Axis Bank Q1 review: Why did shares fall 3.5% despite 91% surge in profit?

Axis Bank Q1 review: Shares of Axis Bank dropped 3.5 per cent to Rs 702 apiece on the BSE in Tuesday’s intra-day trade as investors booked profit in the counter post astounding June quarter (Q1FY23) results. Analysts described Axis’ Q1 earnings as “focused earnings delivery, post balance sheet strengthening phase”.

The Mumbai-based lender best Street estimates as it reported net profit of Rs 4,125.26 crore, up 91 per cent year-on-year. Net interest income (NII) growth was 21 per cent on year, at Rs 9,384 crore, and in-line with estimate. The bank calibrated its growth to improve net interest margin (NIMs) by 11 basis points (bps) sequentially to 3.6 per cent.

According to analysts, Axis’ earnings beat was led by NIM expansion, and credit cost being restricted at less than 20 bps. This, coupled with 34 per cent YoY growth in fee income, more than offset the treasury loss of Rs 670 crore.

ICICI Securities said that decline in stress pool, including net non-performing assets (NPA), restructured loans, and BB & below rated loans, to 2.17 per cent vs 2.33 per cent in fourth quarter of fiscal 2021-22 (Q4FY22), along with non-NPA provisioning buffer of 1.7 per cent reassures moderating credit cost trajectory.

"Focus on profitability is a welcome move and we believe the bank should gradually turn around its core performance as risk appetite for better yielding loans has come back and that should support NIMs. Further, gradual benefit of operating leverage and contained credit cost should drive return on assets (RoA) to 1.4-1.5 per cent, and return on equity (RoE) to around 15 per cent over fiscal year 2022-23 (FY23)/fiscal 2024 (FY24)," said Antique Broking.

Axis Bank's loan book grew 14 per cent YoY, and slipped around 1 per cent QoQ, as the bank chose to avoid low-yielding corporate assets and focused on margin-accretive, profitable growth.

While growth in the retail segment remained strong at 25 per cent, growth in large corporates declined sharply by 5 per cent YoY. Growth in SME loans was at 27 per cent, but declined 7 per cent QoQ. Nirmal Bang has cut loan growth estimates by 3.2 per cent each for FY23 and FY24 to factor-in Q1 performance.

On its part, the bank remains confident of chasing growth in the corporate segment with rates increasing, pricing stabilizing, and corporate demand reviving. It has guided for 3.7-3.8 per cent NIM in the next 8-10 quarters, driven by improving loan mix, and overall balance sheet mix.

"Though the loan growth was lower compared to peers, we believe Axis Bank remains on a strong footing to drive loan growth going ahead which should lead to gradual RoA/RoE expansion to 1.5 per cent/15.8 per cent by FY24," said JM Financial.

ICICI Securities has increased its net profit estimate by 3 per cent each for FY23 and FY24, while Edelweiss Securities has increased earnings per share (EPS) estimate by 12 per cent and 19 per cent, for the respective years.

Word of caution

Analysts cautioned against Axis’ elevated operating expenses, which grew 32 per cent YoY due to an increase in business volumes (40 per cent), investment in future growth and technology (25 per cent), collections and statutory-related (15 per cent).

As a result, cost to income ratio (C/I) and cost-to-assets ratio remained elevated at 52.5 per cent and 2.4 per cent, respectively. However, the bank remains committed to achieving 2 per cent opex/assets in the medium term.

"While Q1 was a strong beat, earnings volatility has been high in the past. With a clean loan book and focussed strategy, the management guided that core earnings delivery and NIM expansion will sustain. We believe Axis’ re-rate will depend on Q1 performance’s sustainability," said Edelweiss Securities.

That apart, Citibank’s consumer business acquisition, which will not be financially accretive in the immediate term; imminent equity raise due to hit on net worth (goodwill amortisation) and common equity tier-1 (CET-1); and retention of an acquired credit card and deposit customer base are near-term monitorables.