PL Stock Report: Axis Bank (AXSB IN) - Q2FY24 Result Update - Retail/SME supporting better margin profile - BUY

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

Rating: BUY | CMP: Rs980 | TP: Rs1,250

Q2FY24 Result Update - Retail/SME supporting better margin profile

Quick Pointers:

§ Good quarter; core PAT beat due to better NII/NIM and lower provisions.

§ Opex continues to drag; may remain elevated in near term.

AXSB delivered good numbers as core PPoP beat PLe by 8.2% led by better NII and fees; opex was a drag. As net slippages were controlled, provisions were lower leading to better profitability. NIM positively surprised yet again at 4.19% (beat by 24bps) driven by (1) strong QoQ growth in higher margin segments of PL, SME and SBB (2) intentional slowdown in housing and (3) lower deposit growth of 1.6% QoQ resulting in higher LDR. Bank expects NIM to remain at healthy levels due to change in product mix towards retail/SME. RTD growing by 4.4% QoQ was another positive. Balance sheet construct is being calibrated towards higher margin segments and granular deposits. However, deposit growth needs to catch-up for sustained loan growth of 17%+. CITI integration and business investments would keep opex elevated. With likely RoA of 1.7% for FY25/26E, we maintain multiple at 2.2x but raise TP to Rs1,250 from Rs1,170 as we roll forward to Sep’25E ABV. Retain ‘BUY’.

§ Core PPoP beat led by higher core revenue; opex was a miss: NII was ahead at Rs123.1bn (PLe Rs116bn) as NIM was better while loan growth was slightly higher. NIM (calc.) was a beat at 4.19% (PLe 3.95%) mainly led by lower CoF also due to higher LDR. Loan growth was 22.7% YoY (PLe 21% YoY) while deposit growth was lower at 17.8% YoY (PLe 19.8%). Other income was in-line at Rs50.3bn; while fees were more. Opex was a 3.9% miss to PLe at Rs87.2bn due to more other opex, while staff cost was lower. PPoP was a beat at Rs86.3bn (PLe Rs82.7bn) and core PPoP was 8.2% higher to PLe. Asset quality was stable with controlled net slippages. GNPA/NNPA declined by 23/5bps QoQ to 1.78%/0.37%; PCR was steady QoQ at 80%. Provisions were lower at Rs8.14bn (PLe Rs12.0bn). PAT was Rs58.6bn (PLe Rs53bn) while core PAT at Rs59.4bn was 15.2% higher to PLe.

§ Sequential loan growth led by retail/SME: Credit growth QoQ was 4.5% attributable to retail (+4.4%) and SME (+9.5%) while corporate grew by (3.2%). Neo-banking proposition for SME continued to witness good traction and bank is adding 5000 new corporates each month. Retail accretion was broad based driven by LAP, PL, vehicle, SBB and Agri. Bank is comfortable with the quality of PL portfolio as exposure to small ticket segment is minimal. While HL growth was muted, disbursals in Q2’24 increased by 26% QoQ. Deposit growth was softer at (+1.5% QoQ) although RTD growth was healthy at 4.4% (basis QAB) which was a positive. Moreover, as per the bank, there has been a reduction in deposit outflow by 550bps bps over last 2 years, which increases lendable deposits. CASA ratio was 44.4% (45.5% in Q1’24).

§ Opex saw a blip due to one-time impact: Rise in other opex was mainly a function of two exceptional items, (1) non-recurring expenses incurred for rationalization of card spends and (2) increased prudence in actuarial valuation of reward points on cards. Additional opex was led by volume (9%), technology (51%), BAU (27%) and integration (4%). Bank maintained its guidance of expending Rs20bn of integration cost over 18-months. We expect opex to remain elevated in near term as (1) Citi business is a higher yield and cost business that would keep cost to income sticky and (2) AXSB plans to add 500 branches in FY24E (vs 145 in FY23 and 249 in H1FY24).

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