Axis Bank rating – Overweight: Turnaround likely to gain pace over 3 years

RoE expected to reach ~16% by FY25; ‘Overweight’ rating retained with target price of Rs 910; valuation is attractive.

Axis Bank rating
Although Axis has seen a pickup in CASA, retail deposit momentum has been subdued.

A Good turnaround has been under way for Axis Bank over the past three years – asset quality has turned, granularity has improved, distribution has expanded and growth is now accelerating. Axis Bank has a) significantly tightened underwriting practices, reduced risk in corporate banking and improved provisioning coverage; b) improved granularity across key metrics – fees, loans, and deposits; c) strengthened digital banking initiatives and expanded its distribution capabilities; d) increased investments in higher margin business (where growth has now accelerated); and e) generated significant value in subs. as part of one Axis initiative.

The next big deliverable will be retail deposit growth, which could improve operating profit growth on a sustainable basis: Although Axis has seen a pickup in CASA, retail deposit momentum has been subdued. Apart from lower rates, this has been driven by reclassification of retail term deposits from ‘size’ based classification to ‘ownership’ based, and could weigh on retail deposit growth momentum for next 2-3 quarters. That said, the bank has increased investments in payments, wealth management, and corporate salary accounts, and is gaining good traction. This, coupled with an improving macro and rising rates, should help accelerate retail deposits by late FY23 onward, in our view.

We expect the Axis turnaround story to gain traction, with improved delivery over the next three years: This should be reflected in higher revenue growth, where we expect an 18% CAGR over FY22-25, vs. 13% over the past three years. We expect margin improvement by 25-30bps, loan growth of 16% CAGR, and moderation in cost to assets to 2.1% by FY25. This should drive >20% core PPoP growth over next three years. Coupled with lower credit costs, we expect RoA to improve to 1.5% by FY25, from 1.2% currently.

Attractive risk reward: Core valuations appear attractive at 1.35x FY23/1.2x FY24 book, and do not seem to be fully pricing in the structural improvement, we believe (RoE of ~16% seen by FY25, vs. 12% in FY22). We value the bank at 1.7x book, implying >35% upside. Our price target of Rs 910 remains unchanged. Key risks: slower than expected improvement in the liability franchise and/or significant attrition in Citi’s retail client and employee base (if the proposed acquisition is approved).

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