Jefferies sees big upside in Axis Bank shares, says valuation gap with ICICI Bank to narrow

Axis Bank emphasized at its Analyst Day that investment in digital platforms is helping engage with customers across life-cycle, boosting cross-sell. With the Citi & Flipkart partnership, it will be among the top credit card platforms & is deepening SME engagement, highlighted global brokerage Jefferies in a note. 

“The lender's management is confident about asset quality, growth & ROA; any normalisation in net interest margin (NIM) can be made up via op efficiency. Valuation discount of 40% to ICICI Bank should narrow a bit; capital raise will be watched,” the note stated.

Jefferies has maintained its Buy rating on Axis Bank shares with a target price of ₹1,110 apiece. It believes that SME book has risks, but initiatives to derisk the book are encouraging. Also, improvement in the deposit franchise will help growth/derisking.

Further, cost controls and deposit rate cuts should support earnings and Asset quality concerns are largely priced in, in Jefferies' view, and macro recovery could drive re-rating for the private bank. 

Axis Bank's management was confident about sustaining growth (around high teens) and also believes that even if ROAs can sustain near current levels, any normalization in margins can be made up via the scope for operating synergies.

Axis Bank has unveiled its growth, profitability and sustainability strategy, which focuses on RAROC-based business growth, building a granular fee profile and digital leadership to achieve sustainable performance, said analysts. 

Apart from retail, the MSME and mid corporate segments will be the key growth engines delivering higher RAROC, while granular fee income (67% retail in H1) and some improvement in its otherwise investment driven, higher cost structure (set to normalize back to 2% by FY25E) is likely to drive-up RoA/RoEs in the long run, as per brokerage house Emkay.

“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),” said the brokerage while retaining its BUY rating on the bank stock, with a target price of ₹1,110 per share.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.