Axis Bank Ltd: Key risks: JPMorgan

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Axis Bank Ltd
May miss loan growth targets. Axis’ loan growth in 1H has been a sluggish 6% vs.
our forecasts of 25% for the full year – we are clearly imputing a significant
acceleration in 2H. Our baseline assumption is that there is some acceleration in
corporate capex in the coming months, and Axis is very exposed to this trend, given
its dependence on mid-corporates for loan growth. There is a significant possibility
of a miss on this score.


Management guidance of lower margins: Though margin moderation is expected
for Axis Bank as leverage increases and CASA levels normalise, margins in the
medium term could surprise on the downside. Management has also lowered their
guidance on base margins from 3.5% earlier to 3.25-3.5%, highlighting the risk to
margins especially from higher wholesale rates.

Continued softness in SME asset quality: Large corporate and retail assets have
shown significant improvement in asset quality over last 2-3 quarters but slippages
continue in the SME sector for most banks. Axis Bank’s exposure to SME is the
highest among private banks at ~20% and hence it remains most vulnerable to asset
quality risks. SMEs related to the global economy like textiles, gems and jewelery
continue to show weakness.

Dependence on wholesale deposits: Given the tight liquidity situation, rates have
moved up sharply by 200-300 bps over the last 3-6months and this would impact
wholesale funded banks/institutions. Wholesale deposits constitute >60% of the term
deposits for Axis and would impact margins for Axis over the next 2-3 quarters.
Though Axis bank's investment book to some extent is corporate linked and higher
rates would provide a set off to high funding costs, margins would be impacted,
given high dependence on wholesale deposits