The concentration in top 20 advances/exposures improved by 171bp/86bp y-o-y to 8.6%/12.4% in FY19. However, on the liability side, the concentration of top-20 depositors increased by 39bp y-o-y to 11.8%. The bank has shifted its deposit strategy away from CASA to ‘CASA + retail term deposits’. Though the bank has a strong management team and a well-articulated strategy in place, execution is going to be critical to deliver long-term sustainable growth and earnings. NPL cycle has shown improvement signs and we estimate earnings to recover though credit cost trajectory can still remain uneven given sluggish macro. We thus estimate RoA/RoE to improve to 1.4%/17.0% by FY21 and maintain our Buy rating with a target price of Rs 925 (2.7x FY21E ABV + Rs 42 for subsidiaries).

Retail franchise strengthens; deposit strategy focused on ‘CASA + retail TD’ The contribution of retail book has increased to 50% from 32% in FY14, even as the bank has consciously lowered the share of housing loans in its retail mix to 47% from 55% in FY15. The proportion of higher-yielding retail loans – comprising mainly personal loans, credit cards and small business banking (SBB) – has increased from 9% in FY13 to 20%. On the liability side, the share of CASA and retail term deposits has been largely stable at ~81% though bank has guided for a change in deposit strategy, with focus shifting from CASA to ‘CASA + Retail TD.’

Business productivity improving; aggressive focus on increasing branch count AXSB’s business per branch improved from Rs 2.4 bn in FY18 to Rs 2.6 bn in FY19, while business per employee improved from Rs 150 m to Rs 168 m over the same period. However while the focus on increasing branch count stays high, the bank has relatively lower deposit productivity (SA per branch) when compared to other private peers. Notably, AXSB’s management has guided for a further rise in the number of branches to 5,000 from 4,050 currently.

Fee income getting granular; credit card segment forms 23% of total fees Retail and transaction banking fees now form ~81% of total fees (77% 5 years ago), signifying the increasing granularity of fee income. This is primarily driven by cards and third-party distribution fees, which together constitute 36% of total fees. The credit card business is showing a robust performance, with its market share up by 1.8x over the last five years. The efficient use of data analytics, along with higher digital transaction volumes, has led to increased volumes for several retail segments, which, in turn, is helping build good traction in retail fees.