JM Financial sets record target price for Axis Bank, projects 17% upside

Domestic brokerage firm JM Financial has recently raised its target price for Axis Bank, India's fourth-largest private sector bank, from ₹1,375 to ₹1,450 per share. This revised target price sets a new record for the stock and also suggests a potential upside of 17 per cent based on its closing price on Thursday.

The brokerage said that the bank has effectively navigated tight liquidity conditions to sustain strong growth in net interest income (NII), achieving a CAGR of 22.7 per cent over the period from FY22 to FY24. The bank has also built robust provision buffers, with a provision coverage ratio (PCR) of 78 per cent on non-performing assets (NPAs) and a 1.2 per cent provision on its non-NPA book.

Looking ahead, the brokerage anticipates a moderation in operating expense (Opex) growth, projecting it to decrease to 15.2 per cent CAGR from FY24 to FY26, down from 22.1 per cent over FY22 to FY24. This change is expected as the integration of Citi’s operations takes shape.

It projects credit costs to rise slightly to 0.6 per cent over FY25 and FY26. While the bank benefitted from interest rate hikes in FY23, it has enhanced its share of deposits that will reprice within six months to one year during FY24, increasing by 375 and 576 basis points, respectively. This strategic move aims to mitigate the impact on net interest margins (NIMs) from potential future rate cuts.

According to the brokerage, the bank has maintained a buffer provision of ₹50 billion for the transition to expected credit loss (ECL) norms, part of a total of ₹117.3 billion in non-NPA provisions.

Checking opex growth boosts profitability outlook

JM Financial highlighted the bank's strong liquidity profile, with a liquidity coverage ratio (LCR) exceeding 120 per cent. This solid foundation should enable the bank to report a growth rate of 15 per cent for deposits and 16% for advances from FY24 to FY26, with NIMs expected to remain above 3.8%, even amid potential rate cuts.

In the first quarter of FY25, the bank reported higher credit costs, but only 13 per cent of its loan book is exposed to unsecured segments. Furthermore, 89 per cent of its corporate book is rated A- or above, and incremental issuance of credit cards has already been moderated.

Thus, the brokerage believes that the first-quarter credit cost of 1.1 per cent does not reflect the full-year outlook. "Our projections indicate moderate credit costs of 0.6% for FY25 and FY26, supported by the bank's conservative positioning regarding unsecured exposure and its corporate portfolio," said JM Financial.

Following the initial integration expenses related to technology and Citi in FY24, Axis Bank has seen Opex growth moderate to 10.9 per cent in the first quarter. It anticipates this trend to enhance profitability, projecting opex growth at 16% for FY25 and 15 per cent for FY26.

Therefore, the brokerage retained its positive outlook on Axis Bank, forecasting a return on assets (RoA) of 1.74% and a return on equity (RoE) of 16.5% by FY26.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.