Emkay Global Financial has given Buy recommendation for Axis Bank with a target price of Rs. 1020 in its research report issued on Jul 25, 2022

Emkay Global Financial’s report on Axis Bank

Despite subdued credit growth, Axis Bank reported healthy growth in NII/fees, and core profitability grew by 17% yoy after a long gap. This, coupled with lower LLP, led to a 14% beat on PAT at Rs41.2bn (up 91% yoy) despite elevated opex (CI ratio: 52%; cost-asset: 2.4%). The bank had withdrawn near-term cost guidance in Q4 citing volatility, but has now guided for a medium-term cost-to-asset ratio of 2%, driven by better productivity. Credit growth was slow at 14% yoy/down 1% qoq vs. much higher growth for peers (ICICI/HDFCB: 22%), mainly due to declines in corporate/overseas/SME books. However, retail growth remained healthy at 25% yoy/3% qoq, with strong growth in unsecured loans, but mortgage growth was surprisingly slower than peers. Better portfolio mix/asset repricing led to a 11bps qoq improvement in NIMs to 3.6%. Axis has retained NIM guidance at 3.7-3.8% for the next 8-10 quarters on better portfolio mix and run-down in RIDF bonds. Despite lower slippages at Rs37bn/2.4% of loans, the GNPA ratio was largely flat at 2.8% due to slow growth. The bank carries a healthy specific PCR of 77%/Covid provisions at 0.7% of loans, which should keep LLP under check. We expect the bank’s RoA/RoE to improve to 1.6%/16% by FY25E – up from 1.2%/12% in FY22. That said, Citi portfolio acquisition calls for shoring up capital levels and could lead to a dilution in RoEs.

Outlook

We maintain our long-term Buy rating on the stock with a TP of Rs1,020 (value standalone bank at 1.8x Jun’24E ABV and subs valuation at Rs80), given steady improvement in RoEs and reasonable valuations. That said, the bank will have to consistently deliver on growth/core profitability and maintain management stability for a re-rating.

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