Equity Research: Axis Bank

Axis Bank is one of India's leading private sector banks, recognized for its diverse range of financial services, commitment to technological innovation, and a vast network of branches and ATMs. Established in 1993, the bank has rapidly expanded its operations and emerged as a key player in India's banking and financial sector. In this comprehensive overview, we will delve into the various facets of Axis Bank, including its history, services, innovations, and its role in shaping the Indian banking landscape.

About the Company 

Axis Bank is one of India's leading private sector banks, recognized for its diverse range of financial services, commitment to technological innovation, and a vast network of branches and ATMs. Established in 1993, the bank has rapidly expanded its operations and emerged as a key player in India's banking and financial sector. In this comprehensive overview, we will delve into the various facets of Axis Bank, including its history, services, innovations, and its role in shaping the Indian banking landscape.

I. History and Background:

Axis Bank was initially incorporated as UTI Bank in 1993, a time when India's banking sector was going through significant transformation. It was sponsored by the Unit Trust of India (UTI), the country's oldest and one of the most respected mutual funds. The bank's name was changed to Axis Bank in 2007, reflecting a strategic shift and rebranding effort.

II. Leadership and Governance:

1. Board of Directors: Axis Bank's Board of Directors comprises a mix of experienced professionals from diverse fields, ensuring effective governance and strategic decision-making. The Board plays a crucial role in the bank's overall management and its commitment to good corporate governance.

2. Leadership Team: The bank's leadership team, led by the Managing Director and CEO, plays a pivotal role in executing the bank's strategic vision. They oversee the day-to-day operations, risk management, and innovation initiatives.

III. Banking Services and Products:

Axis Bank offers a wide range of banking services and products to cater to the diverse needs of its customers. These include:

1. Retail Banking: Axis Bank's retail banking services cover savings and current accounts, fixed deposits, recurring deposits, and personal loans. It also offers various credit cards, catering to different customer segments.

2. Corporate Banking: Axis Bank provides a comprehensive suite of financial solutions for corporate clients, including working capital loans, trade finance, project finance, and treasury services.

3. Wealth Management: The bank offers wealth management services, catering to high-net-worth individuals and providing personalized investment solutions.

4. Investment Banking: Axis Bank's investment banking division helps clients with mergers and acquisitions, capital markets, and advisory services.

5. Digital Banking: Recognizing the importance of digital innovation, Axis Bank offers a range of online and mobile banking services, making it convenient for customers to manage their accounts, transfer funds, and pay bills.

IV. Technological Innovations:

Axis Bank has been at the forefront of adopting and promoting technological innovations in the banking sector. Some notable initiatives include:

1. Axis Internet Banking: The bank's online banking portal allows customers to access their accounts, pay bills, and transfer funds conveniently. It offers robust security features to protect customer data.

2. Mobile Banking: Axis Bank's mobile app provides on-the-go banking services, enabling customers to manage their accounts and make transactions from their smartphones.

3. Axis ATMs: The bank's extensive network of ATMs allows customers to withdraw cash, check balances, and perform various other transactions 24/7.

4. Internet Payment Gateway: Axis Bank's payment gateway services enable online transactions and e-commerce businesses to accept payments seamlessly.

5. Axis Pay: A unique feature allowing customers to send money instantly to anyone using their mobile number and a payment ID.

V. Social Responsibility and Sustainability:

Axis Bank is actively involved in social responsibility and sustainability initiatives. The bank supports various community development programs, financial literacy campaigns, and environmental sustainability efforts. It is committed to reducing its carbon footprint and promoting responsible banking practices.

VI. Awards and Recognition:

Over the years, Axis Bank has received numerous awards and accolades for its excellence in banking and financial services. These recognitions highlight the bank's commitment to customer satisfaction, innovation, and corporate responsibility.

VII. Global Presence:

Axis Bank has a growing international presence, with branches and representative offices in various countries, serving the banking needs of the Indian diaspora and businesses with international interests.

VIII. Future Outlook:

Axis Bank continues to adapt to the evolving financial landscape by embracing technological advancements, expanding its product offerings, and maintaining a commitment to customer service. With a strong foundation, a focus on innovation, and a dedication to responsible banking, Axis Bank is poised to play a significant role in India's financial future.

Management

Industry Outlook

In 2024, the global banking industry is facing a complex economic landscape characterized by a slowing global economy, supply chain disruptions, shifting trade relationships, and geopolitical tensions. Additionally, extreme weather-related events are posing economic challenges. Here is a summary of the key points discussed in the provided text:

1. Global Economic Outlook: The International Monetary Fund (IMF) anticipates that the world economy's growth will be limited to around 3.0% in 2024. Advanced economies, including the United States, the Euro area, Japan, the United Kingdom, and Canada, are expected to experience modest growth at 1.4% in 2024. However, many emerging economies are likely to see stronger growth due to factors such as robust consumer demand, younger demographics, and improved trade balances.

