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Earnings in line; deposit growth remains muted

Margins surprise positively; asset quality robust

* AXSB’s PAT grew 10% YoY to INR58.7b (in line) in 2QFY24, driven by healthy NII growth (19% YoY/3% QoQ) and contained provisions, despite high opex.

* NIMs improved 1bp QoQ to 4.11% (vs. a decline for many peer banks), aided by higher liquidity deployment (~500bp QoQ decline in LCR ratio) and a better asset mix.

* Loan growth was healthy at 23% YoY/4.5% QoQ, while deposit growth was muted (+1% in 1HFY24). The C/D ratio thus increased to ~94%.

* A decline in fresh slippages (to INR32.5b) and healthy recoveries led to a sharp decline in GNPA ratio. Restructured book was under control at 0.19%.

* We change our earnings estimates by -1.7%/2.1% for FY24/FY25 and expect FY25 RoA/RoE of 1.9%/16.6%. Retain BUY.

Loan growth recovers; NIMs up 1bp QoQ

* AXSB’s 2QFY24 PAT grew 10% YoY to INR58.6b (in line), aided by healthy NII and controlled provisions. However, opex was high as the bank continued to invest in technology, employee additions and future growth.

* NII grew 19% YoY (up 3.0% QoQ) to INR123.1b. Reported margins inched up 1bp QoQ to 4.11%, supported by liquidity deployment. Fee income grew 29% YoY/10.6% QoQ, while the bank reported a treasury loss of INR1b.

* Opex growth was high at 32% YoY/6% QoQ (4% higher than MOSLe), due to investments in digital and tech, employee increments, and expenses related to Citi’s integration. As a result, C/I increased to 50.2% in 2QFY24 vs. 48.3% in 1QFY24. PPoP grew 12% YoY to INR86.3b (in line).

* Loan book grew 23% YoY/4.5% QoQ, with Retail/corporate loans up 4.4%/3.2% QoQ and SME loans growing at a faster rate at 23% YoY/9.5% QoQ. On the liability front, deposit growth was modest at 18% YoY/1.5% QoQ. CASA ratio moderated 200bp to 44%.

* On the asset quality front, fresh slippages declined to INR32.5b (vs. INR39.9b in 1QFY24). GNPA ratio improved by 23bp QoQ to 1.73%, while net NPA ratio declined 5bp QoQ to 0.36%. PCR was stable at 79.5%, while restructured loans declined slightly to 0.19% of customer assets.

Highlights from the management commentary

* About 31% of the book is fixed-rated, which will re-price in next one year. In the floating-rate book, 17% linked to MCLR and 46% to Repo (large part of increase is from SME side).

* The bank maintains its estimate for the total integration expense to be INR20b for 15-18 months.

* Opex grew 6% QoQ due to high technology-related expenses, integration expenses, 9% linked to volume, and high network expenses. A large part of the expenses are attributable to cards business.

* The increase in the cost of funds was moderated in 2Q and the bank has guided for a limited increase in funding costs over coming quarters.

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