Q3FY24 Review: Axis Bank: PPOP in-line; operational trends robust

24 Jan 2024 , 12:47 PM

Axis’s Q3 PPOP was in line with Consensus, and PAT was 3% ahead adjusted for AIF provisions. NIM declined 10 bps (better than expectation) as 18bps increase in COF outpaced 7bps of yield expansion. Deposits grew faster than loans, aided by bulk deposits. NIM decline should be lower relative to the peers. Stressed loan ratio fell 24 bps QoQ, due to better recoveries/ upgrades. Analysts of IIFL Capital Services trim their FY25-26 est. by 1-2% on slower growth, and raise TP to Rs1,420 (30% upside) as analysts of IIFL Capital Services roll forward to FY26. Axis remains their top pick as we expect 20% CAGR PPoP growth over FY25-26E, and narrowing of ROA gap vs peer to drive rerating. Maintain BUY

Bulk deposit mobilisation drives LDR lower (to 93%). 

Loan growth of 4% QoQ/22% YoY was broad based, however home loan growth was slower at 2% QoQ. Deposit growth of 5% QoQ was led by strong growth in non-retail TDs (+21% QoQ). NIM declined 10bps QoQ as 7 bps rise in yields was offset by 18 bps increase in COF. The bank expects COF to rise further (albeit at a slower rate) in Q4 and Q1FY25. Analysts of IIFL Capital Services expect lower NIM compression for Axis relative to ICICI/Kotak.

Cost ratios to improve; asset quality stable. 

CIR improved 79bps QoQ, and cost to avg. asset ratio by 3 bps to 2.61%. While the bank intends to continue investing in the franchise, CITI integration expenses should end in next 5 qtrs, and thus drive operating leverage from FY26 onwards. Gross slippages inched up to 1.7% (vs 1.5% in 2Q), however higher recoveries and a lumpy corporate up grade led to 16 bps QoQ improvement in GNPA. Stressed loan ratio improved 24 bps QoQ to 2.4%. Bank provided Rs1.8bn for AIF investments, but higher recoveries led to in line credit cost of 0.45% (0.37% ex AIF).

Valuation gap to narrow vs larger peers: 

Analysts of IIFL Capital Services expect Axis’s ROA gap to narrow vs the larger peers (led by robust fee income growth and operating leverage benefit kicking in), which in turn should drive the rerating. The stock is currently trading at 1.8x 1YF P/B, for RoA/RoE of 1.8%/17% over FY25-26E. Analysts of IIFL Capital Services value the bank at 2.0x FY26E ABV and subs at ~Rs82/share, resulting in SOTP-based TP of Rs1,420.