Maintain 'neutral' on Axis Bank and increase our target price to R558 to value the stock 2.2x price-to-adjusted book value.
Maintain ‘neutral’ on Axis Bank and increase our target price to R558 to value the stock 2.2x price-to-adjusted book value. Axis is currently trading at 2.4x P/AB 12-month forward versus its five-year average of 1.9x P/AB. Given higher visibility of earnings improvements over the next two years, we have increased our RoE expectations from 19.5% to 20%.
We expect current credit growth trends to continue in FY16e and a pickup only in FY17e with growth improving to 24% by then. This coupled with improvement in fee income growth and lower credit costs is estimated to lead to higher earnings growth of 21% and 28% for FY16e and FY17e leading to ROA expansion to 2% by FY17e.
Q3FY15 earnings at R1,900 crore (18% y-o-y) were 5% higher than our estimates mainly due to higher treasury gains and lower than expected credit cost. Improvements in asset quality and loan growth were the key highlights of the quarter.
Loan book grew by 23% y-o-y, and much stronger q-o-q at 8% y-o-y led by healthy growth in retail and corporate advances. The bank has guided for a continuing focus on retail especially towards high yielding products like personal loans and credit cards, which grew handsomely this quarter. CASA declined marginally but outlook remains strong at 44% leading to stable margins at 3.9%.