Axis Bank Demonstrates Strong Growth Potential, Appealing Valuations: Jefferies
According to a report released after hosting Axis Bank's CEO for investor discussions in the United States, global brokerage firm Jefferies indicates that Axis Bank holds a positive stance on its sustainable return on equity (ROE) of 18 per cent. The bank's strategic focus on enhancing its funding composition is predicted to lead to decreased volatility and improved net interest margins, making it an appealing choice among banking stocks.
The bank's attention is directed towards enhancing its funding mix by augmenting the share of retail deposits, encompassing term and savings deposits. This initiative aims to align Axis Bank with best-in-class peers. The report highlights the bank's approach of fostering better customer experiences, reorienting branch staff, emphasising corporate salary accounts, and boosting digital banking platforms.
Although the transformation of the funding mix and a reduction in funding costs may span over 18-24 months, the rise in the proportion of retail funds over the past year has already positively impacted outflow rates, now comparable to those of larger banks. This development has in turn facilitated loan growth.
Axis Bank's management is confident that the credit growth for the banking sector can be sustained at around 12-13 per cent, while the bank itself can achieve a growth rate 4-5 percentage points higher, ranging from 16-19 per cent.
Jefferies underscores the improved pricing environment in corporate lending, which benefits Axis Bank by enhancing its scope of participation. While there's some uptick in the capex cycle, banks and promoters remain cautious about extensive capital expenditure.
Reiterating the bank's strong financial position, the management confirmed that capital raising is unnecessary, given the Common Equity Tier-1 Capital Adequacy Ratio (CET-1 CAR) of 14 per cent and an annualised ROE of 19 per cent for the fiscal year 10FY24.
Jefferies anticipates a 16 per cent Compound Annual Growth Rate (CAGR) in profits for the bank from FY23 to FY26, with an ROE of 18 per cent. The report notes that most of the impact of rising funding costs has been absorbed by earnings, and an enhanced funding mix could have a constructive influence on Net Interest Margin (NIM) and Return on Assets (ROA).
Valuing Axis Bank at 18 times the 12-month forward adjusted Price-to-Book (PB) ratio, Jefferies finds this to be an attractive proposition (with a 25 per cent discount compared to ICICI Bank and HDFC Bank). Thus, the report designates Axis Bank as a top pick in the financial sector, awarding it a "buy" rating along with a price target of Rs 1,200. As of now, Axis Bank's shares are trading at a slight dip of 0.92 per cent at Rs 981.10 on the Bombay Stock Exchange (BSE) at 10.20 am. This year, the shares have surged nearly 40 per cent.
