Axis Bank: On the right axis; primed for re-rating

24 Nov 2023 , 11:33 AM

Recommendation: Buy; Target Price: Rs 1260

Analysts of IIFL Securities attended Axis’s Analyst Day and interacted with the senior management team. Multiple business initiatives are not only improving the financial metrics, but also making it sustainable. Analysts of IIFL Securities 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. They believe the narrowing of ROA gap vs peers should drive the re-rating. Maintain BUY. 

Better-quality, granular and more sustainable profitability: 

ROAs of 1.8% are 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% (+258 bps in four years) and decline in LCR run-off rates. Share of corporate loans, ‘BBB and below’ exposure (lowest among peers) and lumpy fees have declined sharply. NIMs have structurally improved (+25 bps through the cycle), and with a better RWA profile. 

Key takeaways: 

(1) Highest LCR deposits, CASA ratio and fee income among larger peers; (2) Business contribution of the digital bank ‘open’ to increase 3-4x by FY27 from 5% now; (3) Asset-led branch expansion strategy in Bharat is aiding higher risk-adjusted margins, faster branch breakeven, higher RAROC and meeting PSL targets; (4) Wider roll-out of Siddhi app (from 31k employees now to 60k by end-FY24) should drive better productivity and lower attrition; (5) Personalisation and more nudges is improving cross-sell, and Axis believes it is already ahead of private peers in analytics; (6) NEO for business has potential to improve transaction banking fees; and (7) Card and WM business metrics trending above expectation post the Citi acquisition. 

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

Following the RBI’s regulatory tightening, analysts of IIFL Securities estimate proforma CET1 ratio to fall to 14% (14.6% now). However, with net capital accretion and proforma levels still above the bank’s internal threshold, it does not expect to raise capital. Axis is trading at 1.7x FY25E P/B, which is 10% below LTA for the average RoA/RoE 1.8%/18% over FY25-26E.