Axis Bank: On the right axis

12 Jan 2024 , 11:54 AM

Axis Bank has made significant strides in improving the quality of, loans, liabilities, NIM and fee income. Multiple business initiatives are not only improving the financial metrics, but also making the profitability sustainable. Analysts of IIFL Capital Services expect it to deliver the best PPOP ROA improvement vs peers, led by robust fee income growth and operating-leverage benefit kicking in from FY25 onwards. Analysts of IIFL Capital Services expect core PPOP to grow at 19% Cagr; avg. ROA of 1.8% and ROE of 18%. They reiterate Axis as their top pick, on the back of confluence of narrowing ROA gap vs the peers, attractive valuations and favourable investor positioning. Increase TP to Rs1,380. 

Better-quality, granular and more sustainable profitability: 

ROAs of 1.8% is back to the heydays of FY11-16, but is of superior quality and more sustainable. Liability franchise has improved, as reflected in: (i) Incremental CASA market share gain of 7% since FY19, led by micromarket-focused approach. (ii) Addition of new liability relationships at the same pace as HDFC. (iii) Increase in the share of retail deposits to 57% (+258bps in four years) and decline in LCR run-off rates. The share of corporate loans, ‘BBB and below’ exposure (the lowest among peers) and lumpy fees have declined sharply. NIMs have structurally improved (+25 bps through the cycle), and with a better RWA profile. 

Cost efficiencies to drive the highest PPOP ROA improvement: 

Analysts of IIFL Capital Services expect loans and deposits to grow at high-teens, and fee income at 20% Cagr. This growth will be led by acceleration in retail (Citi acquisition) and transaction fees (NEO app for MSMEs launched in June’23). Opex should remain elevated in FY24 due to integration expenses; but analysts of IIFL Capital Services expect operating leverage to kick in from FY25 and cost-to-asset ratio to improve to 2.3% by Q4FY25 (guidance of 2.15%). Consequently, PPOP ROA should increase by 33 bps over FY23-26E vs -15 bps to +15 bps for peers. Asset quality environment remains benign and the bank holds the highest contingency buffers (second only to ICICI); which shall keep credit costs in check. 

No capital-raise plans; expect valuation gap to narrow vs peers: 

With the net capital accretion and proforma CET1 of 14% still above the bank’s internal threshold, it does not expect to raise capital. Axis is trading at 1.9x FY25E P/B (in line with its LTA) for the RoA/RoE 1.8%/17% over FY25-26E. Increase analysts of IIFL Capital Services SOTP based TP to Rs1,380 (23% upside) as they roll-forward and increase their target P/B to 2.0x (vs 1.9x earlier). With the confluence of narrowing ROA gap vs the peers, attractive valuations and favourable investor positioning, analysts of IIFL Capital Services reiterate Axis as their top pick in the sector.