BackStable NIM saves the day for Axis Bank, but deposits need a push
Axis has managed to close the margin gap with close peer ICICI Bank, whose NIM compressed by 25bps sequentially in Q2 to 4.53%.
PremiumA key highlight of Axis Bank’s September quarter (Q2FY24) result was expansion in net interest margin (NIM). Even though the overall NIM rose by a mere 1 basis point (bps) to 4.11%, in the backdrop of sequential rise in cost of funds, this is a positive. One basis point is 0.01%.
The increase in cost of funds was offset to a large extent by better yields due to a favourable product mix, utilization of excess liquidity and reducing share of low yielding Rural Infrastructure Development Fund bonds.
With this, Axis has managed to close the margin gap with close peer ICICI Bank, whose NIM compressed by 25bps sequentially in Q2 to 4.53%. “The NIM differential between ICICI Bank and Axis Bank, which hovered at 68bps over Q4-Q1, has narrowed 26bps to a differential of 42bps in Q2," said a Yes Securities report. With this, the Axis stock rose nearly 2% on Thursday.
Yet, at a time when deposit mobilization is becoming intense and cost of funds is elevated, how long can the cheer on NIM sustain? The answer to this lies in the company’s ability to pass on the increased cost. In H2FY24, the management expects deposit costs to increase further, but the pace of deposit cost growth is likely to moderate. Note that the bank’s loan-to-deposit ratio at 94% is elevated and could act as a headwind to NIM outlook.
Deposit growth was a disappointment, lagging far behind loan growth. As on September end, deposit growth on a sequential basis was muted at 1.5%, in comparison loans grew 4.5% in the same duration. It is crucial to push the pedal on deposits and that too at favourable rates. The bank targets 400-600bps higher loan growth rate (ex-merger) than the industry in the medium term. One way to push deposits higher would be through branch expansion. The bank expects to add about 500 branches in FY24..
But operating expenses (opex) which have shot up need close monitoring. The bank’s investments in digital initiatives, employee increments and expenses related to Citibank’s consumer business integration have kept opex elevated.
Meanwhile, Axis Bank’s asset quality continued to improve. In Q2, gross and net non-performing assets ratios fell by 23bps and 5bps sequentially to 1.73% and 0.36%, respectively. While this is comforting, the future course of the stock rests on the NIM trajectory and the pace of deposit mobilization. In this calendar year so far, the Axis Bank stock has risen by 4% backed by healthy loan growth.
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