Q3 showing was strong; normalising credit cycle and improving PPOP growth boost prospects; TP up to Rs 850 from Rs 750
Axis Bank’s Q3FY19 performance was strong with accelerating PPOP (pre-provision operating profit) growth and improving asset quality. Management presented its strategy and levers for its 18% RoE aspirations in 3 years. Our revised estimates factor in 16.5-17.0% RoE by FY21F (100-150bps higher than consensus). With a granular balance sheet and income stream now, we believe Axis Bank is on the cusp of a re-rating — we roll over our valuation base to Mar-21F and increase our TP to Rs 850/share, implying 2.35x FY21F book (29% potential upside). Axis and ICICI Bank (ICICIBC IN, Buy) remain our preferred picks in financials space.
Asset quality – tide has clearly turned
Q3FY19 was stable with 98% of corporate slippages BB-rated and below book and lower net slippages in retail/agri. The new MD & CEO indicated his comfort with NPA tagging in the bank and that, coupled with quantum of BB and below book getting closer to long-term average, indicates that the tide has clearly turned.
Strong PPOP performance
The bank delivered core PPOP growth of ~18% y-o-y aided by NIM improvement and pick-up in fee growth. With ~15bps of cost levers and some margin improvement, we expect Axis Bank to deliver 16.5-17.0% RoE by the end of FY21F.
Getting the right team
Axis Bank did lack top management depth with recent exits in the corporate bank. The bank is beefing up with senior management positions including the recent hire of credit head from HDFCB. The new CEO expects to complete all new appointments by end Mar-19.
All ingredients for a re-rating
With a normalising credit cycle and improving PPOP growth, we believe Axis Bank is on the cusp of a re-rating. The current multiple of 1.83x Mar-21F adjusted book is still undemanding for a bank with +16-17% ROEs, granular balance sheet and income streams and strong management.
High RoE aspirations: Under the new MD & CEO, the bank presented its strategy with focus on high growth, improving PPOP and growing sustainably. It aspires for a RoE of ~18% in 3 years, which we believe is significantly higher than consensus expectations. Our estimates are 8-10% higher than consensus.
High growth: Management explained that its market share in deposits and loans is 4-5% only and it sees ample scope for accretion to market share.
Profitability improvement: Key levers on PPOP will be cost improvement (cost to assets of 2.0% from 2.15%) and margin improvement. What remains a question mark for us is bank’s ability to simultaneously improve margins and bring credit costs to below long-term average. Management explained that it is working on each aspect of risk-based pricing and expects improvement in risk-adjusted spreads.