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AXSB continues to outperform ICICI on slippage

Our view – AXSB can narrow the gap with ICICI on net interest margin

Gross slippage ratio for AXSB averages 1.81% over the past 7 quarters compared with 2.01% for ICICI: 35% of the gross slippages for the quarter were accounts that were standard but linked to a borrower that had otherwise defaulted (on another account) or were accounts that were upgraded in the same quarter. Provisions for the quarter were Rs 10.28bn, up by 26.2% QoQ but down by -28.5% YoY, translating to calculated annualised credit cost of 45bps. Provision of around Rs.1.82bn was made towards applicable Alternate Investments Funds (AIF) Investments pursuant to the RBI circular.

While margin contracted sequentially, AXSB can still pull multiple levers to enhance structural margin: For the quarter, yield on advances improved 6 bps QoQ. The bank has increased pricing on personal loans and is in the process of doing so for NBFC loans. Cost of deposits increased 15 bps QoQ to 4.94%. Rise in cost of deposits would spill over into 1QFY25. The levers for margin expansion include share of retail and SME in loan book, share of unsecured loans, segment shift in wholesale loans and share of INR loans.

As of now, AXSB is growing far in excess of the banking system growth but sounded a bit cautious on this front: Given the focus on loan to deposit ratio, deposit growth would be a key constraint to growth in the near term. Management does not see interest rates in the economy coming down anytime soon. Over the medium term, management reiterated guidance of growing 400-600 bps higher than banking system loan growth.

We reiterate BUY rating on AXSB with a revised price target of Rs 1425: 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 2.2x FY25 P/BV for an FY24E/25E/26E RoE profile of 17.1%/16.9%/17.1%. We assign a value of Rs 127 per share to the subsidiaries, on SOTP.

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

? Asset quality: Gross slippages amounted to Rs 37.15bn (annualized slippage ratio of 1.6%), while recoveries and upgrades were Rs 25.98bn

? Margin picture: NIM at 4.01% was down 10 bp QoQ, where the sequential rise in cost of funds was higher than the rise in yield on interest earning assets

? Asset growth: Advances grew 3.9%/22.3% QoQ/YoY driven sequentially by SME loans and by few segments in retail loans

? Opex control: Total opex rose 2.6%/32.5% QoQ/YoY, Employee Expense rose 3.9%/18.9% QoQ/YoY and other exp. rose 2.1%/39.4% QoQ/YoY

? Fee income: Fees income grew 4.2%/29% QoQ/YoY, where retail banking fees grew 5.8%/35.7% QoQ/YoY

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