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Our view – Rise in stress within internal risk benchmarks

Asset Quality – Gross slippage rose meaningfully on sequential basis, with the the bulk of the rise emerging from the retail book: Gross NPA additions amounted to Rs 47.93bn for 1QFY25, translating to an annualized slippage ratio of 1.97% for the quarter. Gross NPA additions had amounted to Rs 34.71bn during 4QFY24. The retail book contributed Rs 42.29bn to slippages in the quarter compared with Rs 31.1bn in 4Q. 32% of total slippages were linked accounts which were standard when classified or upgraded during the quarter. There has been deterioration in asset quality across some parts of the book, such as retail unsecured but it is not a of concern as of now as internal risk benchmarks have not been breached. Reported net credit cost amounted to 97 bps for the quarter but management does not regard this as indicative of the credit cost expected for full year FY25. About 30 bps of this is attributable to timing difference for recoveries from the wholesale book, which would eventually happen

Net Interest Margin – Margin was broadly stable on sequential basis as two factors canceled each other out: NIM was at 4.05%, down -1bps QoQ and -5bps YoY. Higher interest reversal during the quarter was offset by interest on income tax refund. The through-the-cycle NIM expectation remains 380 bps. However, management would like to retain as much of the current NIM as possible.

Balance sheet growth – AXSB is currently tracking 14% YoY growth but remains confident of its steady state growth delivery: The advances for the bank stood at Rs 9,800 bn, up by 1.6% QoQ and 14.2% YoY. The bank expects interest rates to remain elevated and system credit growth to converge to system deposit growth of 13%. On a long-term basis, the bank’s advances growth can be 300-400 bps higher than system credit growth. We reiterate BUY rating on AXSB with a revised price target of Rs 1550: We had placed AXSB as the very top pick for the first time in our report dated May 2022. We value the standalone bank at 2.0x FY26 P/BV for an FY25E/26E RoE profile of 16.2%/16.0%. We assign a value of Rs 157 per share to the subsidiaries, on SOTP.

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

* Opex control: Total opex fell/rose -2.1%/10.9% QoQ/YoY, Employee Expense rose 7.0%/16.4% QoQ/YoY and other exp. fell/rose -6.2%/8.2% QoQ/YoY

* Fee income: Fees income de-grew/grew -7.7%/16.0% QoQ/YoY, where retail banking fees de-grew/grew -10.9%/17.8% QoQ/YoY

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