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Healthy NII growth; elevated opex leads to slight earnings miss

* Axis Bank (AXSB) reported 2QFY27 net profit of INR70.0b (up 38% YoY/down 2% QoQ; 4% miss).

* NII grew 12% YoY/5% QoQ to INR153.7b (3% beat). NIM contracted 10bp QoQ to 3.36% (vs. our est. of 3.34%).

* Loan book grew 23% YoY/8.9% QoQ to INR13.7t, led by the corporate (up 8% QoQ) and SME segments (up 9% QoQ). Deposits grew 21% YoY/5.8% QoQ to INR14.5t, aided by FCNR(B) deposits of INR1.02t. CASA mix stood at 36%. ? Fresh slippages declined 14% QoQ to INR47.62b. GNPA/NNPA ratio declined 12bp/4bp QoQ to 1.16%/0.37%. PCR rose 20bp QoQ to 69.9%.

* We raise our FY28E earnings estimate by ~5%, factoring in rate hikes, taking FY28E RoA/RoE to 1.6%/15.1%. Reiterate Neutral with a TP of INR1,475 (based on 1.6x FY28E ABV).

NIMs contract 10bp QOQ; through-cycle guidance reiterated at 3.8%

* AXSB’s 2Q PAT was INR70.0b (up 38% YoY, down 2% QoQ, 4% miss) as strong NII growth and lower-than-expected provisions were offset by elevated opex intensity and softer treasury income.

* NII grew 12% YoY/5% QoQ to INR153.7b (3% beat), with NIM contracting 10bp QoQ to 3.36% (MOFSLe: 3.34%), of which 11bp was due to the impact of FCNR(B) deposits.

* Other income declined 3% YoY/1% QoQ to INR65.3b (6% lower to MOFSLe), as fee income grew at a modest 6% YoY, with softer treasury income of INR0.85b. Thus, total revenue grew 8% YoY to INR219.0b (in line).

* Opex grew 9% YoY/11% QoQ, (7% higher than MOFSLe), including INR2.5b of one-time expense related to the labor code and certain costs associated with FCNR(B) mobilization. PPoP grew 6% YoY/declined 5% QoQ to INR110.8b (5% miss, driven by higher opex). As a result, C/I rose to 49.4% (up from 45.5% in 1QFY27).

* Loan book growth was healthy at 23% YoY/8.9% QoQ, driven by the Corporate (up 8% QoQ) and SME segments (up 9% QoQ), while Retail loans grew 3% QoQ, excluding the FCNR(B) impact.

* Deposits grew 20.7% YoY/5.8% QoQ, aided by FCNR(B) deposits of INR1.02t. Excluding FCNR(B) deposits, growth was 17% YoY/3% QoQ. CASA deposits rose 1.5% QoQ (up 10.5% YoY). As a result, CASA ratio declined to 36% (down 200bp QoQ).

* Fresh slippages declined 14% QoQ to INR47.62b, as asset quality improved across segments. GNPA/NNPA ratio declined 12bp/4bp QoQ to 1.21%/0.35%. PCR rose 20bp QoQ to 69.9%.

* The CAR/CET-1 stood at 16.27%/14.96%. The average LCR was 119%

Valuation and view

AXSB reported a mixed quarter, with strong NII growth and lower provisions offset by elevated opex. The bank reiterated its through-cycle NIM aspiration of ~3.8%, driven by an improving balance sheet mix. Deposit growth was primarily led by strong FNCR(B) mobilization, taking the CD ratio to 94.6%. Loan growth was healthy, led by growth in corporate and MSME, while retail growth picked up marginally. The bank also reiterated its medium-term guidance of growing advances ~300bp faster than the industry. Asset quality improved across segments, with both GNPA and NNPA ratios declining. Credit costs declined, driven by a reduction in slippages and recoveries of INR9.7b from written-off accounts. The bank continues to maintain a healthy cumulative provision buffer of INR159b (~1.2% of loans), which is expected to facilitate a smooth transition to the ECL framework. We raise our FY28E earnings estimate by ~5%, factoring in rate hikes, taking FY28E RoA/RoE to 1.6%/15.1%. Reiterate Neutral with a TP of INR1,475 (based on 1.6x FY28E ABV).

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