Axis Bank Rating: Buy | Retail engine needs to be accelerated

Axis Bank’s (Axis) Q2FY23 earnings surpassed I-Sec and consensus expectations by a wide margin (>20%) with PAT at `53.3bn (up 29% q-o-q, 70% y-o-y). Beat was across operating metrics, especially with NIMs soaring as much as 36bps q-o-q to 3.96%. NII growth settled at 31% y-o-y and 10% q-o-q. Core operating profit was up 43% y-o-y and 19% q-o-q adjusting for a treasury loss of Rs 0.86 bn. Credit cost too was contained at 16bps. ‘Opex to assets’ stayed put at 2.25% with <1.5% q-o-q rise in expenses. The quarter registered a much awaited RoA at 1.8% and RoE at 18.5%.

Going forward, given moderate balance sheet expansion, we believe Axis needs to accelerate its retail TD engine to support asset growth with the CD ratio now at 92%. Also, sustained efforts need to be made to drive ‘cost to assets’ below 2% in the medium term.

This was the second quarter for which performance can simply be described as focused earnings delivery post a balance-sheet strengthening phase. Surprise on NIM and visibility on sustainability of operating performance compel an earnings upgrade of 13%/8% for FY23e/ FY24e. Maintain BUY with a revised TP of Rs 1,130.

How sustainable is the performance and what are the levers available for further uplift

Given that 39% of the loan portfolio is EBLR-linked, 17% with 6-12 months MCLR reset, as well as gradual decline in RIDF investments and improved traction in better-yielding focused product segments – we believe all these factors can support yields to offset deposit cost pressures.

Decline in stress pool to 1.89% and non-NPA provisioning buffer of 1.6% are reassuring of a moderate credit cost trajectory.

Advances growth too has gained pace with retail growing 22% y-o-y/3% q-o-q, SME scaling up 28% y-o-y/7% q-o-q and corporate banking too contributing during the quarter with 7% y-o-y/ 6% q-o-q growth. Market share gain in SME, Bharat banking, leadership growth in card business, strengthening of transaction banking and growth in identified focused retail segments will likely sustain the momentum.