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Margins expand 5bp QoQ; treasury gains aid earnings

CD ratio moderates to ~90%

* AXSB reported healthy PAT beat at INR71.3b (up 7.6% YoY/17.4% QoQ), driven by healthy revenue growth and treasury gains.

* NIMs expanded 5bp QoQ to 4.06% on a favorable asset mix even as funding cost pressure is likely to continue until 1HFY25.

* Loan growth was healthy at 14% YoY/3.5% QoQ, while deposits grew 12.9% YoY/6.3% QoQ. The CD ratio moderated to 90.3%.

* Fresh slippages declined to INR34.7b, whereas healthy recoveries and upgrades led to a decline in the GNPA ratio. Restructured book was under control at 0.16%.

* We raise our estimates while remaining watchful over cost and a high CD ratio at 90%. We estimate AXSB to deliver a 14.5% CAGR in loans over FY24-26. Accordingly, we estimate FY26 RoA/RoE of 1.8%/16.8%. We retain our Neutral rating with a revised TP of INR1,200 (1.7x FY26E ABV).

Deposit growth healthy; CASA mix improves to 43%

* AXSB’s 4QFY24 PAT grew 17.4% QoQ to INR71.3b, aided by healthy other income and improvement in margins, partly offset by higher provisions.

* NII grew modestly by 12% YoY (4.4% QoQ) to INR130.9b. Reported margins expanded 5bp QoQ to 4.06% due to improvement in yields. Fee income grew 23% YoY/9% QoQ, while treasury gains and provision reversal supported other income growth at 21.8% QoQ (17% above our estimate).

* Opex grew 25% YoY/4% QoQ (in line), owing to continued investments in digital and technology, employee increments, and expenses related to Citi’s integration. Due to one-off other income, the C/I ratio improved sharply to 46.9%, while the cost-to-assets ratio continued to inch up. PPoP grew 15.3% QoQ to INR105.4b (14% above MOFSLe). The bank plans to continue to invest in the business as long as RoE stays at healthy levels above 18%.

* Loan book grew 14% YoY/3.5% QoQ, with Retail loans up 6.6%, corporate down 2.9% QoQ. SME loans grew at a healthy rate at 17% YoY/4.7% QoQ. Deposit growth gathered pace at 12.9% YoY/6.3% QoQ, led by healthy growth in retail and non-retail TDs. The CASA mix rose 100bp QoQ to 43%.

* On the asset quality front, fresh slippages moderated to INR34.7b (vs. INR37.2b in 3QFY24). The GNPA ratio improved by 15bp QoQ to 1.43%, while the net NPA ratio declined to 0.31%. PCR improved to 78.5%.

Highlights from the management commentary

* There were no one-off items affecting NIM and NII, which reflect a disciplined strategy. The bank has various mechanisms in place to uphold margins.

* Trading gains came from DCM, treasury and reversal of MTM losses booked in 3Q

* Cost to assets – As long as the bank can deliver 18% RoE, it will continue to invest in the franchise.

* If the marginal CoF stays steady, deposit repricing should be completed by 2QFY25.

Valuation and view: Maintain Neutral with a TP of INR1,200

AXSB delivered a healthy earnings beat in 4QFY24, characterized by healthy other income and improvement in margins. NIMs improved 5bp QoQ, led by an improvement in asset mix and controlled rise in funding cost. We keep an eye on near-term growth as an elevated CD ratio will constrain credit growth, while continued re-pricing of deposits may keep margins in check. The bank has healthy LCR of 120% as it maintains industry-best outflow rates; however, the impact of a surge in non-retail deposits will need to be watched over the coming quarters. The bank has reiterated its guidance of growing by 300-400bp higher than the system over the medium term. AXSB has also suggested that it will continue to invest in the business, taking advantage of controlled credit costs. This will keep cost/asset ratios elevated over the near term. We raise our estimates by 2-4% for FY25-26 while remaining watchful over cost and high CD ratio at 90%. We estimate AXSB to deliver a 14.5% CAGR in loans over FY24-26. Accordingly, we estimate FY26 RoA/RoE of 1.8%/16.8%. We maintain our Neutral rating with a revised TP of INR1,200 (1.7x FY26E ABV).

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