The test for Axis Bank, after a stellar Q2

The stock rose 9% on Friday to hit a 52-week high of  ₹906 on NSE. (Photo: Mint)
The stock rose 9% on Friday to hit a 52-week high of 906 on NSE. (Photo: Mint)

Summary

So far in 2022, Axis Bank’s stock has rallied nearly 33%, outperforming Nifty Bank, which is up 15%.

There is exuberance among Axis Bank Ltd’s investors. The private sector lender exceeded expectations on core metrics such as net interest income and net interest margin (NIM), during the September quarter (Q2FY23). The stock rose 9% on Friday to hit a 52-week high of 906 on NSE.

For the second quarter, Axis Bank’s performance can be described as focused earnings delivery after a balance-sheet strengthening phase, said analysts at ICICI Securities Ltd. The quarter registered the much awaited return on assets at 1.8% and return on equity at 18.5%, they said.

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After Q2 results, several broking firms revised the bank’s earnings estimates upwards. That said, in a rising interest rate scenario, sustainability of NIMs will be crucial for banking investors. The bank’s management aims to maintain NIM at current levels but acknowledges that cost pressures are set to increase as deposit growth rises. Axis Bank’s NIM expanded by 36 basis points sequentially in Q2 to 3.96%, the highest in at least the last 10 quarters.

“The bank was able to improve its NIMs, albeit on the back of sub-par deposit growth. The sustainability of such metrics remains contingent on upping the pace of deposit mobilization, as the current loan-to-deposit ratio (H1FY23: 90%) appears untenable," said an HDFC Securities report dated 21 October.

In Q2, the bank’s deposit growth stood at 10% year-on-year primarily due to muted growth in retail term deposits, which contribute highest share to total deposits. Also, the cost of deposits rose to 3.8% in Q2 from 3.69% in Q1.

Nonetheless, improving long-term earnings prospects bode well for the bank’s valuation multiples. “Axis Bank has ticked a lot of boxes that are critical to its re-rating story. Even after the current rally, we continue to see opportunity in absolute terms and even more compelling in relative terms, considering the prices at which many other banks are trading," said Santanu Chakrabarti, India analyst, banking, financial services and insurance, at BNP Paribas.

So far in 2022, Axis Bank’s stock has rallied about 33%, outperforming Nifty Bank, which is up 15%. ICICI Bank’s stock has risen by 23%. Analysts expect the Axis Bank stock to bridge the valuation gap with peers because of improved earnings. Meanwhile, Axis Bank has got the Competition Commission of India’s nod for integration of Citi’s retail business and expects closure by Q4FY23. Apart from the progress on the Citi deal, investors in the Axis Bank stock should also watch out for trends in treasury loss.

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