Buy AXIS Bank Ltd For Target Rs.1,375 By JM Financial Services
Axis Bank’s 1QFY25 earnings missed estimates (PAT at INR 60.3bn, +4.1% YoY, -4.7% JMFe) primarily led by higher credit costs (1.1% vs 0.37% QoQ). Slippages from unsecured portfolio (further exacerbated by seasonally weak agri asset quality) and corporate book (and lower recoveries) led to meaningful jump in credit costs, also driving GNPA higher by +11bps QoQ to 1.54%. While this comes as a negative surprise, we believe Axis Bank should not see any material asset quality deterioration given slower than industry growth in unsecured portfolio and focus primarily on ETB customers. We build avg credit costs of ~50bps for Axis Bank for FY25E/26E. Operating expenses growth slowed down to +11% YoY and aided core PPOP growth (+16.9% YoY). While acknowledging the current challenging environment w.r.t to deposits that constrains growth stance, we believe Axis Bank's liability franchise continues to improve gradually and should hold it in good stead in the medium term (loans grew +14.2% YoY/+1.6% QoQ, deposits grew +12.8% YoY/-0.6% QoQ). We retain our positive stance on Axis Bank and would utilize any meaningful correction to add exposure to the name. Maintain BUY with a TP of INR 1,375 (valuing core bank at 1.9x FY26E BVPS).
* Growth trends tepid: Net advances grew by a modest (+14.2% YoY, +1.6% QoQ), with mostly secular trends across segments. Retail grew (+17.5% YoY, +0.3% QoQ), followed by SME loans at (+18.7% YoY, -0.7% QoQ) and wholesale segment at (+6.6% YoY, +5% QoQ). Within retail, growth was led by personal loans at (+29.4% YoY, +2.8% QoQ), followed by LAP at (+28.5% YoY, +2.2% QoQ) and SBB at (+26.2% YoY, +2% QoQ). Retail segment forms ~60% of the total book. Mgmt. continues to guide for a 300-400bps above industry growth in advances. Given the systemic constraints in deposit accretion, growth in deposits remained flat sequentially (-0.6% QoQ, +12.8% YoY) with CASA ratio at 41.8% (vs 43% QoQ). We build in a loan growth CAGR of 16% and deposit growth CAGR of 15% over FY24-26E.
* Opex moderation aids PPOP growth; NIMs hold up: Operating profit stood at INR 101bn (+14.7% YoY, -4.1% QoQ, +6.7% JMFe) driven by a) healthy growth in NII (+12.5% YoY, +2.7% QoQ) and b) lower operating expenses (-2.1% QoQ, +10.9% YoY). Cost to assets as result stood at 2.48% (vs 2.59% QoQ). Mgmt. indicated that while the bank’s strategic investments in distribution expansion and technology initiatives will continue, they anticipate further moderation in opex growth going ahead. CoF during the quarter inched up only marginally to 5.44% (vs 5.43% QoQ); consequently NIMs remained steady at 4.05% (vs 4.06% QoQ).
* Credit costs a negative surprise: Headline asset quality metrics saw a slight deterioration with GNPA/ NNPA at 1.54%/0.34% (vs 1.43%/0.31% QoQ) with Retail/ CBG/ WBG at 1.38%/0.88%/1.98%. Gross slippages remained elevated at 1.97% (vs 1.48% QoQ) contributing to higher credit costs at 1.11% (vs 0.37% QoQ). Mgmt. attributed ~55% of these slippages to timing differences in the corporate portfolio, resulting in lower recoveries and upgrades, but remain confident that it shall normalise in coming quarters. We build in average credit cost of 0.48% for FY25E/26E.
* Valuation and view:Axis Bank continues to be amongst our top-picks and has outperformed the Bank Nifty by 3% and 10% in the last 3m and 6m resp. We believe a) sustainability of NIMs, b) moderation in opex and c) control on credit costs should help AXSB sustain its outperformance. We expect RoA/RoE of 1.8%/16.9% by FY26E. Maintain BUY with a TP of INR 1,375 (valuing core bank at 1.9x FY26E BVPS).
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SEBI Registration Number is INM000010361
