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Progressing well

Strong revenue drives earnings beat, delivery on core, critical

Axis Bank’s (AXSB IN) Q3 PAT of ~INR 60.7bn surpassed estimates on higher-than-expected revenue traction (better NII and higher core fee), even as opex (up 2.6% QoQ) was sticky. The key discussion points hereon will be: a) NIMs, which declined 10bps QoQ (as expected) – the trajectory is critical given limited levers, b) opex outcomes, which continue to run elevated and are a challenge and c) softer core deposit traction – Q3 again saw reliance on bulk deposits – even as some markers on deposits (outflow rate, quarterly average balances etc.) improved. While performance in the past few quarters enabled AXSB to converge with frontline banks’ performance, volatility has been a concern and delivery hereon on deposits growth, funding cost and consistency may be critical to drive a re-rating

NIMs as expected; trajectory hereon, the key

NIMs were 4.01% (down 10bps QoQ), as expected. With deposits cost likely to rise further (growth at a cost has been challenging plus repricing impact still pending), and given limited yield levers, LCR at 118% plus CD ratio already at 93%, NIMs may be under strain, Thus, the liability franchise may warrant higher scrutiny, which has rather been a slow-moving piece for AXSB, albeit improving.

Asset quality trends stable; no major red flags visible

Slippages were curtailed at 1.8% (versus 1.6% QoQ). The credit cost (annualized) was 54bps (versus 70bps QoQ), benefiting from better recoveries. Within various segments, asset quality appears to be quite comfortable. Through the cycle, AXSB has created sufficient buffer to cushion from negative surprises, if any – Coverage of +75% on stress pool. With NIMs likely peaking out and opex sticky, credit cost is the key variable for RoA delivery.

Valuations: Recommend BUY; TP raised to INR 1,311

AXSB, in the past three years, has hinged on the strategy to strengthen fundamentals. That said, the volatile performance, first led by softer aspects, then by asset quality strain and lower PPoP, hastaken the sheen off of fundamental changes, thus undermining underlying valuations. The progress in underlying business performance reinforces our belief of improved delivery, but consistency is the key. We introduce FY26E estimates and roll over to September 2025E, leading to raised TP of INR 1,311 (from INR 1,246), with INR 83 as subsidiary value. Key monitorables are: a) consistent delivery on core PPoP, b) capital raising plans (if any) and c) building on merger benefits from Citi portfolio.

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