Axis Bank's profitability under pressure on NIM contraction: Moody's

Affirms 'Baa3' long-term deposit ratings

Global rating agency Moody’s today affirmed private lender Axis Bank’s “Baa3” long-term deposit ratings, reflecting a diversified loan portfolio and above-industry average profitability to support internal capital generation and its strong solvency. It maintained a stable outlook on the ratings.

However, Moody's expects the bank's profitability to somewhat moderate. This would be driven by a contraction in Net Interest Margin (NIM) due to strong lending competition, a moderation in the growth of high-yielding unsecured retail loans after regulatory intervention, and repricing of maturing deposits at higher interest rates.
 

Its NIMs have already seen a decline at 4.01 per cent in December 2023 from 4.26 per cent in December 2022 and 4.11 per cent in September 2023.

Ratings also factor in India's favourable operating environment, which offers the bank an opportunity to further strengthen its market position. The bank's diversified loan portfolio and above-industry average profitability will support internal capital generation and its strong solvency, Moody’s said in a statement.

In addition, Axis' strong retail franchise, access to low-cost deposits, and sufficient holdings of liquid government securities will support its funding and liquidity, Moody’s said.

Moody's expects Axis to grow loans above the industry's average loan growth of 12-14 per cent in the financial year ending March 2025 (FY25), enabling the bank to gain a larger market share.

Axis' healthy NIM, diversified non-interest income, and operational efficiencies support its above-industry average profitability. Return on assets for the nine months ended December 2023 was 1.8 per cent, compared with the industry average of 1.2 per cent.

The bank's credit cost will also rise marginally from the current cyclically very low levels as the loan books season. The bank's asset quality is expected to remain broadly stable as India's economic momentum continues to be robust. Indian corporates' improving profitability and de-leveraged balance sheets are supporting stable asset quality.

However, delinquencies in the small business loans and unsecured retail loan portfolio will increase modestly due to elevated interest rates as the loan book seasons.
 

Still, given the bank's focus on cross-selling loans to existing customers with stable salaried jobs and high credit scores for unsecured retail lending, these factors will help mitigate the risks, the rating agency added.