Axis Bank Impresses Market with Strong Q2 Margin Performance: Is it Time to Buy or Sell the Stock?

On October 26, Axis Bank’s stock saw a 1.3 percent increase, reaching Rs 968 per share, following a notable margin performance in the July-September quarter (Q2FY24) that left a positive impression on the market. The private sector lender also delivered lower slippages and robust net interest income (NII), which garnered appreciation from analysts.

Over the past month, Axis Bank’s stock has remained relatively stable, in contrast to a 3 percent decline in the Sensex benchmark.

Axis Bank Surprises with Strong Q2 FY24 Margin; Expecting Continued Growth

Global brokerage firm CLSA has bestowed a ‘buy’ rating upon Axis Bank, setting a target price of Rs 1,200 per share. They emphasized that Axis Bank’s Q2 margin performance outshone its peers, particularly highlighting the stable net interest margin (NIM). This is noteworthy as other lenders like ICICI Bank and Kotak Mahindra Bank saw margin contraction in Q2. Axis Bank’s NIM expanded by 15 basis points on a year-on-year basis, reaching 4.1 percent in Q2FY24 due to lower cost of funds, remaining relatively flat sequentially.

Furthermore, the bank’s management has indicated an expectation of only a limited increase in funding costs in the coming quarters, which could further bolster margins.

Strong Asset Quality and Loan Growth Drive Axis Bank’s Q2 Profit

Jefferies analysts noted that Axis Bank’s strong asset quality and consistent loan growth contributed to a healthy profit in Q2. However, they acknowledged that increased operating expenses, stemming from investments in new technology, employee increments, and expenses associated with the integration of Citi, weighed on profit.

In Q2FY24, Axis Bank’s net profit increased by 10 percent year-on-year, reaching Rs 5,864 crore, driven by a 19 percent year-on-year rise in net interest income (NII) and controlled provisions. Jefferies further highlighted the bank’s return on equity (RoE) of 18 percent during the quarter, which bodes well for the future. In terms of valuation, analysts found the adjusted price-to-book (PB) at 1.5 times (x) FY25 to be attractive.

Robust Asset Quality, but Deposit Growth Raises Concerns

Meanwhile, analysts at Motilal Oswal expressed confidence in Axis Bank’s healthy asset quality, stating, “Asset quality of Axis Bank remains robust with slippages declining further and recoveries remaining strong.” They maintained a ‘buy’ rating on the bank’s shares, setting a target price of Rs 1,150 per share.

The bank’s non-performing assets (NPA) decreased by 77 basis points year-on-year, reaching 1.7 percent in Q2, while net NPA slipped by 15 basis points year-on-year, amounting to 0.36 percent.

However, analysts remained watchful of the bank’s deposit growth, as it plays a critical role in sustaining healthy loan growth, which is the highest in over seven years. In Q2, Axis Bank’s loan book grew by 23 percent year-on-year, whereas deposit growth increased by 18 percent year-on-year. Consequently, the CASA (Current Account Savings Account) ratio stood at 44 percent in the quarter ending in September.

“We change our earnings estimates by -1.7/2.1 percent for FY24/FY25 and expect FY25 RoA/RoE of 1.9/16.6 percent for Axis Bank,” added analysts at Motilal Oswal.