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High provisions drag earnings; elevated C/D ratio to suppress loan growth

Asset quality deteriorates slightly

* Axis Bank (AXSB) reported a net profit of INR60.3b (+4% YoY; 6% miss) in 1QFY25. The miss was due to higher provisions.

* NII grew 12% YoY and 3% QoQ to INR134.5b (in line). NIM moderated 1bp QoQ to 4.05%, displaying continued resilience. Provisioning expenses were INR20.4b (sharply higher than MOFSLe), thus leading to the 6% miss at the PBT level.

* Loans grew 14% YoY (2% QoQ). Deposits grew 13% YoY (-1% QoQ), thus resulting in further increase in the C/D ratio to 92%. CASA mix stood at 42%.

* Fresh slippages came in at INR47.93b (vs. INR39.9b in 1QFY24). GNPA/NNPA ratios thus increased 11bp/3bp QoQ to 1.54%/0.34%. PCR stood broadly stable at 78%. About 55% of the rise in credit costs is attributed to lower recoveries in the corporate portfolio this quarter.

* We cut our earnings estimates by 5.6%/7.8% in FY25/26, as we moderate our growth assumptions and build in higher credit costs. We thus estimate FY26E RoA/RoE of 1.7%/16.2%. Reiterate Neutral with a revised TP of INR1,175 (based on 1.7x FY26E ABV).

Business growth muted; NIM moderates 1bp QoQ

* AXSB reported a net profit of INR60.3b (+4% YoY; 6% miss) in 1QFY25. The miss was due to higher provisions.

* NII grew 12% YoY and 3% QoQ to INR134.5b (in line). NIM moderates 1bp QoQ to 4.05%. Other income grew 14% YoY to INR57.8b. Treasury gains stood at INR4.06b (vs. INR10.2b in 4QFY24). Total revenue thus grew 13% YoY to INR192.3b (in line) during the quarter.

* Opex grew 11% YoY to INR91.3b (4% beat). The C/I ratio stood at 47.5%, while the cost-to-assets ratio improved to 2.5%.

* PPoP thus grew 15% YoY to INR101.1b (in line). The bank suggested continuing investments in the business while maintaining the ability to tighten the overall opex run-rate.

* AXSB’s loan book grew 14.2% YoY/1.6% QoQ, with retail/commercial loans being flat/up 4% QoQ and SME loans growing at 20% YoY/0.3% QoQ. Deposit growth was modest at 12.8% YoY/down 0.6% QoQ. Retail TD dipped 0.9% QoQ while non-retail TD grew 4.8% QoQ. CASA mix moderated 100bp QoQ to 42%. C/D ratio increased 194bp QoQ to 92.2%.

* Fresh slippages came in at INR47.93b (INR39.9b in 1QFY24). GNPA / NNPA ratio thus increased by 11bp/3bp QoQ to 1.54% and 0.34% respectively. PCR stood broadly stable at 78%.

* Net credit costs came in higher at 97bp due to seasonality and lower recoveries & upgrades and did not reflect the full-year credit costs owing to timing differences. About 55% of the rise in credit costs is attributed to lower recoveries in the corporate portfolio this quarter. Excluding this timing difference, the effective credit costs would be 67bp. The restructured loans edged lower to 0.14% of net advances.

Highlights from the management commentary

* The new investment guidelines had a net positive impact of INR12.19b, reducing RoE by 82bp and RoA by 7bp. However, CET 1 improved 14bp.

* ECL provisions included INR50.12b in extra provisions, providing a cushion of 40bp over the reported capital ratio.

* In 1QFY25, the net credit costs did not reflect the full-year outlook due to timing differences. Approximately 55% of the increase is attributed to lower recoveries in the corporate portfolio.

* Excluding this 55% impact from timing differences, the effective credit costs would be 67bp. About 32% of gross slippages were linked accounts that were standard; as these slippages regularize, so would the linked provisions.

Valuation and view

AXSB reported a mixed quarter, with higher provisions leading to the earnings miss, while margin witnessed a meager 1bp QoQ moderation. Asset quality deteriorated, with credit costs increasing sharply due to the timing difference and lower recoveries. Loan growth was driven by the corporate segment, while deposits saw a muted growth leading to an increase in the C/D ratio to 92.2%. We will keenly monitor the near-term growth as an elevated C/D ratio will constrain credit growth, while continued re-pricing of deposits may keep margins under check. The bank has a healthy LCR of 120%, as it maintains the industry-best outflow rates; however, the impact of a surge in non-retail deposits will need to be monitored over the coming quarters. We cut our earnings estimate by 5.6%/7.8% in FY25/26, as we moderate our growth assumptions and build in higher credit costs. We thus estimate FY26E RoA/RoE of 1.7%/16.2%. Reiterate Neutral with a revised TP of INR1,175 (1.7x FY26E ABV)

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