Axis Bank Q2: Analysts see up to 28% upside on sustained earnings growth

Axis Bank shares hit a record high of Rs 905 on the BSE on Friday, surging 9.5 per cent in the intra-day trade, after the bank beat Street's September quarter earnings' expectations across parameters by a wide margin. They closed at Rs 900 level, up 8.9 per cent on the BSE as against 0.2 per cent gain in the benchmark S&P BSE Sensex.

The stock of private sector lender surpassed its previous high of Rs 866.60, touched on October 25, 2021. Key brokerages have raised their target prices on the stock, and see up to 28 per cent upside.

"Axis Bank's Q2FY23 earnings surpassed our, and consensus expectations by a wide margin (over 20 per cent) with net profit at Rs 5,329.7 crore (up 29 per cent quarter-on-quarter, 70 per cent year-on-year). Beat was across operating metrics, especially with net interest margin (NIMs) soaring as much as 36 basis points QoQ to 3.96 per cent. Moreover, its net interest income was at Rs 10,360 crore, up 31 per cent YoY and 10 per cent quarter-on-quarter," said ICICI Securities.

The brokerage further added that Axis' Q2 performance was the second quarter for which performance can be described as "focused earnings delivery post a balance-sheet strengthening phase". Surprise on NIM, and visibility on sustainability of operating performance, it said, compel an earnings upgrade of 13 per cent and 8 per cent for FY23 and FY24.

Analysts said the lender's sharp beat on expectations was driven by a higher-than-expected margin expansion, and flat operating expenditure (opex). Core pre-provision operating profit grew strongly at 19 per cent QoQ, and 43 per cent YoY to Rs 7,716.2 crore. The bank, they said, addressed three key earnings concerns through a big 36bp QoQ NIM expansion, flat QoQ growth in opex, and 7 per cent QoQ growth in current account-savings account (CASA). 

"Axis bank delivered a strong beat on every line item with return on asset (RoA) improving to 1.9 per cent in Q2FY23 from 1.4 per cent QoQ. More importantly, the bank delivered a strong beat on three concern areas of NIM, opex, and CASA. The risk reward in Axis remains highly favourable as, despite the recent outperformance, the stock trades at 1.7x book value (BV) FY24E. With improving profitability, we expect further re-rating," noted Nuvama Institutional Equities.

The stock is among its top stock picks as it believes a strong deposit franchises like Axis Bank become more valuable in a rising rate environment.

The lender's total deposit growth came in at 10 per cent YoY/1 per cent QoQ due to the ongoing reclassification/liquidation of old deposits from retail to wholesale, but CASA grew 7 per cent QoQ/14 per cent YoY with 4 per cent QoQ savings growth. Loans grew 18 per cent YoY/ 4 per cent QoQ - retail grew 3 per cent QoQ, mid-corporate/SME grew 9 per cent QoQ each, and corporate 5 per cent QoQ.  

Going ahead, market share gain in SME, Bharat banking, leadership growth in card business (4th largest in industry), strengthening of transaction banking, and growth in identified focused retail segments will likely sustain the momentum, believe analysts.

On the asset quality front, Axis Bank reported a drop in gross NPA ratio to 2.5 per cent from 3.53 per cent a year ago, and 2.76 per cent a quarter ago. The net NPA ratio was at 0.51 per cent versus 1.08 per cent a year ago, and 0.64 per cent on June 30. 

The bank's fresh slippages moderated to Rs 3,380 crore, which, coupled with healthy recoveries and upgrades, enabled an improvement in asset quality ratios. Restructured book remains controlled at 0.38 per cent of customer assets.

"The bank needs to mobilize deposits further to maintain a corporate debt restructuring (CDR) of below 90 per cent. Therefore, deposit growth is likely to be key monitorable in coming quarters. Moreover, the future outlook of asset quality is at manageable level as the strong standard asset coverage (1.4 per cent of gross loans) is likely to absorb delinquencies from restructuring. In view of adequate Covid buffer, glimpse of growth rejuvenation and manageable restructuring pool, we recommend a BUY," noted LKP Securities.

Kotak Institutional Equities, too, maintained their 'BUY' rating with a fair of Rs 1,000 (Rs 960 earlier), valuing the bank at ~2.0X book and ~17X September 2024 EPS (due to charges for Citi) for RoEs (return on equity) of 15 per cent in the medium-term. 

"We acknowledge the concerns around sustaining opex and NIM at these levels, along with weak deposit growth, probably have no convincing answers today. However, we believe a positive view is perhaps a more convincing one to make, given that asset quality is not a concern and the bank has a superior liability franchise. Even if the NIM were to come under pressure, the bank has adequate buffers that can be unwound next year, which implies that the risk to earnings downgrade is quite limited," it said.