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Poor half year should not make us lose sight of the long-term

Our view – AXSB will build on RoA going forward and beyond FY25

Asset Quality – Gross slippage remained slightly elevated compared with FY24, while management made material excess provisions: Gross NPA additions amounted to Rs 44.43bn for 2QFY25, translating to an annualized slippage ratio of 1.8% for the quarter. Gross slippage ratio had amounted to 1.9% during 1QFY25 whereas the gross slippage ratio for FY24 had amounted to 1.6%. For the quarter, the retail segment contributed as much as Rs 40.73bn to gross slippages, with the bank citing stress in the unsecured segments. Recoveries and upgrades improved to Rs 20.69bn for 2QFY25 compared with Rs 15.03bn in 1QFY25 as accounts whose recovery was delayed in 1Q were recovered in 2Q. Provisions were Rs 22.04bn, up by 8.1% QoQ and 170.6% YoY, translating to calculated all-inclusive annualised credit cost of 89bps. Additional contingency provisions made in the quarter were Rs 5.20bn and these are purely prudential and do not reflect the management’s view of stress on the balance sheet

Net Interest Margin – Margin declined 6 bps sequentially but 5 bps was attributable to one-offs: NIM was at 3.99%, down -6bps QoQ and -12bps YoY. Sequential decline in NIM was driven by the absence of interest on income tax refund, which had amounted to Rs 2.2bn in 1Q. While management did not provide NIM guidance, it stated that it would be able to manage the rate cut cycle over the course of a full year.

Balance sheet growth – Sequential loan growth was sluggish but management guided for improvement in the second half: The advances for the bank stood at Rs 10,000 bn, up by 2.0% QoQ and 11.4% YoY. The bank expects loan growth to improve in 3Q and 4Q. The bank is operating its CD ratio within a range paying due heed to the regulator’s view but is comfortable with its CD ratio. In the long-term, the bank can grow 300-400 bps higher than the industry

We reiterate BUY rating on AXSB with a revised price target of Rs 1475: We value the standalone bank at 1.8x FY26 P/BV for an FY25/26/27E RoE profile of 15.4%/15.9/15.5%. We assign a value of Rs 166 per share to the subsidiaries, on SOTP

Other Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio was at 47.0% down by -47/-326bps QoQ/YoY and the Cost to assets was at 2.6% up/down by 8/-9bps QoQ/YoY.

* Fee income: Core fee income to average assets was at 1.5%, up/down 7bps/- 2bps QoQ/YoY

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