AXIS Bank is on track to deliver steady performance. Buy for target price of Rs 1195 (35% upside): HDFC Securities

Axis Bank

Future-proofing efforts meet early-stage gains

Axis Bank (AXSB) showcased its transformation journey and outcomes over the past three years. The heavy Tech investments (2.5x in past 3 years) and re-jigged portfolio granularity on both sides of the balance sheet are gradually yielding positive results at the margin. While AXSB is likely to continue its investment phase, resulting in elevated opex ratios, the bank is incrementally focused on high-yielding profit pools by leveraging its branch network, digital capabilities and partnerships to drive productivity gains. Deposit mobilisation is likely to remain a challenge and our forecasts factor in loan/deposit CAGR of 17%/18% over FY22-FY25E due to an untenably high loan-to-deposit ratio (~90%). While we expect near-term RoAs to come off as deposit pricing catches up, we are now relatively more constructive on potential medium-term RoEs for the franchise. Maintain BUY with a TP of INR1,195 (standalone bank at 2.2x Sep-24 ABVPS), even as we argue for gradual convergence with ICICIBC valuation multiples.

► MSME + “SURU” + unsecured retail = new profit growth engines: AXSB is inching up its exposure to MSMEs (including mid-corporate), Bharat Banking (rural and semi-urban markets) and unsecured retail (Personal loans + Credit cards), which are likely to emerge as new growth drivers. Unsecured retail is likely to be led by KTB customers (through partnerships) and NTB customers (AA framework etc.), while SURU (Semi-Urban + Rural) is likely to be driven by branches, and FinTech partnerships. The SURU strategy is likely to help address the bank’s PSL shortfall, especially in a couple of specific buckets.

► Tech investments to sustain; digital journeys WIP: AXSB’s transformation journey in enhancing its digital capabilities and transformation remains WIP, although a bulk of the heavy lifting in terms of building core blocks appears to be largely done. While AXSB has maintained that continued digitisation of several customer journeys and new product launches are likely to keep nearterm tech spends elevated, we see significant potential for sustained mediumterm productivity gains from the continued investment phase.

► Deposit re-pricing headwinds inevitable: AXSB’s deposit mobilisation and re-pricing of deposits are likely to emerge as a near-term headwind for its aspirational loan growth rate. The bank is currently pricing its deposits 15-25 bps lower than its peers in an increasingly tightening liquidity environment.

► Early promise calls for gradual convergence with peer: AXSB finally seems to be on track to deliver steady performance with lower shocks. While the bank is on track to deliver ~14-15% RoE over the next couple of years, we argue that enhanced productivity and gradual exercising of pricing power in chosen segments could drive sustained medium-term RoEs. We argue for a gradual convergence in valuation multiples with ICICIBC.