Margin expansion and AI-driven efficiency are driving earnings growth, but macro caution and credit risks remain key watchpoints for Q2 FY2025.

($C) Margin Gains and AI Upside Amid Macro Risks

# Margin Momentum Meets Macro Caution: Q2 FY2025 Earnings Outlook

## Executive Summary

We maintain a **Bullish** outlook for Q2 FY2025, driven by **sustained margin expansion** and **robust segmental growth** in Wealth and US Personal Banking. **Q1 FY2025’s operating margin of 25.2%** (up from ~21% a year ago) and **Total Revenue of $21.6B** (+3% YoY) set a strong foundation for further improvement. While management’s tone is balanced, the market may be underestimating the **impact of AI-driven operational transformation**—a potential catalyst for both cost efficiency and incremental revenue. The primary risk remains **elevated credit losses** in the cards segment, but current trends suggest these are manageable in the near term.

## Recent Trends Signal What’s Next

Recent quarters show a clear trajectory of **revenue growth and margin improvement**. The last four quarters reveal a steady climb in both topline and profitability, with cost discipline driving operating leverage.

### Quarterly Financial Trends Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q2 FY2024    | 20.8         | 58.5             | 21.0                 | 14.2          | 1.65    |
| Q3 FY2024    | 21.0         | 59.2             | 22.5                 | 15.0          | 1.72    |
| Q4 FY2024    | 21.3         | 60.1             | 23.4                 | 15.8          | 1.80    |
| Q1 FY2025    | 21.6         | 61.0             | 25.2                 | 16.5          | 1.95    |

**Key Takeaway:**  
**Revenue and margins have improved sequentially for four quarters**, with Q1 FY2025’s efficiency ratio at 62.2% (down from 67% in Q2 FY2024), indicating a leaner cost structure and setting the stage for further margin gains in Q2.

## Management’s Forward Tone and Positioning

Management’s Q1 FY2025 commentary was **“cautiously optimistic”**, balancing confidence in strategic execution with awareness of macro risks.

- **Quote:** “We delivered a strong quarter, but remain vigilant given the uncertain environment.” (Q1 2025 Earnings Call)
- **Quote:** “We’re seeing early signs of normalization in demand, particularly in our core lending businesses.” (Q1 2025 Earnings Call)

Compared to prior quarters, the tone has shifted from defensive to **measured optimism**, with a greater emphasis on **operational transformation and technology investment**. The explicit mention of “targeted investments” and “AI-driven efficiency” signals a proactive approach to both growth and cost control.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs will be pivotal for Q2 FY2025:

1. **Loan Growth:**  
   Q1 FY2025 loan balances rose **2% YoY** (vs. flat in Q4 FY2024), supporting net interest income.

2. **Client Assets:**  
   Client assets grew **9% YoY** (Wealth segment up 16% YoY), indicating strong fee income potential.

3. **Efficiency Ratio:**  
   Improved to **62.2%** in Q1 FY2025 (from 67% a year ago), reflecting ongoing cost discipline.

### KPI Movement Table

| KPI                | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Loan Balances ($B) | 410       | 415       | 418       | +2%        | +0.7%      |
| Client Assets ($B) | 1,050     | 1,120     | 1,145     | +9%        | +2.2%      |
| Efficiency Ratio   | 67.0%     | 63.5%     | 62.2%     | -4.8 pts   | -1.3 pts   |

**Implication:**  
**Loan and asset growth** will drive revenue, while the **efficiency ratio trend** supports further margin expansion. Any reversal in these KPIs would be an early warning for Q2 results.

## Missed by the Street

A key overlooked signal is the **early-stage impact of AI-driven operational transformation**. Management disclosed, “We are piloting AI tools such as Agent Assist to streamline client interactions and reduce back-office costs” (Q1 2025 10-Q). This initiative, not yet fully reflected in consensus models, could unlock **incremental cost savings and revenue opportunities** as adoption scales.

Additionally, a subtle shift in the **credit loss provision methodology**—noted in the footnotes—suggests a more conservative stance, which may buffer against near-term credit shocks.

## Scenarios for the Upcoming Quarter

### Q2 FY2025 Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                         |
|----------|--------------|---------|----------------------|---------------------------------------------------------|
| Bull     | 22.0         | 2.05    | 26.0                 | Strong segment growth, AI-driven cost savings, stable credit |
| Base     | 21.8         | 1.95    | 25.5                 | Moderate revenue, steady costs, manageable credit losses |
| Bear     | 21.5         | 1.85    | 25.0                 | Credit losses rise, expense uptick, slower segment growth|

**Most Likely:**  
The **Base case** is most probable, given current evidence of steady segment growth, ongoing cost discipline, and management’s measured tone. Upside exists if AI initiatives deliver faster-than-expected efficiency gains.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS ($) | Operating Margin (%) |
|--------------|--------------|---------|----------------------|
| Q2 FY2024    | 20.8         | 1.65    | 21.0                 |
| Q3 FY2024    | 21.0         | 1.72    | 22.5                 |
| Q4 FY2024    | 21.3         | 1.80    | 23.4                 |
| Q1 FY2025    | 21.6         | 1.95    | 25.2                 |

### KPI Movement Table

| KPI                | Q1 FY2024 | Q4 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Loan Balances ($B) | 410       | 415       | 418       | +2%        | +0.7%      |
| Client Assets ($B) | 1,050     | 1,120     | 1,145     | +9%        | +2.2%      |
| Efficiency Ratio   | 67.0%     | 63.5%     | 62.2%     | -4.8 pts   | -1.3 pts   |

### Key Management Quotes

1. **“We delivered a strong quarter, but remain vigilant given the uncertain environment.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Management is confident but not complacent about macro risks.*

2. **“We’re seeing early signs of normalization in demand, particularly in our core lending businesses.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Lending activity is stabilizing, supporting revenue visibility.*

3. **“Our efficiency ratio improvement reflects disciplined expense management and early benefits from technology investments.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Cost control is a key margin driver.*

4. **“We are piloting AI tools such as Agent Assist to streamline client interactions and reduce back-office costs.”**  
   *Q1 2025 10-Q*  
   *Interpretation: AI adoption could accelerate cost savings.*

5. **“Credit loss rates in cards remain elevated, but we are proactively managing risk exposures.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Credit risk is a watch item, but controls are in place.*

6. **“We expect a slight uptick in Q2 expenses as we invest in strategic transformation and technology.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Near-term cost pressure is expected, but for long-term gain.*

7. **“Client assets in Wealth grew 16% YoY, reflecting strong net inflows and market appreciation.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Wealth segment is a key growth engine.*

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**Bottom Line:**  
Q2 FY2025 is set up for another quarter of **margin and revenue growth**, with operational transformation and segment momentum as key tailwinds. The market may be underestimating the upside from technology-driven efficiency, even as credit risk and investment costs warrant close monitoring.