The quarterly performance by Axis Bank was reflective of broader themes observed in other banks. NIM improved sharply and drove a beat in NII, and operating expenses were kept in check. Together, this led to a beat in profit estimates. The overall transformation at Axis Bank continues.
As AXSB pivots its asset mix towards higher yielding assets, runs down RIDF (rural infrastructure development fund) bonds, maintains higher NIM and focuses on bringing down its cost/assets ratio, its core operating profitability is estimated to improve. We estimate operating profits RoA to expand by 50bp over FY22-25e to 2.8% of assets. As the gap of AXSB’s core profitability versus ICICIBC reduces, so should its valuation discount. At 1.7x FY24e core P/B, the stock is attractively priced.
We value AXSB at Rs 1,200/share on a SOTP basis. We re-iterate our Buy rating. Downside risks: i) Compression in NIMs, ii) slowdown in retail loan growth.
We increase our FY23/24/25e EPS estimates by +4.4/+6.9/ +4.7%: Our EPS estimates are higher as we (i) increase NIM estimates; (ii) lower operating expenses; and (iii) increase credit costs. We estimate an operating profit/EPS CAGR of c20%/25% over FY22-25e.
Strong operating performance: NIMs expanded by 30bp q-o-q to 4.26%. Fee income growth was strong at 6% q-o-q while operating expense growth was muted (up 4% q-o-q), driving operating profits of Rs 92.8 bn (up 20% q-o-q).
Loan growth (15% y-o-y/ 4% q-o-q) was driven by domestic corporate loans (+11% q-o-q) and SME loans (+5% q-o-q). Sequential growth in retail loan growth was muted.
Highlights from management commentary: The bank has levers to maintain NIMs in the face of increased deposit rate pressures. It also has headroom to run higher operating expenses given muted credit costs. Overall quality of the deposits is increasing as the mix of callable bulk deposits decline. The Flipkart co-branded credit card crossed 3m cards in force. In Q3FY23, c46% of the treasury profits were due to write back of mark-to-market losses made earlier in FY23. The bank anticipates that there will not be any shortfall in priority sector lending (PSL) requirements in FY23.