2. India's Strong Growth: India is expected to have one of the highest growth rates, reaching 6.3% in 2024, driven by its demographics and improving economic fundamentals.

3. China's Economic Challenges: China is facing potential economic headwinds due to weak consumer demand and distressed property markets. This situation may impact China's trading partners and disrupt global supply chains.

4. Global Inflation: After reaching a high of 8.7% in 2022, global inflation is expected to decrease to 5.2% in 2024, according to the IMF. However, inflation rates in many countries are likely to remain above target rates.

5. Central Bank Policies: Central banks are expected to adjust their monetary policies in response to changing economic conditions. In the United States, the federal funds rate is expected to remain elevated but may decrease in the second half of 2024. The European Central Bank (ECB) is likely to start reducing interest rates, while the Bank of England and the Bank of Canada are also expected to lower their policy rates in 2024. The Bank of Japan will adjust its bond yield curve control schemes to address price pressures more effectively.

6. Quantitative Tightening: Many central banks are expected to engage in quantitative tightening measures, which will contract global money supply. In the United States, M2 money supply has been decreasing at its fastest rate since the 1930s.

Financials

Q2 FY24 Result

1. Profit and Efficiency Improvements:

   • Axis Bank reported a robust Return on Equity (RoE) of 18.8% for FY23, indicating improved profitability.
   • The bank is focused on strengthening its retail franchise and investing in its distribution network and technological capabilities to ensure sustainable long-term growth.

2. Retail Deposit Focus:

   • The bank has placed special emphasis on increasing the mix of retail deposits. In FY23, it achieved a 21% growth in CASA (Current and Savings Account) deposits, surpassing its peers. This resulted in a 100 basis point (bp) improvement in the daily average CASA mix, reaching 44%.

3. Digital Initiatives:

   • Axis Bank continues to invest in digital initiatives. In FY23, 55% of personal loans were sourced digitally, a significant increase from 22% in FY18.
   • About 24% of credit cards were issued through a fully digital end-to-end process, and the bank's market share in credit cards improved to 14.7%, making it the fourth-largest credit card issuer in the country.

4. Asset Quality and Provisions:

   • The concentration of the top 20 advances and deposits improved by 105bp and 110bp YoY, respectively, indicating a more diversified portfolio.
   • The bank has shifted its deposit strategy towards "CASA + retail term deposits" while consciously reducing bulk deposits.
   • Asset quality has improved significantly, with gross non-performing assets (NPAs) and net NPAs decreasing. The provision and contingency figures are in line with asset quality improvement.

5. Business Growth and Productivity:

   • Axis Bank has shown business growth, with an increase in business per branch and business per employee. The bank plans to add up to 500 branches in FY24 to mobilize deposits from new customers.
   • The bank is investing in technology and business enhancements to support growth.

6. Fee Income and Subsidiaries:

   • Fee income has become more granular, with retail banking forming a significant portion.
   • The bank's subsidiaries have reported healthy performance in FY23, contributing to the overall profitability. Axis Bank aims to scale up its subsidiaries before focusing on profitability.

7. Net Interest Income (NII): NII for the reporting quarter increased by 19% YoY to Rs 12,314 crore, compared to Rs 10,360 crore in the same quarter last year. The net interest margin (NIM) also grew by 15 basis points YoY to 4.11%, though it remained flat sequentially.

8. Operating Profit: Operating profit for the quarter rose by 12% YoY to Rs 8,632 crore.

9. Fee Income: Fee income registered a significant growth of 31% YoY in the September 2023 quarter, reaching Rs 4,963 crore. Retail fees, in particular, jumped by 38%.

10. Asset Quality Improvement: On the asset quality front, both gross non-performing assets (NPAs) and net NPAs improved both sequentially and on a YoY basis. Gross NPAs stood at 1.73%, and net NPAs declined to 0.36% in the September quarter.

11. Provisions: Provision and contingencies for the second quarter amounted to Rs 815 crore, with specific loan loss provisions at Rs 1,010 crore. The bank did not utilize any Covid provisions during the quarter and held cumulative provisions of Rs 11,758 crore as of September 2023.

12. Business Growth: Axis Bank's CEO and MD, Amitabh Chaudhry, expressed optimism about increasing demand with the upcoming festive season, which bodes well for the business.

13. Deposit and Loan Growth: Total deposits grew by 18% YoY, with savings account deposits rising by 16% YoY, current account deposits increasing by 7% YoY, and total term deposits growing by 22% YoY. The bank's advances rose by 23% YoY to Rs 8.97 lakh crore as of September 30, with domestic net loans increasing by 26% YoY and retail loans growing by 23% YoY.

