Can weak operational performance in Q4 delay Axis Bank's re-rating?

Axis Bank Q4 result review: Analysts do not expect valuation to catch up with peers in light of the NII undershoot, impending dilution to fund the Citi deal, and higher operating expenditure guidance.

Axis Bank shares plunged 6.5 per cent to Rs 729 apiece on the BSE on Friday as lower-than-expected growth in net interest income (NII), and a surprising margin compression worried the Street. In comparison, the benchmark S&P BSE Sensex index slipped 0.8 per cent.

"Axis Bank reported a mixed bag in Q4FY22. While net profit of Rs 4,118 crore outperformed, driven by lower credit cost, NII undershot by growing just 1.9 per cent QoQ/17 per cent YoY, missing Bloomberg consensus by 3.5 per cent, and lagging HDFC Bank’s 2 per cent and ICICI’s 3 per cent," said analysts at Edelweiss Securities.

They, now, do not expect Axis Bank's valuation to catch up with peers in light of the NII undershoot, impending dilution to fund the Citi deal, and higher operating expenditure guidance.

Here's a lowdown of how key brokerages view the results:

Jefferies

While NII growth of 17 per cent looks good, the sequential momentum is underwhelming. This is due to the rise in cost of term deposits, which are a drag on net interest margins (NIMs) of 3.5 per cent, down 7 basis points YoY and 4 bps QoQ- lower than other large private banks.

With Axis Bank’s valuations now at a normalized discount to ICICI Bank, we believe the next leg of re-rating will be driven by expansion in return on equity (RoE). That, in-turn, will be led by expansion in NIMs for which the bank needs to lower funding costs and improve yields a bit.

JPMorgan

With healthy asset quality and conservative provisioning, credit costs could run below normalized levels in FY23. NIMs have levers of expansion in FY23; however, this could be offset by higher opex. Axis Bank’s return on asset (RoA) of 1.5 per cent is 60 bps lower than larger private banks and this will likely remain a drag on valuations. NIM improvement would be a key driver for re-rating.

We raise FY23/24 EPS estimates by 10 per cent/7 per cent driven mainly by lower credit cost assumption.

ICICI Securities

Key to 16-18 per cent RoE trajectory will be NIM improvement, with levers being asset mix change, deployment of excess liquidity, scale-up of low-cost deposits, and gradual decline in low-yielding RIDF investments.

Key risks for the bank include elevated opex offsetting improvement in operating performance, no immediate financial benefit from Citibank’s consumer business acquisition, hit on net worth (due to goodwill amortisation) and CET-1 (due to capital allocation), and retention of an acquired credit card and deposit customer base.

Edelweiss Securities

After guiding for a dip in opex at Q3 call, management has indicated higher opex in FY23E. In light of the NII miss, higher opex guidance and a likely dilution, we expect Axis Bank to continue to trade at a discount to peers. We are cutting EPS by 4 per cent/59 per cent for FY23E/24E building in the Citi deal.

Motilal Oswal Financial Services

The management is committed to meeting its 18 per cent RoE target by FY25, while there exists visibility of achieving 16.5 per cent as of today. We expect Axis Bank to deliver a FY24 RoA/RoE of 1.6 per cent/15.7 per cent.

As the cost-to-asset ratio will rise in the short term, the bank is moving away from its 2 per cent exit guidance.

Kotak Institutional Equities

Growth is accelerating steadily and in segments where the yields are higher, indicating that the operating profits can be solid and probably best-in-class in FY23. This would imply that Axis Bank can move closer to its peers on most operating metrics.

However, the near-term concern is gradually shifting to two issues for the bank: (1) weakening operating metrics for all frontline banks, especially NIM, and (2) merger with Citi as there is likely to be discussion on the integration from HR-related perspective.

Emkay Global Financial Services

We retain our long-term Buy rating on the stock with a target price of Rs 1,020 given steady improvement in RoEs and reasonable valuations. However, the bank's recent opex conundrum (risk of upward revision in cost/asset guidance for FY23) and the potential impact on core profitability in the near term will impact the stock's performance.