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Axis Bank re-rating to continue on steady NIMs, cheap valuation: Analysts

May 03, 2024 13:30 IST

Re-rating of Axis Bank's stock may continue in the near-future, believe analysts, as the risk-reward on the stock remains favourable amid healthy financials.

Axis Bank

Photograph: Danish Siddiqui/Reuters

The bullish stance comes after the Mumbai-based lender delivered a strong outperformance in the March quarter of fiscal year 2023-24 (Q4FY24) on core pre-provision profit and net profit, with improving asset quality.

Axis Bank's net interest margin (NIM) expanded, against expectations, even in a tough market.

 

On the bourses, Axis Bank stock price surged 6.5 per cent to Rs 1,133 apiece on the BSE in Thursday's intraday trade.

The stock settled as the top gainer on the benchmark S&P BSE Sensex, and Nifty50 indices with a gain of 6 per cent.

By comparison, the benchmark Sensex index closed 0.66 per cent higher.

"With the merger drag on HDFC Bank, ban on Kotak Mahindra Bank, and higher valuation for AU Small Finance Bank, we argue Axis Bank offers attractive risk-reward given its resilient NIM and cheap valuation," said Mahrukh Adajania of Nuvama Institutional Equities, in a co-authored note with Madhukar Ladha and Yashesh Gala.

They value Axis Bank's stock at 1.8-times book value (BV) FY26E, assigning a target price of Rs 1,270 to the stock, up 12.7 per cent from current levels.

On Wednesday, Axis Bank reported a net profit of Rs 7,129.67 crore in the quarter ended March, 2024 as compared to a net loss of Rs 5,728.42 crore in the same period of the previous year (Q4FY23).

Net interest income (NII) grew 11 per cent year-on-year (Y-o-Y) to Rs 13,089 crore while fee income grew by 23 per cent Y-o-Y to Rs 5,637 crore.

That apart, Axis Bank's NIM rose 5-basis points Q-o-Q to 4.05 per cent in Q4, which analysts believe is 'commendable' given the competitive intensity, absence of one-offs, improving loan deposit ratio (LDR) and higher liquidity coverage ratio (LCR).

The expansion was driven by higher yields on changing loan mix and resilient cost of finance (CoF).

Business-wise, the lender's loans grew 4 per cent Q-o-Q and 14 per cent Y-o-Y, where retail loans increased 7 per cent Q-o-Q, SMEs expanded 5 per cent Q-o-Q, and corporate 7 per cent Q-o-Q.

Monthly-end Balance (MEB) deposits, meanwhile, grew 6 per cent Q-o-Q/13 per cent Y-o-Y, while quarterly average balance (QAB) deposits also grew at 5 per cent Q-o-Q.

Bulk deposits grew much faster at 13 per cent Q-o-Q.

With this, LDR improved to 90 per cent from 92.7 per cent Q-o-Q.

"Axis Bank can re-rate further given sustained pick up in deposit growth while maintaining margin trajectory and asset quality.

"This is also supported by ongoing branch network expansion and digital initiatives undertaken by the bank.

"Banks efforts to strengthen its liability framework and diversify its portfolio are key factors driving this positive outlook," said those at JM Financial.

The management, meanwhile, has said that the banks aims to grow 300 400bp faster than industry over the over medium to long-term (three to five years), for which deposit growth will be an important determinant.

It expects industry to report 13 per cent deposit growth in FY25, and expects advances growth to converge with this.

The bank shall continue to invest so far as it is able to generate an return on equity (RoE) of 18 per cent, Axis bank management added.

In Q4FY24, Axis Bank's operating expenditure (Opex) grew 25 per cent Y-o-Y and 4 per cent Q-o-Q, owing to continued investments in digital and technology, employee increments, and expenses related to Citi's integration.

Due to one-off other income, the cost-to-income (C/I) ratio improved sharply to 46.9 per cent, while the cost-to-assets ratio continued to inch up.

"We estimate Axis Bank to deliver a 14.5 per cent CAGR in loans over FY24-26.

"Accordingly, we estimate FY26 RoA/RoE of 1.8 per cent/16.8 per cent. We maintain our Neutral rating with an increased target price of Rs 1,200," said Motilal Oswal Financial Services.

That said, analysts advise investors to keep an eye on the near-term growth as an elevated LDR will constrain credit growth, while continued re-pricing of deposits may keep margins in check.

The bank, they said, has healthy LCR of 120 per cent as it maintains industry-best outflow rates; however, the impact of a surge in non-retail deposits will need to be watched over the coming quarters.


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Nikita Vashisht
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