Axis Bank investors cautious on credit, margin outlook

Deposit growth has lagged loan growth. In Q3, loans and deposits grew by 22% and 18% year-on-year, respectively, and by 4% and 5% quarter-on-quarter. Notably, the bank’s asset quality improved, with gross non-performing assets (NPAs) as a percentage of total loans showing a positive trend sequentially, dropping from 1.73% to 1.58% as at the end of December. 

On the other hand, the share of CASA deposits in total deposits fell to 42% in Q3 from 44% in Q2, indicating a drop in the quality of deposits. CASA refers to current account, savings account.

Overall, though, the upshot is that Axis Bank’s net profit grew by 4% to ₹607 crore in Q3.

Despite decent growth, investors are concerned due to the bank’s apprehensions about credit and deposit growth. Anticipating a tight liquidity environment to continue until inflation cools to 4%, Axis Bank foresees a slowdown in credit growth and limitations on deposit expansion. 

Cost of deposits increased further in Q3, and the worry is that the management expects these costs to spill over into Q1FY25, thus pressuring margin.

In Q3, Axis Bank’s net interest margin (NIM) fell 10 basis points sequentially to 4.01%. NIM is the difference between the interest income earned by a bank from its lending activities and the interest expenses paid on its borrowings and deposits, expressed as a percentage of the average interest-earning assets.

To be sure, Axis Bank’s NIM was in line with expectations, supported by improved yields resulting from a favourable product mix and a reduced share of low-yielding Rural Infrastructure Development Fund bonds that helped maintain the bank’s NIM. 

Looking ahead, as the deposit repricing continues and the loan-to-deposit ratio contracts, there might be some near-term pressure on NIM, but it does not appear alarming yet. While the management did express concerns over loan growth, it also expressed confidence in maintaining a 400-600 basis points lead over industry growth in the medium term.

Amid the chase for deposits, Axis Bank has expanded its footprint with the addition of 100 branches in the third quarter, contributing to a total of 350 new branches in the first nine months of FY24. This brings the bank closer to achieving its target of 500 branches by the end of FY24.

Meanwhile, Axis Bank’s credit costs appear to have bottomed out, but its operating expenses trajectory needs to be monitored. “Axis Bank’s opex ratios (cost to average assets) remain elevated at 2.6%,” point out analysts from JM Financial Institutional Securities Ltd. 

The bank’s management has indicated that it will remain in investment mode as the benign credit environment gives them additional comfort to invest in distribution and technology while protecting profitability. “We believe this is likely to keep opex ratios elevated for a longer period of time than anticipated earlier,” JM’s analysts said in a report on 23 January.

As such, investors are sitting on 16% returns over the past year, although near-term triggers appear limited. The bank expects deposit challenges to persist in FY25. In Q3FY24, 65% of Axis Bank’s incremental deposits were bulk. Given the higher share of bulk and deposit challenge, analysts from Nuvama Institutional Equities find Axis more vulnerable on loan growth and NIM compared to ICICI Bank, Kotak Mahindra Bank and others. 

Further, although corporate loans grew by 12.6% year-on-year, these were muted sequentially. Analysts caution lumpy slippages from the corporate book could be a potential downside risk.