Analyst Corner: ‘Buy’ rating on Axis Bank with a target price of Rs 530

Shorter duration of liabilities can lift NIMs in times of low rates.

Axis Bank’s FY20 annual report shows that it continues to de-risk the corporate book with loans rated ‘A’ and above now forming 90-95% of new loans. This can reduce risk of high stress in corporate loans; risks likely from SME/ mid-corp. segments. The retail segment has been scaling up, but Casa growth is low at 8%. Recent attrition among business heads can unsettle momentum. Shorter duration of liabilities can lift NIMs in times of low rates. We maintain ‘buy’ rating.

Will de-risking of corporate book pay off? Axis Bank has been de-risking its corporate loan book for over the past two-three years, and this is evident from loans rated ‘A-‘and above forming 90-95% of incremental loans. The share of loans rated ‘A’ and above is now at 83% (stock) and this should support asset quality. Still the RWA/ total asset ratio of the bank has seen a mild moderation to 67% due to a rise in the share of riskier retail loans (personal/ credit cards/ business banking) and hence performance of this book will be key to overall asset quality for the bank.

The retail-banking segment is witnessing high attrition. Axis Bank has been successful in scaling up its retail segment that forms 67% of deposits and 53% of loans. We continue to be somewhat underwhelmed by growth in Casa deposits of 8%, and, with a fall in the share of Casa in funds, the cost of funds rose yoy. The bank has seen higher attrition among business leaders in this segment, including the exit of its retail segment head. Stability in the management team will be key to the steady scale-up of the franchise. Debit card numbers have been flat yoy, implying that new client additions have been offset by pruning of inactive clients.

ALM profile, esops, subsidiary performance:

The bank’s ALM profile has gaps, but with higher share of shorter-duration deposits, the bank will benefit from downward repricing of fixed deposits. This will be partly offset by short-falls on priority-sector targets that will require investment in low-yielding assets. Amortisation of esop cost can drag profits by 8%. Among subsidiaries, Axis Mutual Fund has fared well with 121% yoy growth in profits, which, along with profits from other subsidiaries, led 83% growth in dividends from subsidiaries.

‘Buy’ rating has been maintained. We add FY23 estimates and expect that after a weak, FY21 earnings can recover from FY22. The planned capital raising of Rs 150 billion will lift net worth by 16%. We maintain our ‘buy’ rating with a target price of Rs 530 based on June 22 adjusted PB.