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Equity Research Report: Axis Bank

Axis Bank may scale 1031 by Mar’23 and 1435 by Mar’25 on the robust business model, steady advance growths, and resilient NIM

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Axis Bank is the 3^rd largest private sector bank in India and was formerly known as UTI Bank (1993-2007). The Bank offers the entire spectrum of financial services to customer segments covering Large and Mid-Corporates, MSME, Agriculture, and Retail Businesses. Axis Bank has a large footprint of 4,758 domestic branches (including extension counters) with 10,990 ATMs & 5,972 cash recyclers spread across the country as of 31^st March 2022.

The Overseas operations of the Axis Bank are spread over eight international offices with branches in Singapore, Dubai (at DIFC), and Gift City-IBU; representative offices in Dhaka, Dubai, Abu Dhabi, and Sharjah and an overseas subsidiary in London, UK. The international offices focus on Corporate Lending, Trade Finance, Syndication, Investment Banking, Liability Businesses, and Private Banking/Wealth Management offerings.

Axis Bank is one of the 1^st new generation private sector banks to have begun operations in 1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India (SUUTI) (then known as Unit Trust of India), Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd., and United India Insurance Company Ltd. The shareholding of Unit Trust of India was subsequently transferred to SUUTI, an entity established in 2003.

With a balance sheet size of Rs. 11,75,178 crores (Rs.11.75T) as on 31^st March 2022, Axis Bank has achieved consistent growth and with a 5-year CAGR (2016-17 to 2021-22) of 14% each in Total Assets & Advances and 15% in Deposits.

At a glance, for Axis Bank, almost 46% of revenue comes from retail banking, 24% from Treasury operations, 26% from corporate/wholesale banking, and 3% from others, while 99% of revenue comes from India (in INR).

Key management:

Board Members:

Key Shareholders: FIIs(45.16%), DIIs(31.59%), LICI (7.97%), SUUTI (1.51%), OTHERS (11.70%)

 

Summary of latest report card: Q2FY23 (Consolidated: INR 100 Cr. =1B)

·         NII Rs.106.33B vs 96.29B sequentially (+10.43%) and 80.85B yearly (+31.51%)

·         Total operating income Rs.151.09B vs 131.22B sequentially (+15.14%) and 123.69B yearly (+22.15%)

·         Total operating expenses Rs.65.39B vs 64.05B sequentially (+2.09%) and 56.63B yearly (+15.48%)

·         EBTDA (Core operating profit) Rs.85.70B vs 67.17B sequentially (+27.59%) and 67.06B yearly (+27.78%)

·         NPA provisions Rs.5.47B vs 3.84B (+42.48%) sequentially and Rs.17.63B yearly (-68.96%)

·         EBITDA (Notional profit after NPA provision) Rs.80.22B vs 63.33B sequentially (+26.69%) and 49.44B yearly (+62.28%)

·         EBTDA/Share (Core operating EPS) Rs.27.89 vs 21.87 sequentially (+27.55%) and 21.87 yearly (+27.55%)

·         EBITDA margin 53.10% vs 48.26% sequentially (+4.84%) and 39.97% yearly (+13.13%)

·         EBTDA margin 56.72% vs 51.19% sequentially (+5.53%) and 54.72% yearly (+2.50%)

·         Operating cost/Income ratio 43.28% vs 48.81% sequentially (-5.53%) and 45.78% yearly (-2.50%)

·         Reported NIM 3.96% vs 3.60% sequentially (+0.36%) and 3.39% yearly (+0.57%)

·         Reported cost of funds 4.09% vs 3.89% sequentially (+0.20%) and 3.87% yearly (+0.22%)

·         Gross advance Rs.7.31T vs 7.00T sequentially (+4.40%) and 6.22T yearly (+17.56%)

·         GNPA Rs.0.20T vs 0.21T sequentially (-5.43%) and 0.24T yearly (-17.62%)

·         Strong operating performance

·         Well-capitalized with a self-sustaining capital structure; adequate liquidity buffers

·         Steady growth in granular deposits, improving the quality of visible

·         Healthy loan growth delivered across focused business segments

·         Continue to maintain a strong position in the Payments and Digital space

·         Declining NPAs and slippages, moderating credit costs

·         Key subsidiaries continue to deliver steady performance

·         Strong growth in fees income across households (retail) and business/corporate & commercial segment

·         OPEX was led by higher tech and employee expenses to support future business growth

·         Overall cost/asset ratio was around 2.25% in Q2FY23 vs 2.24% sequentially (q/q) and 2.09% yearly (y/y)

