratio declined to 44.4% (-162 bps QoQ). NIMs remained flat (4.11%, up +1bp QoQ) as the increase in cost of funds was completely offset by yield expansion (due to changing product mix and reduction in low cost RIDF bonds). Sustainability in NIMs would be a key monitorable as the management deploys levers to offset the impact of increase in cost of deposits. Although opex remained elevated with cost/assets at 2.6% on account of aggressive branch expansion and tech spends, management continues to guide FY25 exit cost-to-asset ratio of 2.1% (exCiti). Credit costs declined to 55bps (-8bps QoQ) during the quarter as fresh slippages decline sequentially (slippage ratio at 1.6% vs 2.1% QoQ). Headline asset quality also improved with GNPL/NNPL at 1.8%/0.4% (-24bps/-5bps). In our view, Axis Bank continues to be in investment mode w.r.t to its distribution and liability franchise as well as digital initiatives. While initial signs of success are visible, we believe it will take some time for the bank in closing the gap with larger private sector peers. In our view, NIMs sustainability coupled with steady loan growth will lead to meaningful valuation upsides for Axis Bank. Given the longterm measures undertaken to improve the liability franchise and portfolio granularity, we expect ROA/ ROE of 1.7%/ 17.6% in FY25E. We maintain BUY with TP of INR 1,040 valuing the core bank at 1.8x FY25E P/BV.

* Loan growth picks up across segments although CASA decline continues: Loan growth (+23%YoY, +5% QoQ) was well rounded across segments with Retail /SME /Wholesale (+4.4%/+9.5%/+3.2% QoQ, +22.5%/+26.6%/+21.5% YoY) growing at brisk pace. Mgmt. remains confident of sustaining loan growth at 400-600bps above expected industry credit growth (13% for FY24) driven by Retail, SME and Mid corporates. 2QFY24 witnessed mild deposit growth (+18% YoY, +2% QoQ) led by TD (+22% YoY, +4% QoQ). However, CASA deposits declined sequentially (+13% YoY, -1.2% QoQ) resulting in CASA ratio at 44.4% (-162 bps QoQ) with SA going down by -79bps QoQ.

* Margins hold up on yield expansion amidst strong operational performance: NIMs remained flat sequentially (4.11%, up +1bp QoQ) led by yield expansion which was sufficient to offset increase in cost of funds. Yield expansion was largely driven by change in product mix (Increasing Retail+SME, now 69% of the book) and reducing proportion of low yielding RIDF bonds (2.1% of assets vs 2.3% in Mar’23). We expect the NIMs to hold up as the management deploys levers to offset the impact of increase in cost of deposits. Axis Bank reported a strong operational quarter with beat on PAT which stood at INR 58.6bn (+10% YoY, 1%QoQ, +5% vs JMFe); supported by robust NII growth (+19% YoY, +3% QoQ) and lower credit cost at 55bps (-8bps QoQ). Although opex remained elevated with cost/assets at 2.6% on account of aggressive branch expansion and tech spends, management continues to guide FY25 exit cost-to-asset ratio of 2.1% (ex-Citi).

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