Axis Bank's NIM Worry May Be A Distraction; CLSA Backs Credit Growth, ROE And Valuation
CLSA On Axis Bank: Net interest margins (NIMs) may be grabbing investor attention, but CLSA believes the bigger earnings picture remains intact at the private-sector lender.
Healthy domestic deposit growth, strong FCNR(B) mobilisation, credit growth well ahead of the industry and further operating leverage could support earnings, while resilient asset quality and attractive valuations strengthen the case for the stock.
CLSA analysts Piran Engineer, Sumeet Jain and Abhishek Agarwal, following an investor call with Axis Bank management, retained their Outperform rating and Rs 1,550 target price. The brokerage continues to count Axis Bank among its top picks, with the stock trading at 1.3x FY28 core price-to-book.
The key point from the brokerage is that an excessive focus on NIMs risks missing the broader earnings story.
FCNR(B) Deposits Could Offset Near-Term Margin Pressure
Axis Bank's domestic deposit growth remains healthy, while FCNR(B) deposit mobilisation has outpaced the bank's overall deposit market share of around 5%, management told investors.
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The resulting liquidity could weigh on margins in the near term. However, CLSA believes the deposits should ultimately be accretive to net interest income.
This gives Axis Bank another avenue for NII growth even as the margin trajectory remains a near-term concern.
Credit Growth Guidance Remains Intact
Management has maintained its medium-term guidance of credit growth around 300 basis points above industry growth.
For CLSA, that remains an important earnings lever. The brokerage believes the combination of stronger NII growth, resilient asset quality and improving operating efficiency can drive healthy core profit growth.
Asset quality, meanwhile, remains resilient despite the Middle East war and El Niño, with management reporting minimal impact from both factors.
Automation Could Bring Another Earnings Lever
Axis Bank is also working on improving its cost structure through greater automation.
Management expects the opex-to-assets ratio to decline further over the medium term, supported by automation-led efficiency gains.
The bank has also begun deploying personalised AI agents for certain employees and has identified around 15 areas where the technology could be deployed with humans remaining in the loop.
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Management expects successful deployment of these AI agents to take at least six months or more. The initiatives are primarily focused on re-architecting internal business operations, with support from Silicon Valley-based forward-deployed engineers.
Cards Remain A Pressure Point
Not every part of the earnings picture is moving in the same direction.
In cards, management acknowledged that pressure on revolver rates remains, pointing to a continuing area of concern.
Still, CLSA's broader assessment is that this does not derail the overall earnings trajectory, given the deposit, credit-growth and operating-leverage opportunities.
Why CLSA Remains Bullish On Axis Bank
CLSA believes the market's focus on NIMs could obscure the bank's wider earnings potential.
The brokerage expects FCNR(B) deposits to provide a longer runway for growth, while robust asset quality and a declining opex ratio should support stronger core PBT growth.
Valuation also strengthens the case. Axis Bank trades at 1.3x FY28 core price-to-book, while its valuation discount to ICICI Bank is now close to all-time highs, according to CLSA.
For the brokerage, the combination of healthy earnings growth, improving ROE and attractive valuations makes Axis Bank one of its top picks.
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