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MOSL : AXIS BANK: Exemplary performance; margins take a giant leap

.  AXIS BANK: Exemplary performance; margins take a giant leap

(AXSB IN, Mkt Cap USD30.7b, CMP INR826, TP INR975, 18% Upside, Buy)

Asset quality remains robust

• AXSB reported a PAT of INR53.3b, up 70% YoY (26% beat), largely driven by 6% beat in NII and lower provisions, which declined 51% YoY.
• The business registered robust growth of 18% YoY and 4.2% QoQ growth in advances. The SME segment grew 28% YoY/8.7% QoQ. The large and mid-corporate segment also came back with a 6% QoQ growth, after witnessing a decline in 1QFY23.
• Fresh slippages moderated to INR33.8b, which coupled with healthy recoveries and upgrades enabled an improvement in asset quality ratios. Restructured book remains controlled at 0.38% of customer assets.
• Buoyed by a stellar performance in 2QFY23, we revise PAT for FY23E/24E by 17%/11%, respectively. This is driven by healthy NII trends, moderating opex (on the back of improved efficiency) and reduction in credit cost. We expect AXSB to deliver FY24E RoA/RoE of 1.8%/18.1% in FY24E. We reiterate our Buy rating on the stock.

PPoP beat driven by NII and controlled opex; asset quality improves

• 2QFY23 PAT grew 70% YoY to INR53.3b (26% beat), largely driven by higher NII, lower opex, and controlled provisions. In 1HFY23, PAT grew 79% YoY to INR94.5b.
• The bank’s NIM expanded 36bp QoQ to 3.96%, resulting in NII growth of 31% YoY/10% QoQ (6% beat). Other income grew 4% YoY (in line), as a result of a decrease in treasury losses of INR0.9b from a loss of INR6.7b in 1QFY23. Core fee income grew 20% YoY, of which, retail fee comprises 93%.
• Opex grew 14% YoY but was largely flat QoQ as past investments made in the business started to yield benefits. However, tech spends rose 19% YoY and forms 8% of overall opex. As a result, C/I and cost to assets ratio (annualized) improved to 46.0% and 2.25%, respectively, in 2QFY23.
• Total provisions declined sharply (51% YoY), aided by lower slippages and higher recoveries. Annualized credit cost (net) stood at 38bp. The bank did not utilize any COVID-related provisions and holds an additional provision buffer (including standard asset provisions) of INR116.2b (1.6% of loans).
• Loan book grew 18% YoY and 4.2% QoQ, with Retail/SME loans up 3%/9% QoQ, while the corporate book also came back with 6% QoQ growth. On the liability front, deposits grew 10% YoY and 1% QoQ. CASA ratio increased to 46%, up 251bp QoQ.
• On the asset quality front, fresh slippages fell to INR33.8b (v/s INR36.8b in 1QFY23). This along with healthy recoveries and upgrades enabled a 26bp/13bp QoQ improvement in GNPA/NNPA ratio. Net NPA ratio thus declined to 0.51%, while PCR improved to 80%. Restructured loans declined to 0.38% with PCR of 23%. BB and below pool (fund based) fell to 1.13% (v/s 1.28% in 1QFY23).