Analysts raise Axis Bank's earnings forecast; to track deposit growth ahead

Axis Bank Q3 result review: Axis Bank's is moving in the right direction with improvement in net interest margins, sustaining loan growth momentum, and expansion in return profile, analysts said

Axis Bank Q3 review: With Axis Bank holding its earnings' growth momentum in the December quarter (Q3) of financial year 2022-23 (FY23), analysts have raised their net profit forecasts for upcoming financial years by as much as 15 per cent, and net interest income (NII) forecasts by 11.5 per cent.

This, they said, would be driven by acceleration in deposits, while maintaining loan growth momentum.

"Axis Bank's transformation is in the right direction with sequential improvement in net interest margins (NIMs), sustaining loan growth momentum, and expansion in return profile. Sustenance of NIMs near current levels, along with moderation in operating expenditure (opex) and controlled credit costs, should aid Axis to deliver on the aspirational return on equity (RoE) target of 18 per cent," said analysts at JM Financial.

Axis Bank reported a 62 per cent year-on-year jump in standalone net profit for Q3FY23 to Rs 5,853.07 crore. Its NII rose sharply to Rs 11,459 crore, up 32 per cent YoY.

On the bourses, however, the Mumbai-based lender's shares fell 3.14 per cent to Rs 904 apiece on the BSE in Tuesday's intra-day trade, before settling 2.5 per cent lower at Rs 910 apiece. By comparison, the benchmark S&P BSE Sensex ended 0.06 per cent up.

Here's what how key brokerages interpreted the results:

Emkay Global | Buy | Target: Rs 1,300

Credit growth was relatively moderate relative to peers at 15 per cent YoY/4 per cent quarter-on-quarter (QoQ), largely due to slower growth in mortgages and card book. However, corporate/SME growth paced-up well.

Deposit/CASA growth remained a struggle with the current account-savings account (CASA) ratio declining to 44 per cent (vs 46 per cent in Q2).

"We revise earnings estimates upward for FY23/FY24/FY25 by 7 per cent/4 per cent/2 per cent, and expect the bank to deliver 1.7-1.8 per cent/17 per cent return on asset (RoA)/RoE by FY25. Given its improving core-profitability, RoE profile, and Management stability, we revise our target price to Rs 1,300 per share," it said.

Nuvama Institutional Equities | Buy | TP: Rs 1,150

With a sustainable business model, management is confident of sustaining RoE of 18 per cent. Cost to assets, a key pain point in the past, will improve to 2 per cent by end FY25 from 2.25 per cent currently as spends on technology are already done. We expect NIM to stabilize at above 4 per cent. RoE for Q3 stood at 19.4 per cent, and RoA at 1.9 per cent.

ICICI Securities | Buy | TP: Rs 1,130

Given moderate balance sheet expansion, Axis needs to accelerate its retail term deposits (TD) engine to support asset growth with the credit-to-deposit (C/D) ratio at 90 per cent. Also, sustained efforts are needed to drive ‘cost to assets’ below 2 per cent in the medium term. NIMs settling much higher than the steady-state guidance and growth in focused segments would sustain current earnings trajectory.

Nirmal Bang Institutional Equities | Buy | TP: Rs 1,132

The bank’s asset quality continued to improve, with gross non-performing assets (GNPA)/ net-NPA (NNPA) at 2.38 per cent/0.47 per cent vs 2.50 per cent/0.51 per cent in Q2FY23. Moreover, gross slippages and net slippages were impacted by a one-off non-recurring item to the tune of Rs 400 crore.

"Despite all the stress indicators showing a sequential improvement, the bank sustained cumulative provisions coverage at 139 per cent. We have raised our earnings estimates, and expect the bank to report RoA of 1.8 per cent, and ROE of 16.6 per cent by FY25," it said.

Kotak Institutional Equities | Buy | TP: Rs 1,100

Axis Bank results surprised as the loan growth was slower in select products such as mortgages/auto, and persistent weakness in deposit growth.

“We are building a decline of 20 bps in FY24 NIM, although the bank has additional levers in loan mix that can help protect the pressure coming from higher funding costs. The ability to bridge the gap between the change in cost of funds/deposits relative to its peers, post significant investments in recent years, can reduce NIM pressure. However, this is likely to take time. The journey on the asset side appears to be quite comfortable,” it said.

JM Financial | Buy | TP: Rs 1,120

Current core valuations of 1.8x/1.5x FY24/25E BVPS are inexpensive, and we expect the discount to larger private sector peers to narrow as Axis Bank starts reporting strong operating performance on a more sustainable basis.