Buy Axis Bank Ltd For Target Rs.1110- Emkay Global Financial Services
Aims to build stronger bank, delivering sustainably-higher RoEs
The bank hosted an analyst meet to showcase its transformational initiatives across business verticals and digital initiatives to deliver sustainably-higher RoEs across cycles. KTAs from the meet are:
* New GPS strategy to focus on delivering sustainably-higher returns: Axis Bank has unveiled its new GPS (growth, profitability and sustainability) strategy, which focuses on RAROC-based business growth, building a granular fee profile and digital leadership to achieve sustainable & best-in-class performance. Apart from retail, the MSME and midcorporate segments will be the key growth engines delivering higher RAROC, while granular fee income (67% retail in H1) and some improvement in its otherwise investmentdriven, higher cost structure (set to normalize back to 2% by FY25E) is likely to drive-up RoA/RoEs in the long run (aspires for 18% RoE).
* The bank has made heavy tech investments over the past few years, to create digital native capabilities and become a digital consumer-lending powerhouse. The bank intends to continue with its high-end tech investments for driving scale across business verticals, coupled with higher productivity. This should lead to an elevated cost structure in the near term (2.25% of assets in Q2FY23), but would ease in the long term (2% by Q4FY25) as the benefits of these investments flow in through higher growth/revenues.
* Higher growth, better portfolio mix and RIDF run-off to structurally drive-up margins: After a prolonged underperformance, the bank has seen better-thanguided/expected margin delivery in the past 2 quarters, mainly benefiting from assetrepricing and sustained improvement in the portfolio mix (retail + SME share up, by 600bps since FY19) coupled with a lower RIDF drag (down 200bps to 3.1% of loans). Notwithstanding near-term cost pressures, the bank retains its NIM guidance for FY23 at 3.7-3.8% and expects a structural uplift going forward, on the back of continued asset repricing and further moderation in the RIDF drag, leading to healthy core-profitability.
* Not in a hurry to raise capital till Citi deal consumption: Bank has reiterated that its current internal capital generation is higher than consumption and it is in no hurry to raise capital (current CET 1 at 15.1%), before consuming the Citi portfolio acquisition (shave off 177bps of capital), thereby easing near-term capital-raising concerns.
* Retain BUY: We expect the bank to clock healthy core-profitability CAGR at 25% over FY23-25E on the back of better growth/margin delivery which, coupled with lower LLP given higher specific + contingent provision buffer, should help it deliver healthy RoEs (16- 17% by FY24-25E without factoring-in the capital raise). Thus, we retain our BUY rating on the stock, with a TP of Rs1,110/share, valuing the standalone bank at 1.8x Dec-24E ABV and subsidiaries at Rs82/share.
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