Axis Bank Stock Research Report

Business growth soft; retail slippages elevated but overall asset quality stable

Despite 9% YoY growth in NII, Axis Bank (Axis) reported Q2FY25 PAT of INR 69.2bn, up 18% YoY, driven by strong treasury gains (INR 11.1bn) and contained opex. The bank utilised favourable tax provisions w-back (INR 5.4bn) towards prudential provisions (INR 5.2bn). Core NIM was flattish QoQ at 3.99% as cost of deposits was flat. Gross retail slippages remained elevated at ~2.7% annualised, though overall net NPA ratio (at 34 bps) was unchanged QoQ and net credit cost improved QoQ to 54bps.
We increase our credit cost estimate to ~70bps each for FY25/26E, given the rising stress in unsecured retail loans. Business growth was muted at ~2% QoQ and advances growth (up 11.4% YoY) is now below systemic growth. We expect strong business seasonality for Axis in H2 and build in ~5/4% QoQ growth for next two quarters in deposits / advances. However, given the weak H1 and elevated LDR (92%), we cut loan growth estimate to ~13% YoY for FY25E. CET 1 stands reasonable at 14.12%.

Maintain BUY with revised TP of INR 1,350

Despite ~13% beat on PAT, we cut our FY25/26E PAT by ~2/5% on lower loan growth estimate and higher credit costs. We estimate Axis to deliver RoA of ~1.65%/1.6% and RoE of ~16/15% for FY25/26E, respectively. Risk rewards appear favourable with stock trading at ~1.6x FY26E core banking and <11x FY26E EPS. Maintain BUY with revised TP of INR 1,350 (vs INR 1,430 earlier), valuing the stock at ~1.9x (~2.0x) FY26E core banking business and INR 126 per share of subsidiaries. Key risks: Higher-than expected rise in slippages and slower-than-expected rise in deposits impacting profitability.

Deposits growth soft and likely to be a growth constraint; NIM stable QoQ

Deposit growth was soft at 2% QoQ (up 14% YoY), dragged by weak CASA (flat QoQ and up 4% YoY) growth. Term deposits growth, however, was healthy at 4/21% QoQ/YoY. CASA ratio declined to 40.6% vs 41.8% QoQ. Contrary to improving trend in last couple of years, deposits outflow rate has risen to 25.7% vs 24.2% QoQ and 23.1% YoY (but still better than 26.8% in Q2FY3) as the bank has tightened thresholds, in line with best practices. LCR dipped QoQ to 115%. Cost of deposit remained stable QoQ at 5.08%. Reported NIM declined by 6bps QoQ (down 12bps YoY) to 3.99% due to 5bps favourable impact in base quarter. NII was flat sequentially and grew ~10% YoY to INR 135bn. We estimate NII growth at ~10% CAGR for FY24-26E.