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One-offs aid earnings; provisioning buffer fortified

LCR declines 5% QoQ to 115%

*  Axis Bank (AXSB) reported 2QFY25 net profit of INR69.2b (up 18% YoY, 4% beat) as tax reversals and treasury gains offset higher provisions. In 1HFY25, earnings grew 11% YoY to INR129b, and we expect 2H earnings to stay flat YoY at INR133b.

*  NII was up 9.5% YoY/flat QoQ at INR134.8b (in line). NIMs moderated 6bp QoQ to 3.99%. Provisioning expenses stood at INR22b (sharply higher than MOFSLe). AXSB made additional contingent provisions of INR5.2b.

*  Loans grew 11.4% YoY (2% QoQ) and deposits rose 13.7% YoY (2.3% QoQ), resulting in a C/D ratio of 92%. Average LCR declined 5% QoQ to 115%.

*  Fresh slippages moderated to INR44.43b (INR47.93b in 1QFY25). Accelerated write-off led to a decline in GNPA by 10bp to 1.54% and flat NNPA at 0.34%. PCR declined to 76.6%.

*  We broadly maintain our earnings estimates and expect FY26E RoA/RoE of 1.7%/15.9%. We had earlier downgraded the stock to Neutral in Jan’24 at INR1,090; we believe that while the current valuation looks comforting after a significant underperformance, the watchful stance on several key metrics (deposit growth, credit cost, LCR & CD ratio) will limit near-term stock performance. Reiterate Neutral with a TP of INR1,225 (1.7x FY26E ABV).

Asset quality stable; NIM moderates 6bp QoQ

*  AXSB reported a net profit of INR69.2b (+18% YoY; 4% beat) in 2QFY25 as tax reversals (INR5.5b) and treasury gains offset higher provisions. In 1HFY25, earnings grew 11% YoY to INR129b.

*  NII was up 9.5% YoY and flat QoQ at INR134.8b (in line). NIM moderated 6bp QoQ to 3.99%. Other income grew 33.5% YoY to INR67.2b (11% beat). Treasury gains stood at INR11b (vs. INR4.06b in 1QFY25). Total revenue grew 16.5% YoY to INR202b (in line) during the quarter.

*  Opex rose 9% YoY to INR94.9b (in line). C/I ratio improved 47bp QoQ to 47%. PPoP grew 24% YoY to INR107b (5% beat).

*  AXSB’s loan book grew 11.4% YoY/2% QoQ, with retail/commercial loans up 2% QoQ/flat QoQ and SME loans growing 16% YoY/6% QoQ. Deposits rose 13.7% YoY/2.3% QoQ. The CASA mix moderated 100bp QoQ to 41%. The C/D ratio stood at 92%, while average LCR declined 5% QoQ to 115% due to an increase in outflow rates.

*  Fresh slippages moderated QoQ to INR44.43b from INR47.93b in 1QFY25. Accelerated write-off led to a decline in GNPA by 10bp to 1.54% and flat NNPA at 0.34%. PCR declined to 76.6%. Credit cost stood at 0.9% vs. 1.19% in 1QFY25. Restructured loans edged lower to 0.13%.

Highlights from the management commentary

*  The bank received a favorable tax order of INR5.5b pertaining to six previous assessment years. AXSB utilized this gain to make INR5.2b of contingent provisions.

*  The bank will continue to operate within the current range of its CD ratio. LCR declined due to an increase in the outflow rates.

*  Write-offs have been higher owing to the bank's pre-defined policy – the bank has an auto write-off rule, which primarily applies to the CBG and retail portfolios. Out of the INR31.19b write-offs, a portion was related to wholesale accounts, whereas a tail amount was written-off after the recovery.

Valuation and view

AXSB reported an earnings beat as tax reversals and treasury gains offset higher provisions. However, margin contracted 6bp QoQ. Asset quality was stable as slippages declined sequentially, while higher write-offs drove improvement in GNPA ratios. Loan growth was muted, while deposits grew 14% YoY (~2% in 1HFY25), leading to a C/D ratio of 92%. Average LCR declined to 115% due to an increase in outflow rates. We will keenly monitor near-term growth as the C/D ratio is still high (the bank aims to maintain the current CD ratio), which will constrain credit growth, while continued re-pricing of deposits may keep margins in check. We broadly maintain our earnings estimates and expect FY26E RoA/RoE of 1.7%/15.9%. We had earlier downgraded the stock in Jan’24 at INR1,090; we now believe that while the current valuation looks comforting after a significant underperformance, the watchful stance on several key metrics (deposit growth, credit cost, LCR & CD ratio) will limit near-term stock performance. Reiterate Neutral with a TP of INR1,225 (1.7x FY26E ABV)

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