Axis Bank has two tailwinds favouring it currently.
We upgrade Axis Bank to ‘buy’ from ‘reduce’ reflecting the correction in valuation multiples, a strong liability franchise and a slightly different entry point into this slowdown for the bank compared to the past, which should result in faster recovery in business momentum as we move into a more normalized environment. We revise our fair value to Rs 620 (from Rs 740 earlier), cutting our estimates by~20-25% to address these concerns.
We revise our fair value to Rs 620 from Rs 740 earlier, cutting our estimates by 20-25% for FY20-22E reflecting lower loan growth of 13% CAGR for FY20-22E, lower-than-previously-assumed NIM and higher loan-loss provisions of 1.4-1.5% of loans due to higher slippages of ~2.4%. We are valuing the bank at 1.8X book and 12.5X March 2022E EPS for medium-term RoEs recovering to 13-14%. Unlike the previous cycle, the correction in multiples has not been as steep as seen in FY02-03 or FY09-10.
We are building higher provisions given the sudden exogenous shock that has come through the lockdown, resulting in lower preparation time for all banks and possible change in consumer behaviour towards loan consumption in the medium term. We, nevertheless, believe that Axis Bank has two tailwinds favouring it currently. Given the construct of the previous corporate credit cycle, Axis Bank has been gradually shifting its loan portfolio towards lower-risk assets (more secured products such as housing) and slower loan growth (corporate and MSME). Hence, the bank is probably heading into this weak retail/SME cycle with a bit more preparedness than before. We shall revisit our estimates as we get clarity on the depth or duration of the current cycle, but it would be fair to assume what we have built. Finally, Axis Bank is one of the top Indian banks with a significantly better liability profile, which should aid quite well in this environment.
Post our HDFC Bank upgrade, investors have raised concern on the timing of upgrade as the price risk to the downside is still high if there is a prolonged period of lockdown or a re-rating back to previous levels would be challenging with absence of positive triggers. While we don’t disagree, we factor a high provision and slower growth to mitigate the first risk while entering into a reasonably strong liability franchise at an attractive entry price, as we see Axis Bank as a strong player in the Indian financial services space in the long term.