·         Guided cost-to-asset ratio around 2% in the medium term

·         Healthy capital position with adequate liquidity

·         Retail loan book Above Rs.4T remains well diversified, grew +3% sequentially and +22% yearly; almost 80% is secured led by home loans, LAP, auto loans, SBB, Commercial/professional equipment, personal loans (100% to salaried segment), credit cards (71% to salaried segment), rural & other (gold, agri) loans

·         The SME banking segment is well diversified with 70% secured lending (WC, TL, OD); average ticket size Rs.7M

·         Thrust on digital technology in data mining, loan account supervision, and customer service

·         Strong growths in credit card issuances

·         Remains a leading player in India’s wealth management space

·         Well-distributed branch network across India (metro, urban, semi-urban and rural)

·         Robust corporate and commercial banking with prudent strategy along with thrust on top-rated clients

·         89% of the corporate loan book is rated A- and above

·         65% of sanctions to Corporate A- and above

·         Overseas corporate loan book is 97% India-linked; focus on Indian MNCs

·         The overall corporate loan book is well diversified and led by banks & financials, engineering & electronics, infra construction, trade, petroleum & allied products, power generation & distribution, real estate, Iron & Steel, Chemicals & allied products, and automobile & ancillaries

·         Simplified commercial banking/lending model

·         Upbeat performance and significant value addition in key subsidiaries (Axis Finance, Axis AMC, Axis Capital, Axis Securities, Axis Trends, and Freecharge

Highlights of analyst concall: Q2FY23

·         The Bank remains optimistic about the Indian (domestic) growth story (potential) despite the chorus of global economic slowdown

·         Domestic consumption remains strong and Axis Bank is quite confident about business (lending) growth

·         Improving profitability metrics (ROE, NIM, Fee growth, core operating profit, and ROA)

·         Robust growth and gaining of market share in advance, deposit, payment transactions, wealth management, and wholesale banking

·         Resilient government business amid gaining of new mandate; focus from deposit to solution-centric

·         Strong balance sheet and operating cash flow; internal accruals are becoming largely sufficient to fund business growths in Q1 and Q2

·         Building next-generation technology architecture with a focus on digital transformation

·         Getting technologically ready for Citibank consumer business integration

·         Despite global macro headwinds, domestically high inflation, and CAD, the Indian government (Fiscal authority) and RBI (monetary authority) are taking pragmatic policy decisions aiming at minimum growth sacrifice, and thus Axis Bank remains optimistic about the domestic consumption story and growth of banking business

·         The bank is keeping ROE above 15% and OPM, and NIM has been among the best in the industry for the last 4-Qtrs (post-COVID)

·         Strong operating performance across all parameters both yearly and sequentially

·         Improved NIM, strong NII, growth in granular fees, and controlled OPEX

·         Strong operating profit coupled with benign credit costs resulted in a significant improvement in ROA and ROE

·         Improvement in B/S mix to loans and investments from other assets

·         High-yielding retail and CBG segments comprised 69% of the total advance

·         Improving risk/return profile of loan book

·         Robust fees income including from 3^rd party distribution

·         Trading loss for Rs.-0.86B  vs loss -6.67B sequentially and profit +4.73B yearly mainly on account of lower MTM for top-rated corporate bonds portfolio (lower bond prices, higher yield); the bank is not expecting any real economic loss out of this portfolio, which may be at par after 4/5 years (on maturity)

·         OPEX was flat sequentially against +14% growth yearly; the yearly increase was on account of higher tech/digital, employee, and other spending to support business growth

·         Operating costs/average asset was around 2.25%, higher by 13 bps yearly and 1 bps sequentially; the bank is committed to achieving around 2% credit costs in the medium term

·         Consolidated ROE at 18.90% annualized basis, improved +5.45% (y/y) and +3.34% sequentially; remain committed to minimum 15% ROE for the medium term

·         Consistent delivery of 15% plus ROE over the last three quarters, improving quality of earnings and with profits in H1FY23 being sufficient to fund growth, the bank is demonstrating delivery across all the initiatives undertaken

·         CASA ratio at 46% on an MEB basis on September 30, 2022, and early improvement in the quality of granular liability growth, visible through a reduction in outflow rates gives us comfort that we have laid a strong foundation for our liability journey. We assess that improvements planned over the next 8 to 10 quarters are on track with some inter-quarter fluctuations which are normal for a business of our scale and size

