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AXSB’s core operating performance is progressing as we had argued in earlier reports. The incremental point of concern is the step-back from the targeted cost/assets of 2% by FY23e. While investments in building infrastructure are essential, this delays the convergence of AXSB’s RoA/RoE with that of ICICIBC by FY24/25e, thereby leading to a delay in the convergence of their valuations too. Despite the marginal earnings cut, our TP is raised to Rs 1,055 (from Rs 980) as we roll over our multiples to FY24e (from FY23e). We think AXSB remains attractive from a medium-to-long term perspective, despite having a few challenges to conquer in the near term.

We revise our FY23/24e earnings by -1.0%/-4.9%, introduce FY25e estimates: The earnings cut is due to an increase in the cost/income ratio to c48% (46% earlier) over FY23-25e. We revise our NIM estimates lower (average 3.5% vs 3.6% earlier). As higher cost ratios impact PPoP RoA, management may utilise the additional provisions (Rs 50.1 bn) to support RoA in the interim. Hence, we cut credit cost estimates to 0.8% over FY23-24e (0.9% earlier). We estimate RoA of c1.5% and RoE of 14.8% by FY25e. We have not incorporated any estimates for the Citibank deal.

Downside risks: (i) any moderation in growth and softness in NIMs; (ii) an increase in operating expenses beyond our estimates which would subdue PPoP growth.

Key takeaways from the Q4FY22 results
NIMs moderated 4bp q-o-q to 3.5% as cost of funds increased 6bp q-o-q. There was pressure on deposit mobilisation as average CASA (up 2% q-o-q) and retail TD (down 1% q-o-q) growth remained muted.

Asset quality improved as the total pool of stressed loans declined to 5.3% of loans (6.2% in Q3FY22). Credit costs improved to 58bp (vs 83bp in Q3FY22). The bank is carrying non-specific provisions at 1.77% of total loans.

Highlights from commentary: Management guided for elevated costs-to-assets in the near term as spending on technology, hiring, branch expansion and various other capacity-building initiatives will continue. It refrained from updating its guidance of 2% cost/assets by FY23e though. Retail asset growth momentum is picking up across the board and management is confident of sustaining it. Fee income was impacted as the bank reduced general banking charges.

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Author: Howard Caldwell