14. Branch Expansion: During the quarter, Axis Bank added 207 branches, expanding its distribution network to a total of 5,152 domestic branches and extension counters

15. Outlook:

    • The bank's liability strategy, digital investments, and focus on retail and granular deposits are expected to drive sustainable growth.
    • Asset quality has improved significantly, and the bank expects credit costs to remain low, enabling healthy earnings growth.

Concall Highlight

Performance Parameters:

• Return on Equity (RoE): AXSB achieved an RoE of over 18%, which is impressive, considering it maintained lower risk-weighted asset intensity compared to the past.
• Low-Cost CASA Share: The bank boasts a low-cost Current Account and Savings Account (CASA) share at 44.4%, which is among the best in the industry. This share has been growing annually at a rate of 15% over the last three years.
• Basel Outflow Rate: Over the last two years, AXSB has managed to reduce the outflow rate under Basel by 550 basis points, bringing it closer to the best in the Indian banking sector.
• Branch Expansion: In Q2FY24, the bank reached a significant milestone by opening its 5,000th branch. It added 207 branches and 110 new centers, expanding its distribution network to 5,152 domestic branches.
• MSME Segment Growth: The bank's disbursement pipeline for Q3FY24 is healthy, and the Micro, Small, and Medium Enterprises (MSME) segment is a key growth driver.
• Neo for Business: The introduction of "Neo for Business," a mobile-first banking and beyond banking MSME proposition designed for SMEs, went live in Q2FY24.
• Rebranding of Mobile App: The bank rebranded its award-winning mobile app as "Open by Axis Bank."
• Axis Finance Growth: Axis Finance witnessed a 31% year-on-year growth in its overall assets under finance in Q2FY24.
• Axis AMC: Quarterly Assets Under Management (AUM) for Axis Asset Management Company (AMC) grew by 5% YoY to INR 2,59,800 crore.
• Segment Focus: The bank consciously avoids the sub-INR 50,000 unsecured lending segment.

Balance Sheet and Growth:

• Loan Composition: INR-denominated loans accounted for 95.8% of total advances as of September.
• Retail and CBG Advances: Retail and Corporate Banking Group (CBG) advances made up 69% of total advances as of September.
• RIDF Bonds: Low-yielding RIDF bonds decreased by INR 7,990 crore YoY, and they now constitute 2.14% of total assets, down from 3.09% in September 2022.
• Integration Expenses with Citi: The bank anticipates integration expenses with Citi to be INR 2,000 crore, incurred over 18 months. About 75% of this expense will be proportionate over time, and 25% will be episodic to expedite the transaction closure.
• Home Loan Momentum: The management has observed positive momentum in the home loan segment.
• SME Lending: Most lending on the SME side is repo-linked.

Profit & Loss:

• Yield on Loans: The bank's efforts to improve yield on loans have been successful, thanks to its retail, SME, and wholesale portfolio composition, reductions in RIDF, and favorable currency composition of the advanced book.
• Cost of Funds: The marginal cost of funds has largely stabilized, with expectations of further rises in the cost of deposits in H2FY24, albeit at a moderated pace.
• NIM Outlook: Net Interest Margin (NIM) will depend on the bank's ability to pass on increased funding costs through better asset pricing, improvements in the book mix, and structural factors.
• Trading Profit and Other Income: Trading profit and other income remained flat year-on-year at INR 71 crore but fell by INR 528 crore sequentially due to lower treasury income.
• Opex and Credit Costs: The bank incurred a one-time charge in Q2FY24 for opex catch-up, and some reward rationalization also took place in the same quarter. These factors contributed to the QoQ increase in operating expenses. Gross and net credit costs are expected to shrink.
• Opex-to-Asset Ratio: The management has guided at an opex-to-asset ratio of approximately 2.1%, including Citi, by FY25.

Valuation and Outlook

Axis Bank (AXSB) has exhibited strong financial performance and resilience in a challenging economic environment. With an RoE exceeding 18%, low-cost CASA share, and a robust distribution network of over 5,000 branches, the bank's operational performance is commendable. Moreover, its efforts to reduce the outflow rate under Basel and its focus on the MSME segment contribute positively to its overall valuation.

The bank's diversified loan composition with a substantial focus on retail and CBG advances and a conscious avoidance of the sub-INR 50,000 unsecured lending segment demonstrates a prudent risk management strategy. The decline in low-yielding RIDF bonds and the healthy growth of Axis AMC's AUM further enhance the bank's asset quality and wealth management capabilities.

Despite the challenges posed by the economic landscape, AXSB's strategic measures to improve yield on loans and manage costs have positively impacted its profit and loss statement. The moderation in the cost of funds and the management's outlook for the net interest margin (NIM) position the bank well for future profitability. Additionally, the management's guidance on achieving an opex-to-asset ratio of approximately 2.1% by FY25 is a positive indicator of cost management.

Source: Company Website, Research Report

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