·         Focus growth segments like retail, SME, and Mid Corporate with better RAROC continue to grow faster at 22%, 28%, and 49% respectively

·         Our balance sheet resilience is visible through strong capital adequacy and returns ratios reported for the quarter. Overall coverage at 138.35% of GNPA and limited COVID restructuring at 0.38% of GCA. This places us in a good position in the current macro environment

·         We continue to closely monitor geopolitical, inflation both domestic and international, and liquidity risks and resultant policy action, its impact on our business and our client's businesses as we move forward

·         The current NIM is 3.96%; above the bank’s minimum target of +3.80%; the bank will try to keep NIM at around +4.00% going ahead despite the higher cost of funds as the bank has adequate pricing power and prudent lending strategy

·         The bank is also confident about robust deposit growths going forward due to a wide branching network and customer trust; CASA grew +14% (y/y) against industry growth of +10% due to emphasis on district/big towns

·         Confident about sequentially flat OPEX and 2% cost/asset and NIM guidance (mid-term) because of fundamental and structural factors

·         The bank is already getting productivity benefits for initial capex (tech spending) in FY21-22

·         Not planning to raise significant capital or dilute equity shortly even after Citi consumer business acquisition

·         Preparing for Max Life (Subsidiary) listing and undergoing various regulatory processes as smoothly as possible

·         The bank is confident about maintaining a medium-term growth story in a sustainable manner rather than a sequential (q/q) basis

·         Retail lending growth is surpassing deposit growth because of various macro headwinds including higher borrowing costs; customers now have to pay higher EMI or debt servicing costs, which along with elevated inflation is creating lower savings/deposit; i.e. lower disposable cash in hand is resulting higher lending and lower deposit

·         The bank is cautious about retail lending and is not ready to dilute the lending framework to ensure no flare-up of NPA in the coming days amid synchronized global tightening and economic slowdown

·         The bank is taking proactive pre-cautionary action for default or sign of default of a borrower (household/SME)

·         The bank is not so much worried about corporate lending as now corporates are largely deleveraged

·         Most business loan (SMEs) is secured

·         The bank is confident about lending growth, and NIM guidance despite lower deposit

·         There is no significant issue in HNI and high salary deposit

Fair Valuation: Axis Bank: Rs.874-1031-1216-1435 for FY: 23-24-25-26

Axis Bank reported a core operating EPS (without NPA/other provisions) of around Rs.91.00 in FY22 against 96.77 in FY21, down by -5.96% as the bank focused on NPA management rather than business/credit growths for most of the year after COVID disruptions.

Looking ahead Axis Bank may report an 18% CAGR on an average in core operating EPS due to the:

·         The normalization of the COVID situation- the full reopening of the economy,

·         Huge infra and targeted rural/agri stimulus by the government

·         Past average run rate and guidance (20% loan growths) along with various pros & cons as discussed above

·         Increasing thrust for secured lending rather than unsecured lending

Although Axis Bank indicated credit growth of around 20% in FY23-26 along with a core operating margin of around 60%, considering synchronized global stagflation/slowing economic growths and possible spillover effect of that in India, RBI tightening, higher borrowing costs, higher inflation/lower discretionary spending and possible higher NPA, 18% CAGR of core operating EPS may be appropriate (on the conservative side) rather than 25%. Axis Bank is cautiously optimistic about overall business growth amid global/local economic slowdown, higher inflation/macro headwinds, higher borrowing costs, and lower discretionary spending.

Thus assuming core operating EPS around Rs.109.20-128.86-152.05-179.42 and an average core operating PE of 8 (against a sectoral average of 10), the fair valuation of Axis Bank may be around Rs.874-1031-1216-1435 between FY23-26 (with valuation risks on the upper side as there may be 20-25% CAGR instead 18% from FY24). As the stock/financial market generally discounts at least 1-year projected earnings in advance, Axis Bank may scale 1031 by Mar’23, 1216 by Mar’24, and 1435 by Mar’25.

Technical view: Axis Bank (LTP: 878.55 as of 24/11/2022-EOD)

Looking ahead, whatever may be the narrative, technically Axis Bank has to sustain above 825-845 for 880/905-920/935* and further 955/992 and 1037; on the slip side, sustaining below 810-800, Axis Bank may further slip to 765/725-705*/680-617*/600 and 575 levels.

Axis Bank: Consolidated P/L Account:

 

Axis Bank: Consolidated B/S

Axis Bank: Consolidated Cash-flow:

Axis Bank: NPA Movement/Asset quality/trend

 

 

 

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