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Axis Bank Q2 Review: Analysts Flag Concerns As It Trails Behind Peers

Brokerages raise concerns about Axis Bank's structurally weak net interest margins.

A pedestrian wearing a protective mask walks past an Axis Bank Ltd. branch on a near-empty street in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A pedestrian wearing a protective mask walks past an Axis Bank Ltd. branch on a near-empty street in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Shares of Axis Bank Ltd. slipped on Wednesday after analysts flagged concerns over a fall in the lender's second-quarter loan growth and net interest margin.

Net profit jumped 86% year-on-year to Rs 3,133.3 crore in the three months ended September. The bank's net interest income, or core income, rose 8% over the preceding year to Rs 7,900 crore. Net interest margin stood at 3.39%.

Here's what brokerages had to say on the Q2 earnings:

Macquarie

  • Axis Bank’s numbers were disappointing on several fronts. Be it loan growth, margins, slippages, the cost-income ratio and finally return on assets – all were inferior to larger peers.

  • Return on assets, at 1.2% (annualised) for second quarter of FY22, was 60–80 basis points lower than larger peers.

  • The key worry is the inability to improve margins. Margins have been stuck in a very narrow range of 3.3–3.5% since June 2017, while larger peers have margins touching 4%. This is now getting to be a structural issue.

  • Management articulated that loan growth being weaker is hurting margins as excess liquidity is being carried. While indeed that could be the case for this quarter, we are unable to explain a four-year trend of margins being low.

  • The slippage ratio of about 3.5% (annualised) was much higher than peers, who reported around 2–3%. However, outstanding restructured assets, at about 80 basis points, is also lower than the 1–1.5% reported by larger peers.

Jefferies

  • Moderation in slippages and low restructuring were positives.

  • Loan growth slowed to 10% year-on-year and 1% quarter-on-quarter as pickup in retail/SME was offset by fall in corporate loans.

  • Weak loan growth and fall in net interest margin limited net interest income growth to 8%.

  • Net interest margin is below peers and gap may take time to close. This could mean that the valuation gap with ICICI Bank will sustain.

  • Axis' net interest margin at 3.4% are lower than the leading banks (4-4.5%) and this reflects combination of slower loan growth and also the need to hold higher government bonds to meet liquidity coverage ratio norms as Axis Bank has higher share of wholesale/short-term funding.

  • While loan growth can improve faster with confidence on environment, liability side-related improvements can take longer.

Emkay

  • Growth disappointed again, but asset quality trends were better than peers. The gross NPA ratio was down 32 basis points quarter-on-quarter at 3.5%, while restructured pool stood at 0.64% of loans.

  • Credit growth remains an irritant, lagging peers like ICICI Bank, HDFC Bank Ltd. and Kotak Mahindra Bank Ltd. However, Axis expects to improve the growth trajectory with the help of retail/SME businesses and a gradual pickup in large corporates.

  • NIM, too, remains an irritant, but Axis pins hope on better growth and change in product mix.

  • The bank has undergone a major transformational journey in the past few years, fortifying the balance sheet, building strong capital/provision buffers and revving up the digital banking platform and even the subsidiaries. However, it will have to deliver on growth/core-profitability to re-rate from hereon.