Axis Bank - Elevated cost-to-assets to delay convergence with peers - HDFC Securities

Axis Bank delivered a mixed bag with earnings marginally ahead of estimates, driven by lower credit cost (60bps annualised). However, PPOP was impacted by moderation in loan growth/ margins and higher opex. Net slippages were muted (0.1% of loans) even as the restructured pool and sub-investment grade portfolio improved sequentially. Despite a gradual shift in its incremental loan mix towards higher-yielding loans, we do not yet see evidence of AXSB's ability to exercise better pricing power, which remains a key driver for RoA reflation. We trim our FY22/FY23E earnings estimates by 4-5% each to factor in higher cost-to-assets and maintain BUY with a revised SOTP-based target price of INR996 (standalone bank at 2.0x Mar-24 ABVPS).

- Lack of pricing power evident in margins: Axis reported NII growth (+17% YoY) and sequentially soft margins at 3.5%, suggesting the bank's inability to exercise pricing power. Opex continued to remain elevated (2.4% of assets), driven by volumes and continued investments in digital initiatives. Loan growth was driven by housing (+20%), LAP (+42%), business banking (+73%) and SME (+27%), while corporate loans witnessed muted traction.

- Back book looks sorted: Net slippages for the quarter were muted at 0.1%, nearly two-thirds from retail (largely secured). With GNPA/NNPA at 2.8% / 0.7%, and improvement in the restructured (0.6%) and sub-investment grade book (1.3%), the back book appears sorted. Credit costs clocked in at 60bps and the management expects to see net accretion to risk-adjusted margins from these levels. The PCR currently stands at 75%.

- Cost-to-assets likely to stay stubborn; RoE guidance unconvincing: Axis Bank's guidance reversal on exit-FY23 cost-to-asset ratio is disappointing, especially given the equally limited line of sight on other RoA reflation levers. While these medium-term investments are necessary, we believe that the bank's aspiration for 2% cost-to-assets is unlike to materialise by FY24E. We also remain unconvinced of the bank's 18% ROE narrative, especially given the rising leverage (higher than peers) - we expect ROEs to peak out at ~16% across cycles.

Shares of Axis Bank Limited was last trading in BSE at Rs. 728.70 as compared to the previous close of Rs. 779.95. The total number of shares traded during the day was 987355 in over 35723 trades.

The stock hit an intraday high of Rs. 769.00 and intraday low of 725.00. The net turnover during the day was Rs. 733293637.00.

Source : Equity Bulls

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AxisBank INE238A01034 HDFCSecurities Q4FY22 ResultUpdate