PL Stock Report - Axis Bank (AXSB IN) - Q1FY24 Result Update - Focus on profitability and business investments - BUY

Axis Bank (AXSB IN) - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs977 | TP: Rs1,170

Q1FY24 Result Update - Focus on profitability and business investments

Quick Pointers:

♦ Good quarter; NII/NIM beat and superior quality of business growth.

♦ Opex drag resulted in 11% miss on core PAT; asset quality was stable.

AXSB saw a good quarter; although core PAT was a miss due to higher opex, NII was 3% ahead to PLe leading to NIM at 4.17% (beat by 17bps). NIM boost was driven by (1) strong QoQ growth in higher margin segments of PL, CC and SBB (2) deliberate slowdown in housing (3) 6% QoQ fall in LCR and (4) lower deposit growth of 0.6% QoQ resulting in higher LDR. RTD growing by 4.5% QoQ was another positive. Balance sheet construct is being calibrated towards higher margin segments and granular deposits which could slightly affect loan growth. However, this should bode well over medium term from a profitability perspective. CITI integration costs and business investments would keep opex elevated. For FY24/25E we raise NIM and opex while reduce provisions resulting in ~3% PAT upgrade. With likely RoA of 1.7% for FY25E, valuation discount to ICICIB (27%) should narrow. We maintain multiple at 2.2x but raise TP to Rs1,170 from Rs1,140. Reiterate ‘BUY’.

♦ Margins higher to PLe by 17bps; miss on core PAT due to opex drag: NII was ahead at Rs119.6bn (PLe Rs116bn) as NIM was better while loan growth was in-line. NIM was a beat at 4.17% (PLe 4.0%) mainly led by better yields. Loan growth was in-line at 22.4% YoY while deposit growth was lower at 17.2% YoY (PLe 20%). Other income was higher at Rs50.9bn (PLe Rs48bn) due to treasury gains; fee was lower. Opex was 14% more to PLe at Rs82.3bn due to both higher staff cost and other opex that also included CITI integration cost of Rs3.85bn. PPoP was lower at Rs88.1bn (PLe Rs92.2bn); core PPoP was 9% lower to PLe. GNPA was in-line at 2.0%; slippages and recoveries came in largely as expected while write-offs were higher. PCR was broadly steady QoQ at 80%. Provisions were Rs10.3bn (PLe Rs10.0bn). PAT was Rs58bn (PLe Rs61.7bn) while core PAT at Rs54.1bn was 11% below PLe.

♦ Growth in higher margin segments cushioned NIM: Sequential loan growth at 1.6% QoQ was attributable to corporate (1.8%) and retail (2.1%). Corporate accretion was led by iron & steel, CRE, infra, roads and NBFCs and disbursal pipeline is healthy. TL:WC mix within corporate is 70:30. Retail growth QoQ was driven by higher NIM segments of PL (+4.3%), cards (+9.6%) and SBB (+7.7%). Housing growth was deliberately muted as bank wanted to deliver on NIM. AXSB expects housing growth to pick-up in Q2. Deposit growth was softer at (-0.6% QoQ) as CASA declined by 4% while TD grew by 2.5%. RTD saw healthy growth of 4.5% QoQ. Since bank is calibrating its loan and deposit mix with focus on higher margin segments and granular deposits, we lower loan CAGR over FY23-25E slightly from 16% to 15%.

♦ Raise NIM for FY24/25E; opex to remain elevated: While we had expected NIM to regularize in Q1FY24 (last quarter fall of 20bps), margins were superior due to (1) substantial share of higher margin segments in quarterly credit flow (2) normalization of LCR post CITI acquisition and (3) lower deposit growth leading to higher LDR of 91.2% (Q4’23 - 89.3%). We raise NIM for FY24/25E by 7/9bps to ~3.7% as balance sheet construct is gradually improving. Opex continues to remain elevated as CITI integration costs are being incurred while healthy NIM provides latitude to make business and technology investments. Hence we increase opex costs for FY24/25E by average 6%.

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